Limitation of liability; liquidated damages; exculpatory clause; arbitration. Divided court rejects as unconscionable a limitation of liability clause and an arbitration clause in home inspection contract.

  Glassford v. BrickKicker and GDM Home Services, Inc. (2009-362) (04-Nov-2011) 2011 VT 118 (Skoglund, J ) (Dooley, J., concurring and dissenting.) (Burgess, J., joined by Chief Justice Reiber, concurring and dissenting).

Plaintiffs, who brought suit to obtain compensation for an allegedly negligent home inspection, appeal the superior court’s order granting summary judgment in favor of the home inspector based on the terms of a binding arbitration agreement in the parties’ contract.  At issue is whether the superior court erred in rejecting plaintiffs’ contention that the terms of the home inspection contract are unconscionable under the common law.  The  contract limited defendant’s liability to no more than the $285 charged for its inspection.  Yet homebuyer would have to pay, at minimum, a $1350 arbitration fee to recover no more than the $285 inspection fee. We find unconscionable the contractual provisions limiting liability to the cost of the inspection and yet requiring arbitration that would necessarily cost more than the amount of the liability limit.  Because the limited liability and arbitration provisions are interconnected in creating the substantively unconscionable illusory remedy, we strike both of them, notwithstanding the contract’s boilerplate severability clause.   Accordingly, we reverse the superior court’s decision and remand the matter for further proceedings consistent with this opinion.

The limitation of liability clause in this case fails to meet any of the elements of the test for a valid liquidated damages provision.  It also fails the Dalury  public policy test under which an exculpatory agreement is invalid if it exhibits some or all of the following characteristics:

[1.] It concerns a business of a type generally thought suitable for public regulation. [2.] The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public. [3.] The party holds [it]self out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards. [4.] As a result of the essential nature of the service, in the economic setting of the  transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks [the party's] services. [5.] In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. [6.] Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or [the seller's] agents

Dalury, (quoting Justice Tobriner of the California Supreme Court in Tunkl. )

Dooley, J., concurring and dissenting, agrees with the majority’s decision to strike the limited-liability provision. Because it fails the Dalury standard for an exculpatory clause and is not a valid liquidated damages proviso, it is unconscionable as a matter of law.   However Justice Dooley would remand for the superior court to reconsider whether the arbitration requirement is unconscionable in light of the decision regarding the limitation of liability. In general, if a contract or a term within a contract is unconscionable, a court can choose either to refuse to enforce the contract, or it may choose to enforce the remainder of the contract with the unconscionable term excised so as to avoid any unconscionable result.  Restatement (Second) of Contracts § 208 (1981).

Burgess, J., joined by Chief Justice Reiber, concurring and dissenting, agree with the majority’s decision to strike the arbitration provision as one-sided and “so ridiculously unfair that it defies reformation.”  However they disagree that Dalury applies and conclude there is no unconscionability per se in the limitation of liability.