Do Exculpatory Clauses Bar Claims For Breach Of Contract?
In Wartsila NSD North America, Inc. v. Hill International, Inc., an appellate court recently addressed the issue of whether exculpatory clauses operate to bar claims for pure breach of contract. Wartsila Nsd N. Am., Inc. v. Hill Int'l, Inc., 2008 U.S. App. LEXIS 13099 (3d Cir. 2008). In the case, an engineering and construction company, had a consulting position open on a power plant construction project. Id. Hill International, Inc. submitted a proposal for the consulting position, which recommended its senior consultant, Richard LeFebvre, for the position. Id. The agreement between Wartsila and Hill contained an exculpatory clause. Id. Subsequent to LeFebvre beginning to work for Wartsila, Wartsila claims that Hill allegedly submitted false information in its proposal. Id. Consequently, Wartsila filed suit alleging claims of breach of contract, fraud, and negligence. Id. After the jury found in favor of Wartsila, the District Court held that the exculpatory clause in the contract was unenforceable and did not bar Wartsila from recovering damages. Id.
On appeal, the 3rd Circuit Appellate Court addressed the issue of whether exculpatory clauses operate to bar claims for pure breach of contract. Id. Under Maryland law, in the absence of legislation to the contrary, exculpatory clauses are generally valid and the public policy of freedom of contract is best served by enforcing the provision of the clause. Id. In addition, the court cites three exceptions that have been identified where the public interest will render an exculpatory clause unenforceable: (1) when the party protected by the clause intentionally causes harm or engages in acts of reckless, wanton, or gross negligence; (2) when the bargaining power of one party to the contract is so grossly unequal so as to put that party at the mercy of the other’s negligence; and (3) when the transaction involves the public interest. Id. The appellate court held that the exculpatory clause did not fall under any of the exceptions, and therefore, overruled the District Court’s ruling. Id.
Illinois courts have addressed issues regarding the enforceability of exculpatory clauses. Chicago Steel Rule and Die Fabricators Co. v. ADT Sec. Systems, Inc., 327 Ill. App. 3d 642, 645 (1st Dist. 2002). In Illinois, courts do not favor exculpatory clauses and strictly construe the clauses against the party it benefits. Id. For an exculpatory clause to be enforced it must have clear, explicit, and unequivocal language establishing that it was the intent of the parties. LaSalle Nat. Trust, N.A. v. Board of Directors of the 1100 Lake Shore Drive Condominium, 287 Ill. App. 3d 449, 455 (1st Dist. 1997). The question of whether an exculpatory clause will be enforced depends upon whether the defendant's conduct and risk of injury inherent in such conduct was of a type intended by the parties to fall within the scope of the clause. Masciola v. Chicago Metropolitan Ski Council, 257 Ill. App. 3d 313, 317 (1st Dist. 1993).
According to Illinois law, a party may create an exculpatory clause to avoid liability, absent fraud or willful and wanton negligence. Garrison v. Combined Fitness Centre, Ltd., 201 Ill. App. 3d 581, 584 (1st Dist. 1990). In addition, the clause will be valid and enforceable unless: (1) there is a substantial disparity in the bargaining position of the two parties; (2) to enforce the exculpatory clause would violate public policy; or (3) there is something in the social relationship between the two parties that would militate against upholding the clause. Id. Furthermore, an exculpatory clause does not violate public policy when (1) the parties to the contract have equal bargaining power; (2) it is invoked against a party to the contract in question; (3) the exculpatory clause is clear and unambiguous; (4) there is no evidence of fraud or duress; (5) there is no legislation to the contrary; (6) there is nothing in the relationship of the parties militating against enforcement; and (7) the damage at issue is to the other party to the contract. Chicago Steel Rule and Die Fabricators Co. v. ADT Sec. Systems, Inc., 327 Ill. App. 3d 642, 645 (1st Dist. 2002).
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