Wolf v. Ford
335 Md. 525, 644 A.2d 522, 1994 Md. LEXIS 101 (1994)
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Rule of Law:
An exculpatory clause in a private contract, such as a discretionary investment account agreement, that absolves a party from liability for its own simple negligence is generally enforceable and not void as against public policy, unless it involves intentional harm, results from grossly unequal bargaining power, or concerns a transaction that so affects the public interest as to be patently offensive.
Facts:
- In April 1986, Elizabeth Wolf, age 18, received a $145,700 settlement from a car accident.
- On April 2, 1986, Wolf and her mother met with Harry M. Ford, a stockbroker at Legg Mason, to invest the settlement funds, stating her goal was to preserve the money for college.
- On April 7, 1986, Wolf signed a Discretionary Account Agreement which authorized Ford to trade on her behalf and included an exculpatory clause exonerating Legg Mason from liability for any losses except those resulting from 'gross negligence or willful misconduct.'
- On April 15, 1986, Legg Mason received $135,000 from Wolf, which Ford used to purchase 22 different stocks for her portfolio.
- Over the course of her relationship with Legg Mason, Wolf made numerous large withdrawals from her account totaling $64,650.
- In September 1987, Wolf signed and returned a letter from Legg Mason explicitly confirming her desire to continue Ford's discretionary authority over her account.
- In June 1990, Wolf, upset with her portfolio's performance, terminated Ford's discretionary authority, and she closed her account entirely in March 1991.
Procedural Posture:
- Elizabeth Wolf filed suit against Harry M. Ford and Legg Mason Wood Walker, Inc. in the Circuit Court for Baltimore County, a state trial court.
- At the close of Wolf's case at a jury trial, the defendants moved for judgment.
- The trial court judge granted the defendants' motion, ruling that the exculpatory clause in the account agreement was valid and there was no evidence of gross negligence or willful misconduct.
- Judgment was entered in favor of Ford and Legg Mason.
- Wolf, as appellant, filed an appeal to the Court of Special Appeals of Maryland, the intermediate appellate court.
- The Court of Appeals of Maryland, the state's highest court, issued a writ of certiorari on its own motion to hear the case before it was considered by the intermediate appellate court.
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Issue:
Is an exculpatory clause in a discretionary investment account agreement, which absolves a stockbroker and investment firm from liability for losses resulting from simple negligence, void as against public policy?
Opinions:
Majority - Karwacki, J.
No, the exculpatory clause is not void as against public policy. Exculpatory clauses are generally valid under the principle of freedom of contract, and will be enforced unless they fall into one of three exceptions: (1) excusing liability for intentional harms or gross negligence; (2) the contract is a product of grossly unequal bargaining power; or (3) the transaction affects the public interest. None of these exceptions apply here. Wolf did not allege gross negligence; there was no grossly unequal bargaining power as Wolf was an adult, initiated the contact, was under no compulsion to accept the terms, and retained control over her account; and a stockbroker-client relationship, while involving fiduciary duties, is a private matter that does not so affect the public interest that it would be 'patently offensive' to enforce such a clause. The court declined to adopt the rigid six-factor 'Tunkl' test for what constitutes 'public interest,' preferring a 'totality of the circumstances' approach.
Analysis:
This decision strongly affirms the principle of freedom of contract in Maryland, establishing that sophisticated parties, and even those less sophisticated but not under duress, can validly contract to waive liability for simple negligence in financial service agreements. By rejecting the rigid Tunkl test in favor of a more fluid 'totality of the circumstances' standard for determining public interest, the court made it more difficult to invalidate exculpatory clauses on public policy grounds. This precedent solidifies the enforceability of such clauses in the securities industry, placing the risk of a broker's ordinary negligence on investors who agree to such terms, and distinguishes this professional relationship from others, like attorney-client, which are deemed more integral to the public interest.
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