Contracts Class Notes 2/4/04


More on Henningsen


The result is good law in that you can count on it being followed today.  You can limit remedies to repair and replacement of defective parts, but not when there is an accident resulting in personal injury or property damage.  In that case, the limit will fall out.  § 2-719 is a statutory way of doing this, but you can count on this being the result.


You can explain the result in more than one way.  One way is to say that the average adherent to such a contract wouldn’t understand a limitation to replacing defective parts as a bar to, for example, a wrongful death claim or property damage claim.


If the manufacturer makes it very clear that there was an agreement, you must consider whether it’s an agreement society will let us make.  Is the agreement unconscionable?  Will we void it for its subject matter even though it’s clear on its face?


How can you argue that this kind of agreement should not be enforceable?  Whatever restriction we put on the freedom of contract must be balanced out by some other principle.


Note the difference between Henningsen, Richards, and Broemmer as opposed to Mundy, Bova, Weisz and so on.  When we talk about personal injury or property damage, things change from the situation where we’re just talking about economic loss.  We’ll allow much more freedom of contract when we have merely economic loss than when we’re dealing with property damage, personal injury, wrongful death, and so on.  Why is this so?


What argument can you make for a decision like Henningsen as a matter of policy?  Clovis says the best argument is deterrence.  Refusing to uphold a limitation on liability spurs manufacturers to make safer cars.  We have a strong feeling about deterring the events that happened in this case.


There are other incentives for manufacturers to produce safe goods besides liability.  If they get a reputation for producing unsafe goods, they won’t sell as much and they might go out of business.  It is a matter of debate how this incentive compares to the tort system.  Another incentive is government regulation.  Yet another is the morality of the manufacturers and whether they can sleep at night.


But a merchant can sell to a consumer a car with no brakes or tremendously defective brakes and not be liable at all for any injury to the consumer.  The way you can do it is to be a particular kind of seller: “Joe’s Junkyard”.  If you sell cars by the pound, there’s no particular expectation that the car will work.  If you sell cars as junk and the buyer must understand that it’s junk because he’s paying a junk price for it then all he is entitled to is junk.  If the junk kills him, it’s tough, unless the person was mentally incompetent or underage.


Some items are inherently dangerous and might cause injury, but there won’t be liability on the part of the seller, like kitchen knives or garbage disposals or guns.


If we required that every used car sold should be in extraordinarily good condition, that would run up the price of used cars, especially older used cars, and it might make for a bad bargain for many members of the public.  There would be, in other words, both benefits and costs.


Richards v. Richards


This isn’t a sale case.  This is a case where Mr. Richards is a truck driver and employee of the Monkem Company, and Mrs. Richards would like to ride along with him in the cab.  The Monkem Company says that you can do that if you get special permission.  To get that permission, you have to sign a form.  Mr. and Mrs. Richards as well as the company sign the form.  The form exculpates Monkem from any liability.  Mr. and Mrs. Richards get into an accident and Mrs. Richards gets hurt.  Mrs. Richards sues her husband on a respondeat superior basis.


But the main defense is that she signed a release agreeing that she wouldn’t seek any damages from the trucking company if she was injured while riding in the truck.  Why doesn’t that work here?


The court is quite divided: It was a 4-3 decision.  Why does the majority find that the release won’t work?  They find that the agreement went against public policy.  They look at three factors that make the contract unenforceable in combination.


First, they find that the contract serves two purposes.  But what’s wrong with serving two purposes?  Don’t most agreements serve multiple purposes?  The two purposes are identified as “permission to ride” and “release from liability”.  There is an obvious reason you would want both provisions in one agreement: one is a consideration for the other.  Mrs. Richards gets permission to ride in exchange for releasing the company from liability.  The problem is that the title of the agreement only indicates one purpose.  It doesn’t rub her nose in the aspect that’s bad for her.  There isn’t a sufficient “poison label” on this thing in the title.


Secondly, the release is said to be too broad.  This release is full of legaldygook and is broader than it needs to be.  It is poorly written.  Why did the lawyer who drafted the agreement do it this way?  It was probably copied from other, older forms and the lawyer was being extra cautious.  It’s common that when you write releases from liability that you make them super-extra broad so there won’t be difficulties down the road.  We want to make sure not to leave any loopholes through which a potential plaintiff can march through.  So the thing is inartistically drafted.  So what?  It contributes to the unenforceability of the agreement.  Would it be possible to read this agreement as to cover what actually happened?  Maybe, but the court isn’t interested in doing this.


Finally, this was a standardized agreement that Mrs. Richards didn’t have a change to negotiate.  It’s a take-it-or-leave-it form.  It’s a contract of adhesion.  But standardized forms have a good side to them too.


What was the company thinking about under these circumstances?  The employee who signed this form was responsible for “risk management”.  The employee is concerned with limiting exposure to liability.  They would have liability insurance to cover lots of regular stuff.  Also, Mr. Richards would be covered by workman’s compensation.  So how can they lower their risk and insurance cost?  They can have a no-riders policy.  If they can enforce it, the only person in the cab will be the driver, and he’s entitled to workman’s comp.  Now here comes Mrs. Richards, who wants to ride along.  The approach taken by the company is: “If you want to ride, you absolve us from liability.”  But it doesn’t work!


What’s the end result of this case?  Will the Monkem Company have their lawyer redraft the release for the future to make it satisfy the Supreme Court of Wisconsin?  No way!  You just really, really don’t allow riders anymore!


Could you really get a different result the next time around?  Is this case really about agreements, or is it about a public policy that disapproves of such an exculpatory provision?  Could you reverse the result before this court if the draftsmanship is better?  Could they find a way to get a different result?  Clovis says even with the best draftsmanship in the world, the court isn’t going to come to a different result.


Broemmer v. Abortion Services of Phoenix


Melinda Broemmer is pregnant, and she and her mother go to Abortion Services of Phoenix.  She is asked to fill out three papers.  One is a consent to an abortion procedure.  One is a medical history.  The third is an arbitration agreement that says if there is any dispute, it will be submitted to arbitration under the American Arbitration Association and will be governed by a gynecologist.


Broemmer goes through with an abortion and gets injured.  She decides that she wants to sue instead of go to arbitration, so she does sue.  The clinic urges that the case should be stayed or dismissed because it’s supposed to go to arbitration.  But the clinic loses out.  The arbitration agreement is struck down.  How come?


There is unequal knowledge and unequal bargaining power in this case.  But that isn’t always dispositive.  Is this only about unequal bargaining power?


To keep this case in perspective, look at Vigil v. Sears Nat’l Bank, 205 F.Supp.2d 566.  In that case, the arbitration clause was upheld even though there was lots of unequal bargaining power.  But that was a credit card case, not a personal injury case.


But what’s wrong in the present case?  The court says that the agreement is out of line with Broemmer’s reasonable expectations.  That comes out of § 211, especially comment (f).  An adherent of an adhesion contract won’t be bound to unknown terms if those terms are beyond the range of reasonable expectations.  They will be bound to such terms if they are within the range of reasonable expectation.  That’s just in a comment, though.  It’s not as carefully done as the back letter law, but a number of courts have hooked on to that comment and it has become part of the jurisprudence in this area.


The courts say that a credit card agreement to arbitrate is within the reasonable expectation of the parties, but an agreement to arbitrate in an abortion personal injury case is not within the reasonable expectation of the parties.


The thing about the contract in this case is that it’s big and explicit.  So why shouldn’t she get the message if it’s so clear?  Is it true that you’re not bound to what you sign unless it’s explained to you?


One of the things to notice is that when we’re talking about personal injury, things change.  We want to deter the sale of shoddy goods.  We want to deter malpractice.  Generally, we disfavor exculpatory clauses.


But there is another perspective.  What is the underlying public policy that the courts don’t talk about?  The policy is lining the pockets of lawyers!  These decisions are pro-trial lawyer decisions.  Why don’t we want to arbitrate?  There’s a 40% fee if we litigate!  If we arbitrate, the fee will be much smaller.  So perhaps there is a public policy in favor of trial lawyers.  Both plaintiffs’ lawyers and defense lawyers will agitate against arbitration.  So who are the majority in these cases?  They are judges in the courts whose election campaigns have been supported by the state’s trial bar.  The dissenters’ election campaigns were probably paid for by the state’s business community.  These are cases where you can probably predict the result.  Until the beginning of the year, the Ohio Supreme Court always went 4-3 for plaintiffs’ trial attorneys, now it goes 4-3 the other way.  Clovis says that it’s shameful the way we elect judges to state Supreme Courts.  There are all kinds of public policies, and one of them is putting money in lawyers’ pockets.


Notice that this idea, the idea of two different kinds of law depending on personal injury, wrongful death, or property damage as opposed to only economic loss, comes up again and again.  The law of contracts as codified in UCC Article 2 will allow you to avoid tort liability for purely economic loss.


Brower v. Gateway 2000, Inc.


If the damages are purely economic, we’ll let an arbitration agreement stand, even if it’s pretty outrageous.  We want to keep the large fees of tort lawyers out of the economic losses that might be suffered.


We’re going to start talking about policing a bargain.  Sometimes a bargain definitely has been made, but we won’t enforce it for one reason for another.  We’ll deal with infancy, and also “dippiness”.


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