Opinion
No. 58041
Submitted: August 9, 2000 Filed: November 28, 2000
APPEAL FROM THE CIRCUIT COURT OF CLAY COUNTY, HONORABLE LARRY D. HARMAN, JUDGE.
Maurice B. Graham and Morry S. Cole, St. Louis, MO for Appellant
Kent M. Bevan, Kansas City, MO for Respondent
Before Ronald R. Holliger, P.J., Patricia Breckenridge and James M. Smart, Jr., JJ.
This case involves a provision in an inspection contract limiting liability for a negligent inspection to the cost of the inspection. The trial court held the clause in question to be enforceable. For the reasons discussed below, we reverse the judgment and remand the case.
In June of 1997, Robert Purcell was shopping for a twin engine jet to be purchased by his company, Purcell Tire Rubber Co., Inc., headquartered in Potosi, Missouri. While negotiating with a prospective seller for the purchase of a 1986 Beechjet 400, he contacted Executive Beechcraft, Inc., a fixed base operator at Kansas City's Downtown Airport about arranging for a "pre-purchase survey." Mr. Purcell sought to determine the condition of the airplane in order to decide whether to buy the airplane, and in order to obtain an idea of its value. After Mr. Purcell engaged in some preliminary discussion with a secretary at Executive Beechcraft, the secretary faxed a contract for the pre-purchase survey to Mr. Purcell. Purcell signed it and returned it to Executive Beechcraft (hereafter "Executive") with a note concerning the delivery of the plane to Executive.
The contract for the pre-purchase survey recited that the survey was designed to be a statement of the condition of the aircraft, but was not designed to be a statement of airworthiness. The contract also states that Executive "makes no guarantee or warranty, either express or implied, concerning the condition or useful life of the aircraft, its systems, avionics or other installed equipment." The contract also indicates that Executive can also perform additional types of inspections if desired. The contract then indicates portions of the aircraft to be inspected, including fuselage, wings, tail section, landing gear, engines, avionics, and log book. At the end of the form is a place for the customer to indicate a desire to have the survey conducted. Just above the signature line for the customer, the following language appears as part of a paragraph:
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.
The entire paragraph states: "We agree to pay in full at the completion of the pre-purchase survey. 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 part [sic] to this agreement beyond the cost of the services performed hereunder."
The entire paragraph states: "We agree to pay in full at the completion of the pre-purchase survey. 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 part [sic] to this agreement beyond the cost of the services performed hereunder."
The cost of the pre-purchase survey for a twin engine turbojet was $1,250.00. Executive conducted the survey. Mr. Purcell then met with Executive's employees to discuss deficiencies in the condition of the aircraft. Purcell Tire and Rubber (hereafter "Purcell") paid the cost of the survey. Purcell subsequently purchased the airplane for $2,080,000.00.
Several months after the purchase, Purcell's mechanics discovered a static oil leak in the left jet engine of the aircraft. The plane was subsequently repaired at a cost exceeding $300,000.00.
In June, 1998, Purcell brought an action against Executive for damages it contends it sustained in repairing the aircraft engine. Purcell alleged an FAA inspector discovered the static oil leak in that engine in April of 1997. Plaintiff Purcell alleged this discovery was recorded in the log book, where it should have been noticed by Executive during the survey. Purcell contended Executive negligently failed to point out the static oil leak, and asserted that Executive was liable in both breach of contract and in tort for negligence.
A key issue of the case in the trial court was whether Executive's limitation of liability provision was enforceable. Executive moved for partial summary judgment as to the issue of any liability beyond the $1,250.00 limitation provided in the contract. The trial court granted Executive's summary judgment motion. Executive thereafter confessed judgment in the amount of $1,250.00, and judgment was entered thereon. Purcell appeals, claiming the trial court erred in enforcing the limitation.
Standard of Review
Rule 74.04 allows summary judgment in cases where the movant establishes (1) that there are no genuine issues of material fact and (2) that the movant is entitled to judgment as a matter of law. ITT Commercial Finance Corp. v. Mid-America Marine Supply Corp. , 854 S.W.2d 371, 377 (Mo.banc 1993). Rule 74.04 also allows the court to enter a ruling of partial summary judgment on a particular issue in the case. Rule 74.04(d). The trial court's judgment in granting a motion for summary judgment is based strictly on the record submitted and the law. ITT Commercial , 854 S.W.2d at 376. Because the propriety of granting a motion for summary judgment is purely an issue of law, the standard of review on appeal is "essentially de novo." Id . The appellate court applies the same criteria for determining the correctness of summary judgment that the trial court used to originally determine the propriety of granting the motion. Id . Thus, there is no need for the appellate court to defer to the trial court's granting of the summary judgment motion. Id.
In its consideration of the appeal, the court views the record in the light most favorable to the party against whom judgment is sought. Id . The non-movant is accorded the benefit of all reasonable inferences from the record. Martin v. City of Washington , 848 S.W.2d 487, 489 (Mo.banc 1993). The determining factor, however, is "the undisputed right to judgment as a matter of law, not simply the absence of a fact question." Hornbeck v. All American Indoor Sports, Inc. , 898 S.W.2d 717, 720 (Mo.App. 1995) (quoting ITT , 854 S.W.2d at 380).
Analysis
Generally, clauses in written, signed contracts are presumed to have been read, understood, and agreed to as part of the bargain. Sanger v. Yellow Cab Company, Inc. , 486 S.W.2d 477, 480-81 (Mo.banc 1972). Despite this general rule, the courts often take a different approach to clauses that release a party from liability for future negligent acts. Warren v. Paragon Technologies Grove , 950 S.W.2d 844, 845 (Mo.banc 1997). In some jurisdictions, such clauses are considered void as against public policy. R. Lord, Williston on Contracts, 4th ed., § 19:21. In Missouri and some other jurisdictions, the clauses are generally not considered per se void. Id . See 57A Am. Jur. 2d § 49. However, such clauses are "disfavored and strictly construed." Id . Therefore, it may be necessary for the party benefiting from the exculpatory clause to show that the parties bargained for the specified allocation of the economic risk at least implicitly if not explicitly. R. Lord, Williston on Contracts, Fourth ed., § 19:21. "Generally, clauses limiting future liability are strictly construed by the courts and are unenforceable unless assented to in the context of free and understanding negotiation." Id . at 278.
For instance, an implicit agreement was found based upon the plaintiff's choice to bring his film to defendant for processing, where he was aware of the limitation of liability on the film packages and the receipts, and was also aware he could take his film to a custom photo lab and have it developed at a non-discounted price. Carr v. Hoosier Photo Supplies, Inc. , 441 N.E.2d 450 (Ind. 1982).
Our analysis must begin with an attempt to understand the contract itself. Because this case was resolved without a trial, the record does not provide substantial information concerning "pre-purchase surveys." On its face, however, this contract appears to be simply a contract for a detailed inspection of the condition of the aircraft by a qualified professional. We note that the contract states that the inspection is not designed to certify the aircraft as airworthy within Federal Aviation Regulations. However, it does purport to examine the observable and measurable aspects of the plane's condition.
Pre-Purchase Contracts for Inspection of Property Generally Contemplate The Inspector Taking Some Responsibility For the Adequacy of the Inspection
It seems evident that both Purcell and Executive intended that Purcell rely on the inspection report in making a decision as to whether to purchase the plane. It strikes us as somewhat incongruous, therefore, for the contract to contain language providing in effect that if Executive is negligent in the performance of its duties, the economic loss resulting from that negligence will remain entirely the responsibility of Purcell (except that Purcell can obtain a refund of the inspection price). The logic associated with such an arrangement is not immediately apparent. Limiting compensation for damage to a partial or full refund, while allowing avoidance of further liability, would not be logically anticipated. Because of the obvious risk of exposure to huge verdicts for death claims related to aircraft malfunction, a survey purchaser might anticipate a provision clearly limiting liability in connection with death and bodily injury resulting from a negligent inspection. However, the provision that liability shall be limited to the cost of the survey is arguably intended to relate to economic damage resulting from a negligent inspection and not to death and bodily injury claims (which might be addressed by the statement in the contract that the inspection is not an airworthiness inspection). For instance, it would seem unusual to suggest that, in the event of a death caused by a negligent inspection, a refund of the inspection price would be an appropriate gesture. In any event, we will assume for purposes of this case that it was intended to apply to economic damage resulting from a negligent inspection.
This contract, in practical effect, is much like a release. This contract basically suggests that if the customer relies upon the survey, and as a result sustains major loss or damage, virtually all risk of the major economic damage remains with the customer. If the short statement that "the liability of [Executive] under this agreement shall be limited to the cost of the services performed hereunder," had been more explicitly rephrased, it might have stated something like this:
Executive will conduct the survey for a price of $1,250.00. If Executive negligently fails to conduct a reasonably thorough survey, and if the customer is thereby damaged, Executive will provide the customer with a refund of part or all of the $1,250.00, but will not be responsible for any damage or loss beyond the sum of $1,250.00, no matter how extensive the damage suffered by the customer.
Seeing this concept expressed clearly might cause a customer to wonder why he or she should be required in advance to relinquish any claim for major loss suffered by virtue of a poorly done inspection. When, however, the concept is expressed in the cryptic statement that Executive's liability under the agreement "shall be limited to the cost of service performed hereunder," the customer will be less likely to take notice of the shift in the allocation of liability.
Individuals buying airplanes are presumably concerned about large, expensive mechanical problems with the plane. One would not spend $1,250.00 for an inspection if one were concerned only about something that could be fixed for several hundred dollars. Accordingly, the reason the customer wants the survey is not so much to verify that the minor things are in appropriate condition, but rather mainly to verify that all the major things are in appropriate condition. The contract before us is a contract which purports to offer peace of mind with one hand, while undermining peace of mind with the other.
Purcell argues that the survey agreement in this case is similar to the inspection agreement before the court in Schaffer v. Property Evaluations, Inc. , 854 S.W.2d 493 (Mo.App. 1993). In that case, the plaintiffs signed a contract to purchase a house. They arranged for the property to be inspected by the defendant inspection company. The inspection company reported, after inspection, that the foundation walls were in "satisfactory structural condition." Shortly after they purchased the house, plaintiffs discovered that the foundation walls were in poor condition, and that it would cost as much as $25,000.00 to provide for a sound foundation. After plaintiffs obtained a verdict, defendant appealed, contending the trial court should have limited the damages to $153.00, the price of the inspection, because the inspection contract provided, "the company's liability for any client post-inspection claims is limited to a maximum of the inspection fee paid unless an inspection warranty is available and has been purchased by the client." The court rejected the contention of the inspection company. Although the form contract included the non-liability language in question, the court found no indication in the record that the parties had bargained for the exculpatory clause. Id . at 495.
The inspection company offered, for an additional charge of $153.00, a twelve month warranty providing up to $1,000.00 of coverage. The plaintiff did not purchase this warranty.
Schaffer indicates that vague and inconspicuous exculpatory language in an inspection contract which purports to absolve the inspecting party of any responsibility beyond a refund will generally be presumed to be "unbargained for." Certainly the defendant in such a case could demonstrate that the release or covenant was in fact bargained for because of the particular circumstances of the matter. However, because the customer will generally rely on the inspection in making a purchase, and because the exculpatory language is somewhat antithetical to the very purpose of the contract in the first place, it is immediately doubtful that the release of liability was actually bargained for, especially when the language is not specific, clear, unmistakable and conspicuous. The conclusion that the language was not bargained for in Schaeffer was buttressed by the fact that the language was not emphatic, not highlighted, did not contain words like "negligence" or "fault," was very broad in its sweep, and seemed antithetical to the purpose of the contract (providing peace of mind to the prospective homeowner). Thus, the purchaser could easily fail to contemplate the notion that the inspecting company would refuse to take responsibility for its own failure to inspect. The fact that in Schaeffer the homeowner could purchase up to $1,000 of warranty protection, while related to the issue of bargaining, was not by itself enough to show that the purchaser had actually bargained for the release of liability.
Presumably, the 12-month warranty was designed only to provide some limited protection as to latent defects (and subsequent failure of mechanical systems).
Non-liability clauses, as a class, are no longer considered per se void as against public policy in Missouri. Warren v. Paragon Technologies Group, Inc. , 950 S.W.2d 844 (Mo.banc 1997). Generally, parties are fully entitled to bargain concerning the limitation or release of liability for their own future conduct. Id. Although such non-liability clauses are not favored, and are strictly construed, they are not unlawful when they have been legitimately negotiated, and accordingly are "clear, unambiguous, unmistakable, and conspicuous." Id . at 845.
It appears that Missouri formerly took the position such clauses were void as contrary to public policy. See, e.g., Cameron, Joyce Co. v. State Highway Comm'n , 166 S.W.2d 458 (Mo. 1942) (contract provided for forfeiture penalty if any attempt were made to litigate any claim that might thereafter arise).
In Warren , the landlord had provided for a non-liability clause in the lease. Plaintiff, the tenant, fell on a sidewalk. The trial court held the language void as against public policy. The Supreme Court reversed the judgment for plaintiff, and remanded the case to allow the landlord to plead the release as an affirmative defense, and to allow the plaintiff to reply to the affirmative defense, by pleading and proving factors which may allow the plaintiff to avoid the release. The release language, the court held, was not per se void. The issue was whether it had been truly agreed to. The error the trial court made was in failing to allow the parties to address the issue of whether the language was appropriately in the lease as part of the bargain.
Related To The Concept Of A Free And Understanding Bargaining Process Is The Concept Of Clear, Specific, Unmistakable And Conspicuous Language For Provisions Releasing A Party From Liability For Future ActionsThis principle of a free and understanding bargain also underlies the reasoning in the case of Alack v. Vic Tanny Int'l of Missouri, Inc. , 923 S.W.2d 330 (Mo.banc 1996). In that case, the individual plaintiff joined a fitness facility. He signed a retail installment contract containing a general exculpatory clause purporting to release the facility from "any and all claims." After being injured, allegedly due to the facility's negligence, the plaintiff brought an action for negligence against the facility. The defendant relied on the non-liability language. Although the court in Alack did not hold the language void per se, the court stated that those relying on such provisions would have to meet an "exacting standard" in order to have such provisions upheld. Id . at 334. The court said there "must be no doubt that a reasonable person agreeing to an exculpatory clause actually understands what future claims he or she is waiving." Id . at 337-38. Therefore, the court required that the words "negligence" or "fault" or their equivalents must be used conspicuously so that "a clear and unmistakable waiver and shifting of risk occurs." Id . at 337. While Alack differs from the case before us in that it is a consumer case rather than a case between two commercial entities, and also because it does not involve an inspection contract, it nevertheless demonstrates that the courts will require evidence that such provisions have actually been bargained for.
The contract, in pertinent portion, said:
Member expressly agrees that Seller shall not be liable for any damages arising from personal injuries sustained by the Member . . . as a result of using the facilities and equipment. . . . Member . . . does hereby fully and forever release and discharge Seller . . . from any and all claims, demands, damages, rights of action, in causes of action, present or future . . . arising out of the Member's or his guest's use or intended use of the said gymnasium or the facilities and equipment thereof.
Id . at 333, n 2.
These cases all recognize the important right of parties to "make their own bargain as to economic risk," while maintaining "the burden of demonstrating the fact of such a bargain." See Crowder v. Vandendeale , 564 S.W.2d 879, 881 (Mo.banc 1978); quoted in Warren , 950 S.W.2d at 849 (White, J., concurring in part and dissenting in part). Bringing these principles to the case before us, we observe that it is not at all clear, based on the limited record before us, that the parties actually were negotiating for a contract by which virtually the entire economic risk of any failure of performance by Executive would fall on Purcell. This court has no knowledge of industry practice and industry awareness with regard to "pre-purchase surveys." Those experienced in aircraft sales may have an "insider's knowledge" to which we are not privy. On the face of it, however, it seems that, just as in the case of the house inspection, there is an intention and understanding here that Purcell would rely on the inspection report for some measure of peace of mind, and that Purcell did not intend to retain all of the economic risk of buying a plane with major defects. Although the question of the validity of an exculpatory clause is a question of law for the court, Warren at 845, there are factual considerations which could enter into resolving the legal issue. The record here shows only that the contract is an inspection contract, the release language is very broad, is not addressed to specific risks, does not use terms such as "negligence" and "fault," and the language is not unmistakable and conspicuous.
It is conceivable, for instance, that in a particular industry, it is generally known that the inspections are merely to provide negotiating leverage for the buyer and not actually to give the buyer peace of mind about the purchase of the item in question. Or possibly, the evidence could be that all other entities performing pre-purchase surveys without liability limitations charge many times as much, so that customers take cost into account and willingly agree to non-liability provisions to obtain an inexpensive inspection, even though the inspection company will not stand behind the inspection.
Purcell points out the language is so broad that if Executive were to negligently crash or otherwise destroy this plane, Executive could still argue its liability is limited to $1,250.00 (or to zero if the damage occurred before the inspection was paid for).
Executive argues, however, that the court need not concern itself with whether the language is clear, specific, unmistakable and conspicuous because here we are talking about an arm's length contract between two sophisticated commercial entities. Executive points out that Robert Purcell and his company had previously been involved in the purchase and sale of fifteen aircraft. In fourteen of those transactions, he obtained a pre-purchase survey.
Executive also points out that in Alack , a consumer purchase case, the court specifically indicated that the requirement of clear, specific, unmistakable and conspicuous language would not necessarily apply to "an agreement negotiated at arm's length between equally sophisticated commercial entities." Alack , 923 S.W.2d at 338, n. 4. The court specifically said it was reserving judgment as to such cases. Id. Executive argues that a clause related to allocation of liability between two sophisticated commercial entities will not be held to the same exacting scrutiny as such a clause in a consumer contract. While we believe that statement is true, we think it is also true that not all contractual provisions entered into between sophisticated commercial entities are enforceable. For instance, forum selection clauses are not enforceable if shown to be unreasonable and unjust. See High Life Sales v. Brown-Forman Corp. , 823 S.W.2d 493 (Mo.banc 1992). Also, certain types of clauses adjusting future liability between commercial entities are disfavored, narrowly construed, and must be shown to have been bargained for. See, e.g., Kansas City Power Light Co. v. Federal Const. Corp , 351 S.W.2d 741 (Mo. 1961) (provision calling for indemnity of party against its own negligent acts). The fact that the contract is between sophisticated commercial entities does not insulate every provision from judicial scrutiny.
The cases on which Executive relies do not involve inspection contracts. Executive relies, for instance, on Monsanto v. Gould Electronics, Inc. , 965 S.W.2d 314 (Mo.App. 1998). That case involved an indemnity agreement entered into between Monsanto and Gould in connection with the sale of polychlorinated biphenyl (a toxic substance used in transformers as an insulating fluid). In the indemnity agreement, Gould agreed to indemnify Monsanto from "any and all liabilities, claims, damages, penalties, actions, suits, losses, costs and expenses arising out of or in connection with the receipt, purchase, possession, handling, use, sale or disposition of such PCB's by through or under [Monsanto]." The court said such terms "clearly and unequivocally provided for Gould to indemnify Monsanto against any and all claims. Id . at 317. The court found the agreement enforceable. Executive also relies on Malan Realty Investors, Inc. v. Harris , 953 S.W.2d 624 (Mo.banc 1997). In that case, a commercial lease contained a paragraph providing for a waiver of trial by jury in any litigation arising out of the lease. The court upheld the waiver provision.
While Monsanto and Malan Realty involve contracts between commercial entities, the nature of the contracts there were very different from the contract at issue here. Monsanto involved indemnity language in an indemnity contract. Such indemnity was clearly bargained for because both parties knew the whole purpose of the contract was to provide indemnity. Malan Realty involved a clear jury waiver provision in a commercial lease. The jury waiver provision was not antithetical to the purpose of the lease any more than an arbitration clause would be. It was not a release of liability for future negligence; it was merely an agreement concerning the procedure for resolving disputes. There was no evident reason not to assume the jury waiver provision was actually understood and agreed to as part of the bargain between the parties. The case before us, however, involves a contract which includes one provision which, as we have noted, seems to run contrary to the reason the purchaser would have arranged the inspection in the first place. In the absence of specific, clear, unmistakable and conspicuous language, and in the absence of evidence showing that agreement to such a provision is implied, it will be considered that such an unanticipated provision presumably was not bargained for.
Executive does not tell us why a sophisticated customer like Purcell, obtaining a pre-purchase survey, would anticipate the possibility of a non-liability provision and agree, by means of a vague contractual provision, to retain the economic risk of a negligently performed inspection. Would an experienced person know that all pre-purchase survey companies must, of economic necessity, refuse to take any liability for their failures? Or would an experienced person know that if he or she wants a real survey of condition that can actually be relied upon, such a survey can be obtained but would cost $75,000.00 or more? Or, in contrast, would the prospective purchaser, sophisticated or not, assume that one purpose of the pre-purchase survey is for the inspector to take some responsibility for accurately evaluating the condition of the aircraft? We think the normal assumption, in the absence of evidence otherwise, is the latter.
See, for instance, judicial treatment of liability limitation provisions in burglar alarm contracts in cases cited in Martin J. McMahon, Annotation, Liability of Persons Furnishing, Installing or Servicing Burglary or Fire Alarm System for Burglary or Fire Loss , 37 ALR 4th § 3, including Central Alarm of Tucson v. Ganem , 116 Ariz. 74, 567 P.2d 1203 (App. 1977) (alarm company could not be expected to assume responsibilities similar to insurance company). See also treatment by some courts of liability limitation provisions in telephone company business listings subscription agreements, e.g., Allen v. General Telephone Co. , 20 Wn. App. 144, 578 P.2d 1333 (1978) (upheld limitation because potential damages would be extremely burdensome because company lacked opportunity to mitigate damages).
Because such a provision seems incompatible with the purpose of a pre-purchase survey, and because provisions releasing a party from liability for future actions are disfavored, Executive has "the burden of demonstrating the fact of such a bargain." Crowder , 564 S.W.2d at 881. "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." Alack , 923 S.W.2d at 337 . Executive cannot point to clear, specific, unmistakable and conspicuous language in this contract and argue that, whatever the nature and context of the pre-purchase survey contract, and whatever a survey purchaser might otherwise reasonably have expected, Purcell must have noticed the language in question and therefore must be held to have explicitly agreed to retain virtually all of the economic risk of a negligently performed inspection. Here, the language was not even clear and specific, much less unmistakable and conspicuous; and we have no evidence that the provision was implicitly bargained for.
In the case of pre-purchase inspection contracts, the court will require the party relying on a liability limiting clause to demonstrate that such provision was bargained for, explicitly or implicitly. Executive has thus far presented no such evidence. We hold the grant of summary judgment as to the liability provision was erroneous on this record. The judgment in this case is reversed, and the case is remanded for further proceedings.