Bluegrass Business Law

March 23, 2008

One-sided contracts are a bad deal for ALL parties (or getting greedy will get ya’)

The Court of Appeals just released a decision that shows that getting greedy will get ya’ in the end. Despite precedents that show that contracts substantially favoring the party with the greater power often are deemed unconscionable (so unfair as to not be enforceable), lawyers stiff draft them and companies still like them. That is what occurred in Speedway SuperAmerica, LLC v. Erwin, 2007-CA-000451-MR (March 21, 2008)(to be published).

The contract involved in the Erwin case was drafted by Speedway and designed to have Sebert Erwin be an independent contractor for Speedway. It also provided that Sebert (love that name!) would indemnify (pay for) and hold harmless (not sue) Speedway for any damages arising out of any breach of the contract. Further, Speedway expected Sebert to get $300,000 in insurance that also insured Speedway plus his own workers’ compensation insurance. The contract was for five (5) years, but Speedway could cancel it any time they wanted for any reason whatsoever, but Sebert could not do the same. He could not even assign the contract to someone else. Basically, the contract only benefited Speedway and provided no protection for Sebert. First year law students learn that such contracts are problematic at best and yet Speedway paid some lawyer big money to come up with the rag.

Sebert had considerably less sophistication regarding contracts; the Court pointed out that he had an eighth (8th) grade education (though my law professors swore they only taught on an 8th grade level when we did not understand them). He likely had no idea exactly what rights he was signing away and had no power to bargain for better terms. He needed a job and Speedway probably said he could take it or leave it. One day, Sebert was directed to help move a different station to move a walk-in freezer. While assisting in that task, Sebert fell and was injured so he sued Speedway. Speedway countersued to enforce the indemnification clause of the contract (basically, if Sebert won his suit, he would have to pay himself the damages).

The trial court dismissed Speedway’s counterclaim because it found that the indemnification clause was not clear and understandable enough for an ordinary person to understand what he or she was contracting away. Speedway appealed and argued that rule only applied to pre-injury releases and, instead, this was an indemnity provisions. They cited case law that found such a provision valid. If you have a greater interest in the process and reasoning of the court, please read the decision. For our purposes here, we are going to cut to the heart of the matter.

The Court decided that it did not matter which case law was applied to this particular contract because the guiding principal fit both pre-injury releases and indemnification clauses. The holding of the Court is that when a contract that is used to defend against the indemnifee’s own negligence is “agreed to by a party in a clearly inferior bargaining position” (Id. at 9) then it is against public policy and not enforceable. In other words, by taking advantage the less sophisticated Sebert and trying to have all the protection and none of the risk, Speedway made their fancy contract worth no more than the paper it was written on. I sure would like to know how much they paid for that contract to be drafted.

This is a narrow holding by the Court in that such indemnification provisions are generally enforceable. If Sebert had been a business savvy contractor, the outcome probably would have been different. Even if the specific holding narrowly rests on the differential bargaining power, the court highlighted other factors that seemed to influence them. Businesses should be aware that they are on shaky grounds when their contracts:
1) Are “take it or leave it” deals with person with clearly less bargaining power.
2) Allow for one-sided termination of the contract.
3) Allow for termination of for ANY reason.
4) Deny assignability for ANY reason.
5) Try to make someone an Independent Contractor but still try to control how that person performs their tasks.
6) Requires the other party to waive a lien or other mechanism for insuring they get paid.
7) Essentially, are too greedy and attempt to get without giving.

Lesson learned: Make deals that are balanced; contracts that distribute risks and responsibilities fairly. Such deals will be honored by courts and your businesses wealth and reputation will benefit over the long term.

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