Ability to cancel contract for “any reason” made it illusory and pre-release for liability for negligence is against public policy when clearly inferior bargaining position: SPEEDWAY SUPERAMERICA v. ERWIN (COA 3/21/2008)

CONTRACTS:  Ability to cancel contract for "any reason" made it illusory and pre-release for liability for negligence is against public policy when clearly inferior bargaining position
DATE RENDERED: 3/21/2008

Speedway appeals from an order dismissing its counterclaim against Sebert L.Erwin and COA affirmed.

Erwin was hurt on store premises and sued Speedway.  However, under his contract with Speedway he was prohibited from assigning the contract and from subcontracting the work to be performed without Speedway’s consent. There was no requirement that Speedway’s refusal of such consent had to be reasonable.

Though the contract was for a term of five years Speedway retained the right to cancel the contract upon written notice “at any time, for any reason.” The contract did not provide Erwin a reciprocal right of cancellation. If Speedway did cancel the contract Erwin’s right to recover damages was limited. 

The trial court also granted Erwin’s motion to dismiss Speedway ’s counterclaim on grounds that the indemnification provision was invalid and unenforceable as against Kentucky public policy

The circuit court based its decision on Hargis v. Baize ,168 S.W.3d 36 (Ky. 2005). Hargis addressed the validity of an exculpatory contract for exemption from future liability for negligence, whether ordinary or gross negligence i.e., a pre-injury release.  Speedway argues that Hargis is inapposite because the document at issue is not a pre-injury release, but an indemnification provision of the type held valid in Fosson v.Ashland Oil &Refining Co., 309 S.W.2d 176 (Ky.1958) where a party uses an indemnification provision to defend against its own negligence, any distinction between a pre-injury release and an indemnification provision can become, as it has in this case, analytically negligible. When an indemnitee uses an indemnification provision in such manner, the provision becomes the virtual equivalent of an exculpatory pre-injury release. In such cases, Hargis remains as relevant as Fosson.   A key factor perhaps the key factor in the analysis of both pre-injury releases and indemnification provisions used to defend the indemnitee’s own negligence is the relative bargaining power of the parties who enter into them.

The predominant fact of this case is the disparity in bargaining power existing between these two parties. Not only did Erwin have only an eighth grade education, the one-sided contract terms themselves are strong indication of the superior bargaining position Speedway enjoyed.

iIt is difficult to see any benefit Erwin received under this contract. Speedway’s ability to cancel the five-year contract “at any time for any reason ” made even the term illusory.

We are not in doubt that there was a significant disparity in the bargaining positions of the parties to this contract.

Focusing on that key factor in Cumberland Valley Contractors , the Supreme Court examined the circumstances of the subject contract and the parties to it and held that the subject exculpatory clause “must be enforced as part of an arm’s-length transaction between sophisticated parties with equal bargaining power.”

However, the Supreme Court has recognized that exculpatory clauses have been invalidated more frequently in the context of personal injury cases where an individual is often forced to sign a release to obtain a necessity such as employment from a party in a superior bargaining position.

Here, the COA found the the case before presented such circumstances in finding the provision invalid.  Such provisions whether pre-injury releases or indemnification provisions applied to defend against the indemnitee’s own negligence, are not against public policy generally but they are when agreed to by a party in a clearly inferior bargaining position.


By Michael Stevens

Please note: I reserve the right to delete comments that are inappropriate, offensive or off-topic.

Leave a Reply

Your email address will not be published.