Limitation of Liability Clauses and Unconscionability: The Impact of Gladden v. Boykin on the Allocation of Risk through Contracts, 13 SCBJ, SC Lawyer, November 2013, #3

• Author: Joey McCue and Logan Wells

Limitation of Liability Clauses and Unconscionability: The Impact of Gladden v. Boykin on the Allocation of Risk through Contracts

Vol. 25 Issue 3 Pg. 16

South Carolina Bar Journal

November, 2013

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0 Joey McCue and Logan Wells

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Generally, everyone is happy when the contract is signed. Goods or services are sold, and money changes hands. Everything is good until it is not. That is when we, as lawyers, get involved. That is also the point at which people reread, or worse, read for the first time, the contracts they signed.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Our society can neither function nor prosper without the use of contracts. Accordingly, the freedom of contract endures as a bedrock legal principal. An equally important, corresponding legal principal is that, barring extenuating circumstances, parties are bound by the terms of those contracts they freely enter. This general principle, however, is not without exceptions. This article explores the application of one of those exceptions, the doctrine of unconscionability, to limitation of liability clauses in the context of the home inspection contract, and the impact a recent S.C. Supreme Court opinion may have on how contracts are drafted to allocate business risks in South Carolina.

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Limitation of liability clauses in home inspection contracts

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0Unconscionability is the “absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms that are so oppressive that no reasonable person would make them and no fair and honest person would accept them.”¹ “The doctrine [of unconscionability] is not one to be applied to disturb the agreed allocation of risk, even if it should result from superior bargaining power of one party, but rather to prevent oppression and surprise.”²

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In a recent decision, Gladden v. Boykin, ³the S.C. Supreme Court upheld the limitation of liability clause in the Palmetto Home Inspection Services, LLC (“Palmetto”) inspection contract. Finding the provision, which limited Palmetto’s liability to the $475 Mrs. Gladden paid for the home inspection, was not unconscionable, the Court stated:

Courts should not refuse to enforce a contract on grounds of unconscionability, even when the substance of the terms appear grossly unreasonable, unless the circumstances surrounding its formation present such an extreme inequality of bargaining power, together with factors such as lack of basic reading ability and the drafter’s evident intent to obscure the term, that the party against whom enforcement is sought cannot be said to have consented to the contract.⁴

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0In Gladden, the home inspector was self-employed, operating out of his home, while Mrs. Gladden had, at one time, been a licensed real estate agent. It was undisputed that Mrs. Gladden read the contract prior to signing and paying for the home inspection services. There was no allegation Mrs. Gladden was uneducated or unable to protect her own interests. Quite the reverse, Mrs. Gladden negotiated with numerous parties throughout the process of purchasing the home and specifically sought Palmetto’s services, passing on a different home inspector described as “harder but best.”⁵

\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0\xA0The Gladden Court explained, “Limitation of liability and exculpation clauses are routinely entered into. Moreover, they are commercially reasonable in at least some cases, since they permit the provider to offer service at a lower price, in turn making the service available to people who...