Howard Weaver v. American Oil Co. and Homer Hoffer
No. 1271S350
SUPREME COURT OF INDIANA
257 Ind. 458; 276 N.E.2d 144; 1971 Ind. LEXIS 562; 49 A.L.R.3d 306
 
December 3, 1971, Filed

PRIOR HISTORY: From the Marshall Circuit Court, Roy Sheneman, Judge. Judge.

This action was initiated by American Oil Company and Homer Hoffer, appellees herein, for a declaratory judgment to determine the liability of appellant under a clause in a lease contract. The trial court entered judgment holding the appellant liable under the lease contract. The Appellate Court held an exculpatory clause of the contract invalid and an indemnifying clause valid. Petition to transfer the appeal to the Indiana Supreme Court is granted.

DISPOSITION: Reversed with directions.

OPINION BY: ARTERBURN

OPINION: In this case the appellee oil company presented to the appellant-defendant leasee, a filling station operator, a printed form contract as a lease to be signed by the defendant, which contained, in addition to the normal leasing provisions, a "hold harmless" clause which provided in substance that the leasee operator would hold harmless and also indemnify the oil company for any negligence of the oil company occurring on the leased premises. The litigation arises as a result of the oil company's own employee spraying gasoline over Weaver and his assistant and causing them to be burned and injured on the leased premises. This action was initiated by American Oil and Hoffer (Appellees) for a declaratory judgment to determine the liability of appellant Weaver, under the clause in the lease. The trial court entered judgment holding Weaver liable under the lease.

Clause three [3] of the lease reads as follows:

"Lessor, its agents and employees shall not be liable for any loss, damage, injuries, or other casualty of whatsoever kind or by whomsoever caused to the person or property of anyone (including Lessee) on or off the premises, arising out of or resulting from Lessee's use, possession or operation thereof, or from defects in the premises whether apparent or hidden, or from the installation existence, use, maintenance, condition, repair, alteration, removal or replacement of any equipment thereon, whether due in whole or in part to negligent acts or omissions of Lessor, its agents or employees; and Lessee for himself, his heirs, executors, administrators, successors and assigns, hereby agrees to indemnify and hold Lessor, its agents and employees, harmless from and against all claims, demands, liabilities, suits or actions (including all reasonable expenses and attorneys' fees incurred by or imposed on the Lessor in connection therewith) for such loss, damage, injury or other casualty. Lessee also agrees to pay all reasonable expenses and attorneys' fees incurred by Lessor in the event that Lessee shall default under the provisions of this paragraph."

It will be noted that this lease clause not only exculpated the lessor oil company from its liability for its negligence, but also compelled Weaver to indemnify them for any damages or loss incurred as a result of its negligence. The Appellate Court held the exculpatory clause invalid, but the indemnifying clause valid. In our opinion, both these provisions must be read together since one may be used to effectuate the result obtained through the other. We find no ground for any distinction and we therefore grant the petition to transfer the appeal to this court.

This is a contract which was submitted (already in printed form) to a party with lesser bargaining power. As in this case, it may contain unconscionable or unknown provisions which are in fine print. Such is the case now before the court.

The facts reveal that Weaver had left high school after one and a half years and spent his time, prior to leasing the service station, working at various skilled and unskilled labor oriented jobs. He was not one who should be expected to know the law or understand the meaning of technical terms. The ceremonious activity of signing the lease consisted of nothing more than the agent of American Oil placing the lease in front of Mr. Weaver and saying "sign", which Mr. Weaver did. There is nothing in the record to indicate that Weaver read the lease; that the agent asked Weaver to read it; or that the agent, in any manner, attempted to call Weaver's attention to the "hold harmless" clause in the lease. Each year following, the procedure was the same. A salesman, from American Oil, would bring the lease to Weaver, at the station, and Weaver would sign it. The evidence showed that Weaver had never read the lease prior to signing and that the clauses in the lease were never explained to him in a manner from which he could grasp their legal significance. The leases were prepared by the attorneys of American Oil Company, for the American Oil Company, and the agents of the American Oil Company never attempted to explain the conditions of the lease nor did they advise Weaver that he should consult legal counsel, before signing the lease. The superior bargaining power of American Oil is patently obvious and the significance of Weaver's signature upon the legal document amounted to nothing more than a mere formality to Weaver for the substantial protection of American Oil.

Had this case involved the sale of goods it would have been termed an "unconscionable contract" under sec. 2-302 of the Uniform Commercial Code as found in Burns Ind. Stat. sec. 19-2-302. The statute reads as follows:

"19-2-302. Unconscionable contract or clause. -- If the court as a matter of law find the contract or any clause of the contract to have been unconcisonable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination. (Acts 1963, ch. 317, sec. 2-302, p. 539)"

According to the Comment to Official Text, the basic test of unconscionability is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-side as to be unconscionable under the circumstances existing at the time of the making of the contract. Subsection two makes it clear that it is proper for the court to hear evidence upon these questions.

"An 'unconscionable contract' has been defined to be such as no sensible man not under delusion, duress or in distress would make, and such as no honest and fair man would accept. There exists here an 'inequality so strong, gross and manifest, that it is impossible to state it to a man of common sense without producing an exclamation of the inequality of it.' 'Where the inadequacy of the price is so great that the mind revolts at it, the court will lay hold on the slightest circumstances of oppression or advantage to rescind the contract."

"It is not the policy of the law to restrict business dealings or to relieve a party of his own mistakes of judgment but where one party has taken advantage of another's necessities and distress to obtain an unfair advantage over him, and the latter, owing to his condition, has encumbered himself with heavy liability or an onerous obligation for the sake of a small or inadequate present gain there will be relief granted." Stiefler v. McCullough (1933), 97 Ind. App. 123, 174 N. E. 823.

The facts of this case reveal that in exchange for a contract which, if the clause in question is enforceable, may cost Mr. Weaver potentially thousands of dollars in damages for negligence of which he was not the cause, Weaver must operate the service station seven days a week for long hours, at a total yearly income of $ 5,000-$ 6,000. The evidence also reveals that the clause was in fine print and contained no title heading which would have identified it as an indemnity clause. It seems a deplorable abuse of justice to hold a man of poor education, to a contract prepared by the attorneys of American Oil, for the benefit of American Oil which was presented to Weaver on a "take it or leave it basis".

Justice Frankfurter of the United States Supreme Court spoke on the question of inequality of bargaining power in his dissenting opinion in United States v. Bethlehem Steel Corp. (1942), 315 U.S. 289, 326, 62 S. Ct. 581, 599, 86 L. Ed. 855, 876.

"(I)t is said that familiar principles would be outraged if Bethlehem were denied recovery on these contracts. But is there any principle which is more familiar or more firmly embedded in the history of Anglo-American law than the basic doctrine that the courts will not permit themselves to be used as instruments of inequity and injustice? Does any principle in our law have more universal application than the doctrine that courts will not enforce transactions in which the relative positions of the parties are such that one has unconscionably taken advantage of the necessities of the other?"

"These principles are not foreign to the law of contracts. Fraud and physical duress are not the only grounds upon which courts refuse to enforce contracts. The law is not so primitive that it sanctions every injustice except brute force and downright fraud. More specifically, the courts generally refuse to lend themselves to the enforcement of a 'bargain' in which one party has unjustly taken advantage of the economic necessities of the other . . .'"
The traditional contract is the result of free bargaining of parties who are brought together by the play of the market, and who meet each other on a footing of approximate economic equality. In such a society there is no danger that freedom of contract will be a threat to the social order as a whole. But in present-day commercial life the standardized mass contract has appeared. It is used primarily by enterprises with strong bargaining power and position. The weaker party, in need of the good or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses.

Judge Frankfurter's dissent was written nearly twenty years ago. It represents a direction and philosophy which the law, at that time was taking and is now compelled to accept in our modern society over the old principle known as the parol evidence rule. The parole evidence rule states that an agreement or contract, signed by the parties, is conclusively presumed to represent an integration or meeting of the minds of the parties. This is an archaic rule from the old common law. The objectivity of the rule has as its only merit its simplicity of application which is far outweighed by its failure in many cases to represent the actual agreement, particularly where a printed form prepared by one party contains hidden clauses unknown to the other party is submitted and signed. The law should seek the truth or the subjective understanding of the parties in this more enlightened age. The burden should be on the party submitting such "a package" in printed form to show that the other party had knowledge of any unusual or unconscionable terms contained therein. The principle should be the same as that applicable to implied warranties, namely, that a package of goods sold to a purchaser is fit for the purposes intended and contains no harmful materials other than that represented. Caveat lessee is no more the current law than caveat emptor. Only in this way can justice be served and the true meaning of freedom of contract preserved. The analogy is rational. We have previously pointed out a similar situation in the Uniform Commercial Code, which prohibits unconscionable contract clauses in sales agreements.

When a party can show that the contract, which is sought to be enforced, was in fact an unconscionable one, due to a prodigious amount of bargaining power on behalf of the stronger party, which is used to the stronger party's advantage and is unknown to the lesser party, causing a great hardship and risk on the lesser party, the contract provision, or the contract as a whole, if the provision is not separable, should not be enforceable on the grounds that the provision is contrary to public policy. The party seeking to enforce such a contract has the burden of showing that the provisions were explained to the other party and came to his knowledge and there was in fact a real and voluntary meeting of the minds and not merely an objective meeting.

Unjust contract provisions have been found unenforceable, in the past, on the grounds of being contrary to public policy, where a party has a greater superior bargaining position. In Penn. Railroad Co. v. Kent (1964), 136 Ind. App. 551, 198 N. E. 2d 615, Judge Hunter, speaking for the court said that although the proposition that "parties may enter into such contractual arrangements as they may desire may be conceded in the general sense; yet when such special agreement may result in affecting the public interest and thereby contravene public policy, the abrogation of the rules governing common carriers must be zealously guarded against."

We do not mean to say or infer that parties may not make contracts exculpating one of his negligence and providing for indemnification, but it must be done knowingly and willingly as in insurance contracts made for that very purpose.

It is the duty of the courts to administer justice and that role is not performed, in this case, by enforcing a written instrument, not really an agreement of the parties as shown by the evidence here, although signed by the parties. The parol evidence rule must yield to the equities of the case. The appeal is transferred to this court and the judgment of the trial court is reversed with direction to enter judgment for the appellant.

DISSENT: Prentice, J.

My opinion is diametrically opposed to those of both the majority herein and of the Appellate Court as set forth in 261 N. E. 2d 99, and 262 N. E. 2d 663. There is no law to support the decisions of the Appellate Court and, ... there are no facts to support the majority opinion of this Court

...

The facts as found, are that although the defendant never read the lease, he had ample opportunity to do so and to obtain counsel. A general rule in effect not only in Indiana but elsewhere, is that a person who signs a contract, without bothering to read the same, will be bound by its terms. Welsh v. Kelly-Springfield Tire Co. (1938), 213 Ind. 188, 12 N. E. 2d 254; Walb Construction Co. v. Chipman (1931), 202 Ind. 434, 175 N. E. 132; Givan v. Masterson (1898), 152 Ind. 127, 51 N. E. 237; Keller v. Orr (1886), 106 Ind. 406, 7 N. E. 195.

Without regard to whether or not he was aware of its contents, a person will be relieved of his obligations under a contract under circumstances falling into two main categories: (1) where the contract is not enforceable because of occurrences or omissions (fraud, concealment, etc.) surrounding its execution and where (2) the contract is not enforceable because of the nature or subject of the contract (illegality of subject matter). The Appellate Court would have us recognize a third category and excuse performance, at least as to harsh provisions, without a showing that he was aware of and understood the contract provisions and their implications, with the burden of proof upon such issues to vary depending upon the relative bargaining positions of the parties. The objective of such a rule is laudable, but I think it, nevertheless, totally unworkable.

...[T]he facts as found by the trial court, together with additional facts mentioned, [do not] suggest a disparity of bargaining positions warranting the application of exceptions to reasonable and well established rules or offend against my concept of fair business negotiations. A general disparity of economic or intellectual positions, while factors to be considered along with others in such cases, do not, in and of themselves, give one who is dominant in such attributes an unconscionable advantage in the particular transaction. Whether or not the contract was "understandingly entered into" by Defendant, we, of course, cannot say; but we see nothing to indicate that he was deprived of the opportunity to understand it by any acts or omissions of American. It would be a strange, and in my opinion impossible, rule if one party to a contract were to be held the guardian of the other and accountable to him for both the advantages he hoped to gain thereunder and the risks or losses that he may have failed to consider. Under such a rule, the less one knew of the provisions of the written contract which he executed, the better would be his position in the event of later dissatisfaction.

Chief Justice Arterburn, speaking for a majority of this Court, has concluded that the defendant was in an inferior position with respect to the lease and treats the lease as we might treat an adhesion contract. I find justification for neither. An adhesion contract is one that has been drafted unilaterally by the dominant party and then presented on a "take it or leave it" basis to the weaker party, who has no real opportunity to bargain about its terms. (Restatement 2d, Conflict of Law § 322 a, Comment e) (C.J.S. Contracts § 10, p. 581). Here we have a printed form contract prepared by American. There was great disparity between the economic positions of American and Defendant, and Defendant was a man of limited educational and business background. However, there is nothing from which we can find or infer that the printed lease provisions were not subject to negotiation or that, with respect to this particular lease, Defendant was not in a bargaining position equal to that of American. The fact that Defendant did not avail himself of the opportunity to read the agreement but elected to accept it as presented does not warrant the inference that his only options were to "take it or leave it." That the "hold harmless" clause was or might have been in small print, as suggested by the majority, can hardly have significance in light of the claim and finding that the defendant did not read any portion of the document.

The majority places great reliance upon the dissenting opinion of Justice Frankfurter in U. S. v. Bethlehem Steel Corp. (1942), 315 U.S. 289, 326, 62 S. Ct. 581, 599, 86 L. Ed 855, 876. I agree that it is a well reason opinion and that the philosophy there expressed has had a great impact upon the parole evidence rule and rightfully so. However, I find no similarity between the actual situations under consideration. In the Bethlehem Steel case, the national security of the United States hung in the balance while the terms of the contract in question were negotiated. Although the negotiators for the government had a theoretical choice between accepting the proposed contract or taking over the operation of Bethlehem, the latter subjected the nation to such grave peril as to amount to no choice at all. Bethlehems' actions clearly amounted to the taking of an unconscionable advantage of the circumstances, and there was ample authority for relieving the government of the harsh terms thusly coerced. The court there had merely to apply the fundamental principles of law that the courts will not enforce a bargain where one party has unconscionably taken advantage of the necessities and distress of the other. In the case at bar, the defendant was under no compulsion to act. There is nothing to indicate that he was motivated by any purpose other than to improve his own economic position, that the lease arrangement was to be more beneficial to American than to him, that he was financially, intellectually or emotionally incompetent or disadvantaged, that his necessities or potential distress were in any way involved or that his bargaining position with respect to this particular transaction, was not substantially equal to that of American.

The case of the Pennsylvania Railroad Co. v. Kent (1964), 136 Ind. App. 551, 198 N. E. 2d 615, has no application, as it was determined upon an issue of public interest and the rules governing common carriers. Also, it is clear that the uniform commercial code sections on sales cited by the majority can have no application; and Chief Justice Arterburn was careful to point out that it was referred to only to illustrate the acceptance of legal philosophies permitting and fostering fair dealings and substantive justice rather than blind and often unjust adherence to hard and fast rules. But we have neither the duty nor the right to abandon established principles whenever, in our judgment, it is necessary to avert a hardship. And should the Legislature see fit to vest us with either or both, I question that we have the requisite wisdom. It is for this reason, I believe, that our mandate is not simply to administer justice but to do so under the law. I hold no special interest in preserving the policy of enforcing indemnity and exculpatory contracts. It may well be that they should be greatly curtailed. But the majority opinion does not hold. Defendant's dilemma does not spring from an unconscionable advantage taken of him either by deceit of American or by virtue of a superior bargaining position. It clearly stems from either an unwillingness or indifference upon his part to utilize the resources available to him or from a willingness to assume the risks in exchange for the rewards that he hoped to gain. Presumably he has had the benefits contracted for, and the majority decision is a grant of retrospective unilateral contractual immunity to the careless and speculative and places a premium upon ignorance. I fear that it will stand as an invitation to any litigant who, finding himself burdened by his own contract, will say that he did not understand its provisions and ask us for relief that we have neither the duty, right nor wisdom to grant.

I would accept transfer of this cause, set aside the decision of the Appellate Court, as modified, and affirm the decision of the trial court.