I am sometimes asked during my risk management seminars if a party to a contract can safely sign an onerous contract with harsh indemnification clauses or other clauses that create excessive liability for an “innocent” party and then avoid the consequences by having a court hold the terms to be unconscionable and, therefore, unenforceable.
Those who ask this generally are contractors and consultants. They suggest that if the contract is grossly one-sided or unfair, it should be obvious to a court that it was signed under duress.
This never fails to bring a smile to my face as I recall a scene from my contract law class at Villanova. It was the third week of our first year. All of us were still in awe and fear of law school — especially of the tough, old, grouchy (and later beloved) professor of contracts.
After reading a sad case where a court enforced a contract that created a particularly bad deal for one of the parties, one naive student asked the professor how such a terrible and unfair thing could be tolerated by the court.
Our professor turned red. His bushy eyebrows rose. He began to tremble and sputter. He slammed his book closed and stared at the unsuspecting student before bellowing:
“This is the study of law. If you want ‘fair’ you belong across the street [at the Augustinian Theological Seminary] and not in law school.”
He stomped out of the class and left us there, with a half hour remaining, to ponder that heavy thought.
That brief performance left a greater impression on me and taught me more about the law of contracts than anything else before or sense.
It turned out that it wasn’t necessary to abandon law school and join the seminary merely because one expected contracts to be fair. All that was necessary was to accept the responsibility for negotiating and signing fair contracts. You get what you negotiate — not necessarily what you deserve. Don’t go into a contract with the hope that a court will bail you out of bad terms and conditions when things turn sour. Negotiate your own good terms.
I retell this story from time to time to encourage contractors and design professionals to negotiate diligently for a reasonable contract, and to not expect a court to fix contractual difficulties of their own making. It is a good introduction, I believe, to the case that is here described.
In Bond Drug Company v. Amoco Oil Co., 654 N.E. 2d 540, 211 Ill. Dec. 78 (1995), the court held that Amoco was not entitled to summary judgment to rescind a sales contract under which it had to pay almost $1 million to cleanup pollution from a gas station on property that it was selling for only slightly more than that.
When the contract was executed the purchaser paid the full purchase price in an escrow account to be held for the benefit of Amoco. During the time that Amoco remediated the pollution problem, the purchaser waited for its land. With the land appreciating in value, Amoco apparently decided it could obtain a better deal if it rescinded its contract and sold the property to someone else.
Amoco made two arguments that the that court agreed with in issuing summary judgment in Amoco’s favor. First, Amoco argued that the representations and warranties clause of its contract did not require it to pay for the cleanup of environmental damage. Second, it offered an alternative argument that even if the clause required cleanup, the contract should be rescinded because the cleanup costs were so high as to show that there was a mutual mistake of fact concerning the property and the extent of the contamination.
The warranty clause provided: “Amoco warrants that Amoco has received no notices from any city, village or other governmental authority of zoning, building, fire or health code violations in respect to the Premises that have not been heretofore corrected and if any violations occur or notices are received as to the same prior to the time Bond takes title and possession, Amoco shall promptly advise Bond of same and Amoco shall correct same, unless same is due to Bond’s fault. If same is due to Bond’s fault, Bond shall promptly cause the violations to be corrected at its expense.”
The trial court concluded that this warranty did not apply to environmental contamination. The appellate court disagreed with the trial court’s conclusion because the warranty required Amoco to “correct all health code violations of any governmental authority.” Since environmental contamination is considered an issue of public health and safety per the terms of the various environmental laws, it must be deemed a violation of a health code and, therefore, Amoco’s responsibility to remedy.
The appellate court also disagreed with the trial court’s conclusion that there had been a mutual mistake of fact that would justify rescinding the contract. The court found that instead of there being a mutual mistake concerning the extent of the contamination and the cost that would be incurred, it was merely a unilateral mistake of Amoco.
According to the court, one party’s mistaken assumptions concerning costs is not excuse for not honoring the contract. “A contract fairly entered into cannot be avoided or disregarded by one of the parties because he discovers that the contract is less profitable to him that he anticipated when he entered into it.”
As the court saw it, “Amoco knew … how to protect itself contractually from such risks prior to negotiating and entering into the [contract.]”
Finally, the court rejected Amoco’s argument that enforcement of the contract would be “unconscionable.” And here, my professor could not have said it better:
“No equitable principle, including unconscionability, will compel the cancellation of a valid contract merely because one of the parties thereto will possibly or probably sustain a loss. Where the parties to an instrument are competent to contract with each other, and there is no question of fraud, neither can be relieved from his agreement on the ground that he did not use good business judgment in entering into the contract.”
About the author: Article written by J. Kent Holland, Jr., a construction lawyer located in Tysons Corner, Virginia, with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects. He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932. This article is published in ConstructionRisk.com Report, Vol. 1, No. 5 (May 2000).
Copyright 2000, ConstructionRIsk.com, LLC