Limiting Liability in Agreements: Exculpatory Provisions and Ambiguities

In many business transactions, parties attempt to limit their liabilities and shift risk.  Typically, it is the party with the most leverage in that business transaction that seeks to include exculpatory provisions to minimize its risk.

As a general rule, and depending on the language of the risk shifting provision, these types of exculpatory provisions are enforceable.  However, when the language of that exculpatory provision is unclear, the provision will not be enforced by Florida courts.  Therefore, it is critical, when drafting and negotiating these types of risk shifting provisions, that one takes great care to avoid any confusion and ambiguity.

Recent Exculpatory Provisions Case Law

The recent case of Obsessions In Time, Inc. v. Jewelry Exchange Venture, LLLP is a lesson in how Florida courts analyze exculpatory provisions in contracts to determine whether the provision is valid and binding or ambiguous and unenforceable.

Obsessions leased a booth from Jewelry Exchange for Obsessions to sell watches and other valuables. Jewelry Exchange provided a safe, where Obsessions could store these valuables.   Ultimately, more than $2 million of Obsession’s valuables were stolen from that safe, and Obsessions sued Jewelry Exchange.

The parties’ lease agreement for the storage of Obsessions’ valuables provided:

 . . . it is hereby agreed that lessor [Jewelry] . . . shall not be liable for any loss or damage to the contents of the vault within the premises caused by burglary, fire, or any cause whatsoever, but that the entire risk of such loss or damage is assumed by the lessee. The lessor shall not be liable for any delay caused by failure of the vault doors to lock, unlock or otherwise operate and the sole liability of the lessor hereunder is limited to the exercise of ordinary care to prevent the opening of said vault or boxes contained therein by any person other than lessee [Obsessions] or the authorized agent of the lessee.

Jewelry Exchange argued that Obsessions damages claims were barred by the above-referenced exculpatory provision.   The trial court agreed and dismissed Obsessions’ complaint with prejudice.

The appellate court disagreed, finding the exculpatory provision was ambiguous and, thus, unenforceable.  The appellate court reasoned that if the lease’s exculpatory provision was meant to relieve Jewelry Exchange of liability for all loss, the use of the phrase “sole liability” created an ambiguity (since that portion of the provision would be rendered meaningless, in light of the language absolving Jewelry of all liability).

Specifically, the appellate court in Obsessions stated: “While purporting to relieve Jewelry of all liability, the exculpatory clause concurrently imposes a duty upon Jewelry to exercise ordinary care to prevent the unauthorized opening of the vault or boxes, and potential liability if Jewelry failed to exercise such care.”

Conclusion

The case law cited above demonstrates that parties must pay careful attention to the language of risk shifting provisions in contracts, particularly if a party seeks to absolve itself of all liability.

Even the slightest ambiguity in the exculpatory language will likely result in a Florida court invalidating the risk shifting provision, which may have disastrous consequences.