Thursday, 16 May 2013

Contractual Unconscionability - You Get What You Pay For

Service contracts often include liability exclusion clauses which limit liability for breach of contract and for negligence in performing the contracted service to the amount actually paid under the contract.  Naturally, if the contract is not properly performed and the recipient of the service suffers damages, they may attempt to convince a court that the exclusion clause is either not applicable to the particular negligence or breach, or should not be enforced because it is unconscionable or contrary to public policy.  

In considering whether a contractual term is unconscionable, courts look at two factors:
(a) inequality in the position of the parties arising from the ignorance, need or distress of the weaker, which left him in the power of the stronger; and
(b) proof of substantial unfairness in the bargain.
(see for example Loychuk v. Cougar Mountain Adventures Ltd., 2012 BCCA 122 at paras. 29-31 and McNeill v.Vandenberg, 2010 BCCA 583 at para. 15)

As shown by the recent decision in Gordon v. Krieg, 2013 BCSC 842, in considering whether a particular bargain is unfair, courts apply a common sense approach whereby they consider the service that was provided, how much was paid for the service, and the potential damages that could result from an improper performance.  In this particular decision, the court concluded that it was not an unfair bargain to limit damages arising from a visual only, three-hour home inspection - which damages could be in tens, if not hundreds of thousands of dollars - to the $400 paid for the inspection.
In Gordon v. Krieg, Ms. Gordon purchased a house and then discovered that it had significant problems with the foundation.  She then proceeded to sue everyone involved, including the sellers, the agents, and the home inspector who performed an inspection of the home for $400.  Her written contact with the inspector contained the following exclusion of liability clause:
4.         Inspector and its employees are limited in liability to the fee paid for the inspection services and report in the event that Client or any third party claims that Inspector is in any way liable for negligently performing the inspection or in preparing the Inspection Report, for any breach or claim for breach of this Visual Inspection Agreement or for any other reason or claim.
Among other things, Ms. Gordon argued that this clause was unconscionable and should not be enforced.  Although the court found that Ms. Gordon failed to satisfy the first branch of the test - there was no inequality between Ms. Gordon's and the inspector's position - it also went on to consider the second branch, whether the bargain was substantially unfair. Considering the quid pro quo in the contract - the amount Ms. Gordon paid and the services she was to receive - as well as potential damages, the court concluded that it was not unfair to contractually limit what could be very substantial damages to the amount paid for the inspection:
[165]     The first point to make is that the fact that the presence of a liability limitation clause does not automatically signal substantial unfairness. Instead, the whole of the contract must be taken into account. Here, the contract provided that PTP would provide an inspector who would divide about three hours between, first, inspecting the house and preparing a written report, and, second, conversing with Ms. Gordon. In return, Ms. Gordon paid a fee of $400. That works out to about $133 per hour. That fee had to cover Mr. Kilby’s wage and all of PTP’s overhead. The contract required PTP to conduct a visual inspection only – neither party expected that PTP would get all forensic on the property by poking holes in walls, tearing up floor boards, or removing insulation. Four hundred dollars does not seem an unreasonable figure for the relatively limited service the contract contemplated. I grant that it might be different if PTP had charged, say, $40,000 for its three hours of time. In that case, it would be difficult to see how such a large fee could be rationally connected to the value of the limited services provided.

[166]     As for the role that the limitation clause plays in the assessment of fairness, it is important to note that the asset that was being inspected was a house that was about to sell for $360,000. Absent the limitation clause, PTP would have been open to claims in the range of tens and hundreds of thousands of dollars. In that case, the fee that PTP charged to Ms. Gordon would have to reflect that risk; it would have been much higher. The limitation clause had the effect, therefore, of moderating the price PTP charged and of bringing that price into a range that was affordable to Ms.Gordon. Rather than being unfair, the limitation clause brought the price Ms. Gordon paid for the inspection down to a point that she could afford.

[167]     For these reasons I find that the bargain between Ms. Gordon and PTP was not substantially unfair.
In short, you get what you paid for.