In Aurora Contractors, Inc. v. West Babylon Public Library the Appellate Division of the Supreme Court of NY, first department looked at a case that involved so-called exculpatory clauses. In essence, a clause of this type is simply contract language that states that a certain party is not at fault (not liable) if a certain event happens.
Remember that a contract is, at its heart, a bargained-for exchange of promises. Central to the policy behind contracts is the idea that the parties are (almost) totally free to agree to whatever they want. And one crucial element of contract negotiation is the determination of which party will bear or assume certain risks. After all, there are many, many ways in which a deal can go wrong. Any foreseeable risks can, in theory, be written into the contract in a manner with which both parties agree.
This case is an excellent look at exculpatory language in contracts and some of the recognized exceptions (because in law there are almost always exceptions to everything). Here the defendant, the West Babylon Public Library, was supposed to secure some adjacent land which was necessary for the plaintiff contractor company to do certain work under the contract. The facts show that the library did not, in fact, secure this adjacent land, and thus the plaintiff could not do the work. Because these circumstances caused a delay in the performance of the contract, the plaintiff was damaged in some way, and subsequently sued for breach of contract.
At issue was certain exculpatory language placed into the contract by the defendant. This language stated that the defendant was not liable for delays that affected the plaintiff’s ability to do the work.
The court first stated that this form of exculpatory language was generally valid and consistent with public policy (that policy being that parties are generally free to agree to whatever they want via contract).
However, the court did not end its analysis there - it helpfully summarized the four main exceptions to exculpatory language clauses for delays, where damages could still be recovered, even in the presence of exculpatory language:
(1) Delays caused by bad faith, or willful, malicious, or grossly negligent conduct. This means that the contractee (the Library in this case) can’t go out and actively cause delays out of spite, malice or for no good reason.
(2) Uncontemplated delays. These are delays that neither side could have even been remotely thinking of when the deal was signed.
(3) Delays that are so unreasonable that they constitute an abandonment of the contract. This is actually similar to (1) but perhaps with less of an element of intent. The contractee can’t keep delaying for a period of time that the court feels is unreasonably. In this case, hypothetically, if the Library did not take steps to secure the rights to the land for 18 months, that might be considered an excessively unreasonable delay.
(4) Delays resulting from the contractee’s breach of a fundamental obligation of the contract. Another slightly tricky scenario – essentially the contractee has certain duties under the contract. If a delay occurs because the contractee actually breached one or more duties (always a bad thing), then it rises to the level where the exculpatory language is no longer a shield.
Here the court ruled that although the defendant showed that the exculpatory language was valid and operated to bar the plaintiff’s damages, the plaintiff raised a valid point that one of the above four exceptions might apply, and thus the case would not be dismissed and would move forward to trial.
Exculpatory language and risk-shifting clauses are a vital part of any business contract. It is crucial to have an experienced attorney familiar with the intricate details of contract law on your side when involved with matters that may involve breach of contract. Please do not hesitate to contact our office for a consultation.