Contractual Exculpatory Provisions and Procedural and Substantive Unconscionability – Some Illinois Bullet-Points

Exculpatory and limitation of damages provisions are staples of commercial transactions; especially in the service contract setting.  The former shields a contracting party from all liability (“if something goes wrong, I’m not responsible”), while the latter caps a party’s monetary damages (“if something goes wrong, my maximum liability is $100”).

For decades, cases across the land have grappled with the validity and enforceability of these contract terms.  Generally, whether a given disclaimer is upheld comes down to a fact-specific analysis of the terms’ prominence and text size (can you find it?) along with the nuances of the parties’ relationship. (is a dominant person taking advantage of a more vulnerable person?)

 Exculpatory Provisions

Illinois favors freedom of contract and exculpatory provisions are generally enforceable unless (1) it’s against public policy to do so or (2) there is something in the social relationship of the parties which weighs against enforcing the term.

Exculpatory terms are not favored and must be strictly construed against the benefitting party, especially where that party drafted the contract.

An exculpatory clause violates public policy where (1) the contract involves an employer-employee relationship, (2) is between the public and those charged with a public duty (i.e. a common carrier or utility), or (3) there is a disparity in bargaining power between the parties so that freedom of choice is lacking.

Courts also look at whether Disclaimers are unconscionable.  Procedural unconscionability applies where the disclaimer is hard to find, buried or hidden.

A contract term is substantively unconscionable where it’s blatantly one-sided and completely favors one party at the expense of the other.

 Illinois’ Construction Contract Indemnification for Negligence Act, 740 ILCS 35/1 posits that agreements to indemnify against a contractor’s negligence are void as against public policy. 

Illinois Disclaimer rules glaringly reflect the importance of pre-contract negotiation.  Parties are free to allocate risks as they see fit and where they are both sophisticated commercial entities, freedom of contract rules prevail and exculpatory clauses will be upheld – save for any public policy reasons against their enforcement.