Wolf v. Ford Wolf V.Ford

Wolf v. Ford

WOLF v.FORD COURT of APPEALS of MARYLAND 335 Md. 525; 644 a.2d 522; 1994 Md. LEXIS 101 July 18, 1994, Filed

State the issue to be decided by this court

The plaintiff had invested funds with the investment banking firm Legg Mason. She was unhappy with her portfolio's performance and wanted to transfer her account from the defendant's control to the control of another stockbroker at Legg Mason. Then, the defendant Wolf closed her account with Legg Mason and filed suit in the Circuit Court for Baltimore County against Ford, Seifert, and Legg Mason in May, 1992 for the losses she had suffered.

The trial judge ruled that the exculpatory clause contained in the Discretionary Account Agreement that Wolf had signed limited the firms' potential liability for the losses Wolf had suffered. The only time the law could enforce the exculpatory clause was when losses resulted from gross negligence or intentional misconduct on the part of the plaintiff, but there was no evidence of either gross negligence or willful misconduct on the part of Ford or Legg Mason.

The issue before the higher court was the enforceability of the exculpatory clause regarding an agreement between an investor and a securities investment firm. Contract law suggests the investment firm will not be liable for losses to the investor unless there is evidence of gross negligence or willful misconduct.

What is the general rule in Maryland regarding the issue in this case?

Wolf argued before the Court of Special Appeals that the exculpatory clause contained in the Discretionary Account, a document that delegates authority to the stockbroker the ability to trade securities without seeking the advance permission of the investor, was void. In other words, that the law which allowed for the original agreement to take place was invalid, and therefore the case should be sent back to the lower courts and the only determination of the trial should revolve around the issue of the negligence of Ford or the investment firm of Legg Mason.

Why do none of the recognized exceptions apply?

The court found that in the absence of legislation to the contrary, exculpatory clauses regarding investing should be regarded as valid to support the public policy of freedom of contract is best served by enforcing the provisions of the clause.

There are only a few exceptions to the principle of freedom of contract. First, is if the behavior of one of the parties is grossly negligent, which was not the case. Second, the contract cannot be the result of coercion or hiding information, but Wolf willingly agreed to the investor-broker relationship. Thirdly, contracts that negatively affect the public interest cannot be permitted to stand.

What standard does this court adopt to determine whether the third exception applies?

The standard that a contract negatively affects public policy is when a contract requires the individuals to engage in actions that are deemed "patently offensive [so] the common sense of the entire community would... pronounce it invalid," which is not the case in the investment contract signed by Wolf. The contract was standard, and gave authority to the broker to invest and manage the original sum of money. Although it could be argued that, given Wolf's expressed desire that the funds be invested conservatively, that the actions of the defendant were not optimal, that does not make it patently offensive to the point that the entire community would consider the contract invalid.

What does the outcome of this case mean for the affected industry? Customers of that industry?

This frees the investment banking industry from the concern that an angry investor will be able to sue a broker or the entire firm if he or she does not like the performance of his or her portfolio. It also means that a wary investor must not invest his or her funds and sign a discretionary agreement without careful consideration about how much control he or she wishes to have over his or her portfolio, the reputation of the broker, and the reputation of the firm. Also, although the investor is signing over authority to the broker, it is the investor's responsibility to keep a watchful eye on the portfolio's performance.

The case acts as a caution for investors wishing to expand their earnings through the markets and investments without a guaranteed return, if they are saving for college, retirement, and other aspects of their life where they cannot afford to lose very much of their original principal.