In Boshyan v. Private I. Home Inspections, Inc., 2014 IL App (1st) 287715, the First District examines the interplay between a liquidated damages provision and limitation of liability language in a written home inspection contract.
The plaintiff home buyer sued his home inspector for breach of contract after the plaintiff encountered property defects after he moved into a house. The trial court granted the inspector’s Section 2-619 motion to dismiss based on the exculpatory contract language.
The inspection contract was profuse with disclaimers. Itlimited the plaintiff to damages of $500, it excluded latent defects from the inspection and also disclaimed any express or implied warranties.
Affirming dismissal of the home buyer’s suit, the Court held that the inspection contract’s $500 damage cap was a valid liquidated damages clause. The Court defined a liquidated damages provision as one that specifies a method of determining damages in the event a contract is breached and that provides an agreed-upon measure of damages upon breach.
The court distinguished a liquidated damage clause from an exculpatory clause: the latter completely insulates the defaulting party’s liability. ¶¶ 23-27.
The Court found the liquidated damages term unambiguous and contract manifested the parties’ intent to pre-calibrate damages at the contract’s outset. ¶ 27.
The Court went further. It held that even if the $500 damage cap wasn’t a valid liquidated damages clause (e.g. it was a penalty to secure performance or was optional in nature*), the term would still be enforced as an exculpatory clause.
Exculpatory clauses seek to strike a balance between freedom of contract principles on the one hand and any public policy considerations which would restrain that freedom on the other hand.
In the area of “nonregulated” contracts (e.g. contracts involving private parties), the Court permits competent parties to allocate business risks as they see fit. Here, since there was no special relationship between the parties – the home buyer and inspector were on an equal bargaining footing – no public policy of Illinois was violated by the contract term limiting plaintiff’s damages to $500.
Take-away: Freedom of contract principles will trump public policy considerations where the contracting parties are on an equal contractual footing in terms of education and socio-economic status and there is no fraud or over-reaching by one of the parties.
Home buyers should be aware that home inspection agreements are often laden with either or both (like the one here) disclaimer language and liquidated damages terms. They should be especially cognizant of damage caps in written home inspection agreements. This case also stands for proposition that a technical violation of a business licensing statute won’t necessarily void a contract involving the violating business.
* For Detailed Discussion of Liquidated Damages Clause, see “Holdback Provision in Real Estate Contract Fails Liquidated Damages Test”, Chicago Daily Law Bulletin, Commercial Litigation Column, March 10, 2014 http://www.slideshare.net/slideshow/embed_code/32194241