Contractual Provisions Minimizing Exposure/Losses in Missouri and Illinois
Parties entering into commercial contracts in Missouri and Illinois have available to them a number of risk limiting and shifting devices. However, in order to be enforceable, they must be drafted with care. Courts are often reluctant to allow an unconscionable result occur in the enforcement of an agreement, but generally allow parties to freely contract; even to enter into a “bad bargain,” if they are sophisticated consumers. This article reviews a few of these devices, on a high level, and shows how certain language is either enforced or interpreted by the courts.
In Alack v. Vic Tanny International of Missouri, Inc., 923 S.W.2d 330, 334 (Mo. banc 1996), Missouri’s leading case on exculpatory clauses, the Supreme Court of Missouri held:
“The best policy is to follow our previous decisions and those of other states that require clear, unambiguous, unmistakable, and conspicuous language in order to release a party from his or her own future negligence. The exculpatory language must effectively notify a party that he or she is releasing the other party from claims arising from the other party’s own negligence. Our traditional notions of justice are so fault-based that most people might not expect such a relationship to be altered, regardless of the length of an exculpatory clause, unless done so explicitly. General language will not suffice.”
“As general rule, exculpatory contracts are enforceable unless it would be against settled public policy of state to do so, or there is something in social relationship of parties militating against upholding agreement.” Harris v. Walker, 119 Ill. 2d 542 (Ill. 1988).
“An exculpatory clause, to be valid and enforceable, should contain clear, express, and unequivocal language referencing the types of activities, circumstances, or situations that it encompasses and for which the plaintiff agrees to relieve the defendant from a duty of care; thereby, party will be put on notice of range of dangers for which he assumes risk of injury, enabling him to minimize the risks by exercising a greater degree of caution.” Garrison v. Combined Fitness Center, 201 Ill. App. 3d 581 (Ill. App. 1st Dist. 1990).
Landlord-Tenant (Exculpatory Clause)
In Milligan v. Chesterfield Village GP, LLC, 239 S.W. 3d 613 (Mo. Ct. App. 2007), the lessee set forth claims of negligence as to city fire codes and ordinances, apartment rules and policies, and smoke alarm inadequacies, after being injured trying to escape a fire in her apartment building. The lessor, Chesterfield Village Apartments, asserted a defense of release based upon the following waiver of liability provision in the rental lease the plaintiff signed:
“Lessee hereby agrees that Lessor shall not be liable to Lessee, his family, guests, invitees, servants, or others for injury to or death of any person or pet, nor for loss or damage to property (including property of Lessee) occurring on or about the Leased Premises from any cause whatsoever, even if the cause or damages or injuries are alleged to be the fault or caused by the negligence or carelessness of the Lessor.”
The court held that the lessee had effectively released the lessor from liability because the clause clearly, unambiguously, unmistakably, and conspicuously applied even if the cause of damages or injuries were alleged to have been the fault or caused by the negligence of the lessor.
The overall lease contract must also clearly and unambiguously define who the “lessor” and “lessee” are. In this case, it is notable that the language of the provision only successfully released the “lessor”, which the court defined as Chesterfield Village Apartments. The property management company, McCormack Management Services, was not found to be a “lessor” because of ambiguous language in the contract. Because the court interpreted the definition of “lessor” to only include Chesterfield Village Apartments, McCormack Management could not use the waiver of liability clause as a defense. See also Easley v. Gray Wolf Investments, LLC, 340 S.W. 3d 613 (Mo. Ct. App. 2011).
Construction Equipment Lease (Indemnity Clause)
In Economy Forms Corporation v. J.S. Alberici Construction, Co., Inc., 53 S.W. 3d 552 (Mo. Ct. App. 2001), the court held the indemnification paragraph in the equipment lease was inconspicuous and it failed to expressly provide that lessee shall indemnify manufacturer/lessor of equipment for manufacturer/lessor’s own negligence. Therefore, the lessee was not required to indemnify lessor for lessor’s own negligence. In Economy Forms, an employee of Alberici was injured while disassembling forms leased from Economy Forms Corporation (EFCO). The employee brought a negligence action against EFCO, and EFCO filed suit seeking indemnity from Alberici. EFCO (lessor) had an equipment lease agreement with J.S. Alberici (lessee) for forms that are used to pour concrete at construction sites. The lease included an indemnification paragraph which featured the following language:
“Lessee [Alberici] shall be entirely responsible for and shall pay and exonerate Lessor [EFCO] from liability for damages arising from injury to any persons or property as the result of the use or possession of the Leased Equipment by Lessee, its agents, employees, sub-contractors or any others after its delivery by Lessor and until its return to Lessor’s possession. Lessee shall also indemnify, defend and save harmless the Lessor from any such claims, founded or unfounded and whether based upon alleged negligence or otherwise.”
The court held that the indemnification paragraph failed to expressly provide that the lessee shall indemnify the lessor from the lessor’s own negligence and that the language was general and broad. The court also looked at whether the indemnification paragraph was conspicuous. The court reasoned that the indemnity paragraph was inconspicuous because it was “not highlighted or set forth differently than the other paragraphs and the title and language of the paragraph were in small print.”
NOTE: When drafting and inserting an indemnity paragraph within a lease contract, one might consider highlighting or setting apart the paragraph with larger font so that it will likely meet the ‘conspicuous’ test. (See §400.1-201 below) (Language doesn’t have to be ‘conspicuous’ if parties are sophisticated commercial entities. See Utility below)
“It is generally held that an indemnity contract will not be construed as indemnifying one against his own negligence, unless such a construction is required by clear and explicit language of the contract or such intention is expressed in unequivocal terms. Buenz v. Frontline Transp. Co., 227 Ill. 2d 302 (Ill. 2008).
Contract between Commercial Entities (Limited Liability Clause)
In Purcell Tire & Rubber Co., Inc. v. Exec. Beechcraft, Inc., 59 S.W. 3d 505 (Mo. bane 2001), the court addressed a limitation of liability clause in a pre-purchase survey contract for a used plane. In Purcell, Purcell contracted with Beechcraft for a pre-purchase inspection survey. Both parties were sophisticated commercial entities that negotiated at arm’s length for the contract. The contract, prepared by Beechcraft, limited Beechcraft’s liability to the performance of a maintenance survey prior to purchase. The contract included the following provision:
“It is expressly agreed that the liability, if any, of Executive Beechcraft, Inc. under this agreement shall be limited to the cost of services performed hereunder. All parties to this agreement expressly agree to indemnify and hold harmless Executive Beechcraft, Inc. from any damages or expenses claimed by any party to this agreement beyond the cost of the services performed hereunder.”
When an oil leak was later discovered that required the engine to be replaced, Purcell sued Beechcraft for negligence in failing to detect the leak. Purcell contended that the liability limitation was ambiguous; specifically the use of “any damages” and “any party”. The court reasoned that the clear, unambiguous, unmistakable, and conspicuous language requirement of Alack did not apply the same way in the context of sophisticated commercial entities. The court enforced the provision and held that the limited liability clause of the contract was unambiguous as to the parties because the parties were sophisticated commercial entities who were experienced in this type of sales transaction. Village of Big Lake v. BNSF R. Co., 433 S.W. 3d 460 (Mo. Ct. App. 2014).
Purchase Contract between Commercial Entities (Indemnity Clause)
In Utility Service and Maintenance, Inc. v. Noranda Aluminum, Inc., 163 S.W. 3d 910 (Mo. bane 2005), the Supreme Court of Missouri held that an indemnification provision between two commercial entities was enforceable. In Utility, Noranda, an aluminum company that specializes in painting high voltage electrical equipment, issued a purchase order to Utility that included the following indemnity clause:
“Seller [Utility] shall indemnify and save Purchaser [Noranda] free and harmless from and against any and all claims, damages, liabilities or obligations of whatsoever kind, including, but not limited to, damage or destruction of property and injury or death of persons resulting from or connected with Seller’s performance hereunder or any default by Seller or breach of its obligations hereunder.”
After the contract was executed, a Utility employee was injured while working at Noranda’s plant under the Utility-Noranda contract. He sued Noranda, alleging that it was negligent and caused his injuries. Noranda argued that under the provision, Utility was required to indemnify it for the damages sustained by the employee. Utility argued that the language of the provision was ambiguous. The court reasoned that the word “any” in the indemnity clause was unambiguous because both parties were sophisticated commercial entities. (See Purcell) It also reasoned that the ‘conspicuous’ requirement, set forth in Alack, was not required (because both parties were sophisticated commercial entities). The Court held that TIG, Utility’s insurance company, had a duty to indemnify Noranda for damages sustained by the employee.
NOTE: The court upheld the enforceability of these provisions among commercial entities, but to be safe one should use the Alack standard of expressly limiting or eliminating liability when drafting purchase/supplier contracts. (See language of Milligan v. Chesterfield Village above)
Purchase Contract (Disclaimer of Warranties by Seller)
Missouri Law expressly allows a seller to disclaim the warranty of merchantability and the warranty of fitness for a particular purpose. Mo.Rev.Stat. §400.2-316. “In order to exclude the implied warranty of merchantability successfully, the contract of sale must state specifically and conspicuously that the warranty of merchantability is being disclaimed.”Harber v. A/tee Industries, 812 F.Supp. 954, 956 (W.D. Mo. 1993) (applying Missouri Law). Missouri Statute §400.2-316 also provides that a seller may disclaim any warranty of fitness for a particular purpose by stating “there are no warranties which extend beyond the description on the face hereof.” In Haber, plaintiff sued seller of a utility truck after he was injured while operating it. Seller argued that he had properly disclaimed all warranties in the purchase contract. The contract contained the following language:
“Buyer purchases the goods sold hereunder AS IS and with all faults and buyer recognizes that there are no warranties of seller which extend beyond the description of the goods sold on the face hereof. Seller hereby disclaims any warranties, expressed or implied, of merchantability of the goods sold hereunder or of fitness for the particular purpose for which such goods are to be used by the buyer.”
The court granted summary judgment in favor of seller as to the plaintiff’s claims of breach of warranty of merchantability and warranty of fitness for a particular propose. The court held that the seller properly disclaimed the warranties in the contract and the language was not buried or inconspicuous.
NOTE: Missouri Statute §400.2-316 provides that language of disclaiming warranties must be “in writing and conspicuous.” According to §400.1-201, “A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals (as: NON-NEGOTIABLE BILL OF LADING) is conspicuous. Language in the body of a form is ‘conspicuous’ if it is in larger or other contrasting type or color. Whether a term or clause is ‘conspicuous’ or not is a decision for the court.
Purchase Contract (Disclaimer of Warranties by Manufacturer)
In Karr-Bick Kitchens & Bath, Inc., v. Gemini Coatings, Inc., 932 S.W.2d 877 (Mo. Ct. App. 1996), plaintiff bought paint varnish and applied it to a customer’s kitchen cabinets. After a short period of time, the varnish started peeling and cracking. Plaintiff sued Gemini Coatings, Inc., the manufacturer of the varnish, for breach of warranty of merchantability and fitness for a particular purpose. The labels on the varnish the plaintiff purchased contained the following language:
“Limitation of Liability: You must be delighted with this product or we will replace the material or refund the purchase price. WE MAKE NO OTHER WARRANTY OR GUARANTEE OF ANY KIND, EXPRESS OF IMPLIED, INCLUDING MERCHANTABILITY AND FITNESS FOR PARTICULAR PURPOSE. LIABILITY, IF ANY, IS LIMITED TO REPLACEMENT OF THE PRODUCT THE PRODUCT OR REFUND OF THE PURCHASE PRICE. LABOR OR COST OF LABOR AND OTHER CONSEQUENTIAL DAMAGES ARE HEREBY EXCLUDED.”
The court held that the disclaimer on the label affixed to the varnish containers by the manufacturer was sufficiently conspicuous to disclaim implied warranties of merchantability and fitness for a particular purpose. See also Am. Auto. Ins. Co. v. Omega Flex, Inc., 4:11CV00305 AGF, 2013 WL 2628658 (E.D. Mo. June 11, 2013) (Holding that when a manufacturer sells goods to a dealer who resells the goods to the ultimate purchaser, the latter cannot sue the manufacturer if the manufacturer has made a legally effective disclaimer of warranties).
Sales to Protect Interests in Product Exposure Cases
Vendor’s Endorsement (Agreement by Manufacturer)
In Standard Artificial Limb, Inc., v. Allianz Insurance Co., 895 S.W. 2d 205 (Mo. Ct. App. 1995), a vendor of an artificial leg (Standard) and its insurer brought action against an insurer of a component parts manufacturer to recover costs of defending and settling a tort action by injured plaintiff (malfunction of artificial limb) against vendor, manufacturer, and manufacturer’s distributor. Allianz Insurance, the manufacturer’s insurance company, claimed that the allegations against Standard (by the injured the party) were not subject to coverage under the language of the Vendor’s Endorsement because they fell under the policy exclusions. The policy stated:
“I. The insurance with respect to the vendor does not apply to:
(b) bodily injury or property damage arising out of any act of the vendor that changes the condition of the products, any failure to maintain the product in merchantable condition any failure to make such inspections, adjustments, tests or servicing as the vendor has agreed to make or normally undertakes to make in the usual course of business, in connection with the distribution or sale of products.”
The trial court had previously found that Standard and the injured party did not use a particular adhesive or any other bonding agent on the set-screws which secured the foot assembly of the artificial limb. The Court of Appeals held that Allianz, the manufacturer’s insurer, did not have a duty to indemnify Standard under the Vendor’s Endorsement because they were excluded from coverage under paragraph 1(b)(iii). The failure of Standard and the injured party to use adhesive on the set-screws of the artificial limb constituted a failure to make “such inspections, adjustments, tests, or service.” Therefore, the court held that Standard was responsible for the plaintiff’s injuries, not the manufacturer or its insurance company.
Professional Employer Organizations (PEO) Leased Employees
Leased Employees (Borrowed Servant Doctrine/Operation of Law)
Courts in Missouri have held that the borrowed servant doctrine can block a general employer’s (lessor of employees) vicarious liability for its employees’ negligence. The doctrine provides “in the leasing of equipment and operators to another, the mere fact that the general employer continues to pay the operator’s wages, the gas, oil, and other expenses, and is responsible for maintenance, does not prevent the operator from being an employee of the lessee.” Wren v. Vaca, 922 S.W.2d 408, 410 (Mo. Ct. App. 1996). The elements of the borrowed servant doctrine are: consent on the part of the employee to work for the special employer (lessee); (2) actual entry by the employee upon the work of and for the special master pursuant to an express or implied contract so to do; and (3) power of the special employer to control the details of the work to be performed and to determine how the work shall be done and whether it shall stop or continue.
In Wren, American Driver Leasing (ADL) leased Vaca to Mo-Kan Express pursuant to a driving contract. While driving for Mo-Kan, Vaca fell asleep and crashed, injuring Wren, who was asleep in the tractor that Vaca was driving. Wren sued Vaca and ADL for damages. The trial court granted summary judgment for ADL on the grounds that it did not exert enough control over Vaca to be held vicariously liable for his negligent actions. The Court of Appeals held that “in order for the general employer (ADL) to escape liability, it must surrender full control of the employee in the performance of the particular work.” The court held ADL had no right to assert control over when, where or how Vaca drove, and therefore ADL could not be held vicariously liable for Vaca’s actions. The Court of Appeals affirmed summary judgment in favor of ADL.
Leased Employees (Indemnification Clause)
In Hitchcock v. New Prime, Inc., 202 S.W. 3d 697 (Mo. Ct. App. 2006), Hitchcock leased a freightliner truck from New Prime, Inc. (NPI) As part of this transaction, two agreements were executed by Hitchcock and NPI; an Independent Contractor Operating Agreement (IOCA) and a Personnel Service Agreement (PSA). The PSA obligated NPI (lessor), upon request, to “lease” an NPI employee to Hitchcock (lessee). Rama Hitchcock, Hitchcock’s wife and employee of NPI, was “leased” to him at his request to operate the freightliner. The IOCA contained a hold harmless and indemnification provision which stated:
“You agree to hold New Prime harmless and to indemnify New Prime against all claims, losses, damages and expenses, including attorneys’ fees (i) arising out of Your acts or omissions or those of Your agents and employees (including drivers leased from New Prime …)”
The PSA contained the following provision:
“Lessee agrees not to hold NPI responsible for any damage or injuries suffered by lessee or to lessee’s equipment as a result of any action by driver and hereby releases NPI from any such claim.”
After receiving injuries in a motor vehicle accident while Rama was driving, Hitchcock filed an action against New Prime, Inc. The trial court entered summary judgment against Hitchcock for failure to state a claim because of the indemnification provisions of the agreement that he had signed. The Court of Appeals reversed the lower courts summary judgment holding that the indemnification provisions of the IOCA and PSA were not effective to release NPI from liability because the words “negligence,” “fault” or their equivalents were not used as required by Alack.
Liquidated Damages Clauses
Another contractual provision which seeks to limit losses or damages is a liquidated damages clause, which fixes the amount of damages in the event of a breach. Courts in Missouri will enforce a liquidated damages provision “when such a clause represents a reasonable forecast of harm caused by the breach and the harm is the type that is difficult to accurately estimate.” Kuczynski v. Intensive Maintenance Care, Inc., 48 S.W. 3d 55 (Mo. Ct. App. 2001). “A plaintiff must show at least some actual harm or damage is caused by a breach, however, before a liquidated damages clause can be triggered.” Mihlfeld & Associates, Inc. v. Bishop & Bishop, L.L.C., 295 S.W. 3d 163 (Mo. Ct. App. 2009).
In Kuczynski, a floor cleaning subcontractor (Kuczynski) brought action against a cleaning services contractor (Intensive Maintenance Care) for service fees allegedly owed pursuant to contract for cleaning services, and the contractor counterclaimed for liquidated damages, alleging breach of contract. The contract between the two parties contained a liquidated damages clause that provided:
In the event of a breach, Contractor (Intensive Maintenance Care) would be entitled to “20% of one-year’s gross payments for services paid by the customer under the contract.”
The trial court awarded damages to Kuczynski for cleaning service fees and also awarded damages to Intensive Maintenance Care on the counterclaim for Kuczynski’s failure to give proper notice. The Court of Appeals held that the liquidated damages clause was valid and enforceable, but remanded the case back to the trial court to recalculate the amount of damages pursuant to the provision.