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Intersection of Tort and Contract: New Maryland High Court Opinion

Last week, the Maryland Court of Appeals decided 100 Investment Limited Partnership v. Columbia Town Center Title Company. This is a business transactions case so it is a little outside the usual purview of this blog. But it talks duty of care in tort cases which is spot on a topic of this blog and vicarious liability. It also talks about contractual indemnification which is a topic I have taught and published on it in the past. So I thought a quick write-up might be of interest. If you are looking for the usual personal injury fare, please drive through and check back tomorrow.

The case arose from a real estate transaction in which Plaintiff hired two companies, Cambridge Title and Columbia Town Center Title to complete title work. Chicago Title Insurance Company underwrote the insurance policies on the disputed real estate.

The facts are a little convoluted – so much so that I almost ditched the post – but I think I have the gist of the story. The gist of the story is as follows: The Millers, owners of the disputed land, first conveyed the property to a doctor. (Note: I normally don’t name parties for reasons I’ve stated before but I’ve taken blogger notice – a derivative of judicial notice – that Miller is a common name.) Anyway, the deed was properly recorded.

Afterwards, the Millers sold the same piece of land to Plaintiff. Plaintiff then hired Cambridge to perform a title search for this transaction, and Cambridge failed to uncover the previous deed. Cambridge then issued a title commitment and insurance policy underwritten by Chicago Title. Afterwards, Plaintiff sought to transfer its interest in the land again, this time using Columbia to perform a title search. Columbia also failed to unearth the previous deed and again issued a title commitment and insurance policy. This insurance policy was underwritten by Safeco Title Insurance Corporation a company later acquired by Chicago Title, which assumed Safeco’s liabilities.

Plaintiff later found out about the previous sale to the doctor and repurchased the disputed land. The expenses for the repurchase and transaction fees totaled $191,510.88. Plaintiff then brought an action to recover the commercial loss, alleging that the title companies negligently performed the title search by failing to discover the doctor’s deed, and that Chicago Title, which underwrote both insurance policies on the disputed land, was vicariously liable.

The Court of Appeals examined two key questions in its opinion – (1) whether the title companies in fact owed a tort duty of care in conducting the title search, and (2) whether Chicago Title could be held vicariously liable.

Duty of Care

First, the court examined whether the title companies owed a tort duty of care for the title search. Plaintiff argued that in cases involving economic loss, a duty is imposed as long as an “intimate nexus” exists between the parties. In contrast, the title companies contended that when the relationship between parties is contractual, no tort duty exists. The court explained that while liability for a faulty title search technically rests on a contractual foundation, it can also be enforced by a negligence action.

The court agreed with Plaintiff that a tort duty can be imposed in economic loss cases by showing an intimate nexus between the parties, and clarified that contractual privity or its legal equivalent satisfies this showing. (In contrast, personal injury cases rely instead on foreseeability to determine the existence of duty.) In this case, contractual privity was established when Plaintiff hired the title companies to perform the title work.

In the absence of contractual privity, the legal equivalent exception applies if (1) the defendant knows that its services will be used for a particular purpose; (2) the plaintiff relies on those services; and (3) the defendant has knowledge of the plaintiff’s reliance. Here, the court found evidence to support all three factors. However, it is important to note that this exception does not extend to “an indeterminate class of people for an indeterminate time, but rather, addresses a specific entity . . . .” In other words, if the defendant has no idea who will rely on its services, the law will not impose a duty of care – the plaintiff has to be known. (Let’s call it the no duty to totally random people rule.)

Here, because both contractual privity and its legal equivalent were present, the court concluded that the title companies had a tort duty to employ reasonable care in conducting the title search.

The court also pointed out that Restatement 522 provides an alternative avenue for imposing tort liability based on liability assumed by professional suppliers of information. Like the intimate nexus approach, however, Restatement 522 also limits liability for professional negligence to the customer and third parties to whom the defendant intends to supply the information or knows the customer intended to supply it. In this particular instance, Plaintiff could establish a tort duty using either approach.

The takeaway message is that a tort duty of care can arise from contractual relationships in cases involving economic loss. Both the intimate nexus test and Restatement 522 provide a basis for this duty. In either case, liability is limited to loss suffered by a known group of beneficiaries. Lastly, it may also be worthwhile to note that the law generally imposes an additional tort duty of care arising from “contractual dealings with professionals such as physicians, attorneys, architects, and public accountants . . . [and] in those occupations requiring peculiar skill,” although title examiners would not likely fall under this category.

Vicarious Liability

Next, the court examined whether Chicago Title could be held vicariously liable for the title companies’ negligence. Chicago Title contended that the exculpatory clause in the insurance policies precluded a claim in negligence. The clause read:

    “Any claim of loss or damage, whether or not based on negligence, and which arises out of the status of the title to the estate or interest covered hereby or any action asserting such claim, shall be restricted to the provisions and conditions and stipulations of this policy.”

The policy indicated that Safeco would insure against loss or damage from faulty titles. The court agreed that the exculpatory language does preclude a negligence claim, and as a result, the issue of vicarious liability was not addressed.

The court noted that in Maryland, exculpatory clauses are generally valid, with three exceptions. First, a party will not be permitted to excuse its liability for intentional harms or extreme forms of negligence (e.g. reckless, wanton, or gross negligence). Second, the contract cannot result from disparate bargaining power. Third, exculpatory agreements are not permitted if they violate public policy. Because the exculpatory clause did not implicate any of the three exceptions, Chicago Title could not be held liable for the title companies’ negligence. In summary, exculpatory provisions in contracts are valid and can prevent tort liability in Maryland as long as no exceptions are triggered.

The Maryland high court will be hearing this issue in the context of whether you can sign away a minor’s tort rights in the near future in Rosen V. BJ’s in the near future.

You can find the court’s opinion here.

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