Unconscionability, Indemnity and Exculpatory Clauses

1. Unconscionability, Indemnity and Exculpatory Clauses Richard Warner

2. Unconscionability Doctrine • A term in a contract is unenforceable if • There was a lack of meaningful choice in the formation of the contract, and • The term is substantively unfair.

3. Steven on Lack of Meaningful Choice • Contracts of adhesion: Contain terms that due to [1] the disparity in bargaining power between the draftsman and the second party, [2] must be accepted or rejected by the second party on a ‘take it or leave it’ basis, [3] without opportunity for bargaining and [4] under such conditions that the ‘adherer’ cannot obtain the desired product or service save by acquiescing in the form agreement.”

4. Steven on Substantive Unfairness • “The exclusionary clause of that contract, upon which the insurance company relies, [1]is an unexpected one. Its application in some circumstances would be unconscionable. [2]It is placed in an inconspicuous position in the document. In view of all these characteristics [3]its rigid application would cast an unexpected burden upon the traveling public and would prefer formality of phrase to the reality of the transaction.”

5. What Does “Unexpected” Mean? • Did you expect this in Chrome’s terms? • “17. Intended Third-party Beneficiary. Adobe Systems Incorporated and Adobe Software Ireland Limited are the intended third-party beneficiaries of Google’s agreement with Sublicensee with respect to the Adobe Software, including but not limited to, the Adobe Terms Sublicensee agrees, notwithstanding anything to the contrary in its agreement with Google, that Google may disclose Sublicensee’s identity to Adobe . . .

6. What Does “Unexpected” Mean? • “and certify in writing that Sublicensee has entered into a license agreement with Google which includes the Adobe Terms. Sublicensee must have an agreement with each of its licensees, and if such licensees are allowed to redistribute the Adobe Software, such agreement will include the Adobe Terms.” • I expected that. • I did not expect that. • Not sure.

7. “Unexpected” and Restatement § 211(3) • Restatement § 211(3). Standardized Agreements: Where the other party[= the business] has reason to believe that the party manifesting such assent [ = the consumer]would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.

8. But What Exactly Is the Test? • The test is: • (1) The business must have reason to believe this: the customer would not assent if he or she knew the agreement contained such-and-such term. • Why not this? • (2) The customer would not assent if he or she knew the agreement contained such-and-such term. • Because any workable version of (2) one turns into (1).

9. Just Ask Two Questions • Who decides what terms are in the contract? • The business. • What conception of a customer should the business use in applying (2)? • A reasonable customer • A reasonable customer with enough knowledge of the business. • So the business constructs a picture of this consumer, then decides what that consumer would find objectionable. • That is (1).

10. Types of Clauses • Exculpatory clause: immunizes a person from the consequences of his/her negligence. • Indemnity clause: holds the indemnitee harmless from liability by requiring the indemnitor to bear the cost of any damages for which the indemnitee is held liable. • Waiver of liability: protects a beneficiary from liability under certain conditions when services he or she received are found to be not as promised.

11. Damage Types • Contracts • General or direct • Special, or consequential, or indirect • Torts • Direct or economic • Indirect or consequential

12. Torts Versus Contracts Torts Contracts Exculpatory Wavier Indemnity Limitation

13. Damage Waivers • Consequential (indirect) damages generally may be waived. • Direct tort damages may be waived but only for a contracting party. • Liability for reckless or intentional actions cannot be waived. • Liability for a defective product cannot be waived.