Tag Archives: illusory contract

TIME TO NEGOTIATE LIMITATION ON REMEDIES AND DAMAGES IS ON THE FRONT END

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Remember, when it comes to contracts, the time to negotiate and enter into mutually agreed upon bargains is on the front end. And, if the contract is not negotiable, at least you know that and can make the business decision whether you want to accept the bargains and risks.  If you don’t, well, you can walk away. Move onto another deal.  If you do, then you make the business decision as to the bargains or risk transfers and accept them moving forward. One of those bargains and risks deals with a limitation on damages and remedies.

In a recent dispute dealing with the sale of an aircraft, there was a provision dealing with the buyer and seller’s remedies in the event of a breach. (Similar to a real estate transaction or other buyer-seller scenario.) “Contract section 10.4(a) stated that if the buyer defaulted, the seller’s “exclusive remedies” were to keep the aircraft and the buyer’s deposit. Section 10.4(b) stated that if the seller defaulted by “fail[ing] to deliver the [aircraft] in accordance with the terms of [the contract],” the buyer’s “sole remedies” were the seller’s reimbursement of the buyer’s inspection costs.” Sky Aviation Holdings, LLC v. Aviation Unlimited, 50 Fla.L.Weekly D2658c (Fla. 4th DCA 2025).  As you can see, there was a limitation on the seller’s damages.

In this case, the seller intentionally breached and notified the buyer that it will refund the deposit and pay the seller’s inspection fees. The seller accepted the limitation on its damages. The buyer didn’t like that and sued the seller arguing that Section 10.4(b) that limited its remedies if the seller breached should be deemed illusory and unenforceable. The trial court agreed and the case proceeded to trial on the buyer’s damages. On appeal, the appellate court reversed remanding the case back to the trial court to award the damages referenced in Section 10.4(b). The appellate court found it presented a reasonable limitation on damages the buyer may recover if the seller breached:

Parties to a contract may agree to limit their respective remedies, and those remedies need not be the same.  The contractual provision, however, must be reasonable for a trial court to enforce it.  To be reasonable, both parties must have genuine obligations. 

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Here, contract section 10.4 imposed real obligations on both the seller and the buyer.

Sky Aviation Holdings, supra (internal citations omitted).

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONSIDER THE RISKS ASSOCIATED WITH AN EXCULPATORY CLAUSE

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An exculpatory clause in a contract is a clause aimed at relieving another party from certain liability. A disclaimer and insulation from liability.   Obviously, if you are the party relieving the other party from liability, you want to consider this risk including the potential enforceability of this risk if something goes wrong.  If you are the party asking for the insulation from liability, you do not want to create an exculpatory provision that disclaims and insulates you of all liability arising from the contract as it may create an illusory effect – that the agreement is nothing but a naked promise on your end because your promise is fully disclaimed and you are insulated from liability if you break your promise.  This could result in an unenforceable contract.

 

The validity of such an exculpatory clause was at-issue in Pier 1 Cruise Experts v. Revelex Corp., 2019 WL 3024618 (11thCir. 2019).   Although not a construction dispute, the exculpatory clause in this case was with two fairly sophisticated parties and expressly insulated one of the contracting parties from “any…damages regardless of kind or type…whether in contract, tort (including negligence), or otherwise.”  Pier 1 Cruise Experts, 2019 WL at *7.   This is a powerful exculpatory clause because it could be broadly construed to insulate that party from its own breaches of the contract.

In Florida:

[A]n exculpatory clause is enforceable so long as (1) the contracting parties have equal bargaining power and (2) the clause’s provisions are clear and unambiguous. With respect to the latter requirement, ‘the intention to be relieved from liability [must be] made clear and unequivocal and the wording must be so clear and understandable that an ordinary and knowledgeable person will know what he is contracting away.”  In the same vein, exculpatory clauses are ‘strictly construed against the party seeking to be relieved of liability.’

Pier 1 Cruise Experts, 2019 WL at *7 (internal citations omitted).

Here, the exculpatory clause was clear and was entered into with parties that had equal bargaining power.  The issue turned on the enforceability under Florida law and how the clause should be construed.

One interpretation is that the clause is enforceable and fully bars all of the parties’ claims against the other party that received this immunity from liability.  Period.

Another interpretation is that because of the broad sweeping application of the clause, it renders the entire contract illusory and void ab initio (i.e., void from the beginning).

A final interpretation could be that the clause will be construed to bar all negligence claims, but not breach of contract claims as it is the insulation from breach of contract claims that creates the illusory nature of the contract.

The Eleventh Circuit Court of Appeal certified this issue to the Florida Supreme Court with the following questions:

Is a contractual ‘exculpatory clause’ that purports to insulate one of the signatories from ‘any…damages regardless of kind or type…whether in contract, tort (including negligence), or otherwise’ enforceable?  Or, alternatively, does the clause confer such sweeping immunity that it renders the entire contract in which it appears illusory?  Or, finally, might the clause plausibly be construed so as to bar some but not all claims and thus save the contract from invalidation?

Pier 1 Cruise Experts, 2019 WL at *12.

Any answer to these questions can have worthy implications.  Notwithstanding, you need to consider that the intent of a clear exculpatory clause is to relieve and insulate another party from liability and that party will rely on the clause if a potential issue or claim arises.  The clause operates as a full disclaimer of sort.  Consider the enforceability of the provision and clearly negotiate the parameters of the provision and appreciate any corresponding risk associated with the provision.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.