10.4.11.2 Notes - Fair v. Negley

NOTE

1. See generally, Moskowitz, The Implied Warranty of Habitability: A New Doctrine Raising New Issues, 62 Calif. L. Rev. 1444 (1974).

In footnote 75, Judge Jacobs quotes a passage from the Washington case of Foisy v. Wyman to support his contention that even a bargained-for disclaimer of the implied warranty of habitability should not be enforced. During the trial of the Foisy case, Wyman (the tenant-purchaser who was asserting the right to be protected by a nondisclaimable warranty of habitability) testified as follows in response to questions put by his own attorney:

Q. So, it was your understanding that you were purchasing the house and that is your only obligation to pay $50 a month?

A. That was the whole understanding at the conception of the deal because her mother told me [objection].

Q. So, the only time prior to March you were on the premises was to just look at it?

A. Right. I told them I would buy and they said fine. They put me in it for $50 a month.

Q. Had you done any work cleaning up the house or anything around the premises before you moved in on March?

A. Oh, yes, I had to.

Q. Before you moved in?

A. Right, I had to. In the basement there was termites and there was things.

Q. When were you doing those things?

A. In February. . . .

Q. At that time did you have any agreement with the Foisys as to whether or not you were going to purchase it?

A. I had the agreement before I walked in that house. That's when they told me you can have it for $50 a month. They wanted $87 a month. I said it isn't worth it because it's sitting still and the windows are out. [Interruption].

Q. That understanding was that you were going to pay $50 per month?

A. Correct. That is the only way I would walk in that house because I wasn't in the proper position to bargain. They bargained to me because I saw a deal and I grabbed it. . . .

(This exchange is quoted in a dissenting opinion in the Foisy case, 515 P.2d 160 at 168-69.) If the plaintiff in Fair v. Negley had given similar testimony, do you think the majority's treatment of the "as is" clause at issue in that case would have been affected? Or does the majority's view of the clause rest upon considerations of public policy that no amount of voluntary bargaining can displace?

2. In his dissenting opinion in the principal case, Judge Price suggests that the implication of a nondisclaimable warranty of habitability in residential leases does the poor more harm than good by forcing the owners of marginal housing to withdraw their property from the market. For a detailed and critical assessment of this view, see Kennedy, Distributive and Paternalist Motives in Contract and Tort Law, with Special Reference to Compulsory Terms and Unequal Bargaining Power, 41 Md. L. Rev. 563, 604-609 (1982).

3. The majority in part rests its decision to disregard the "as is" clause in the parties' contract on what it takes to be the disparity in their relative bargaining power, viewing the agreement between them, in now-familiar terminology, as a "contract of adhesion."

There are, however, many contracts that fit this general description which we do not think objectionable for that reason alone. Suppose, for example, that A owns a painting B desperately wants and offers to sell it to B for a stated price, adding, "this is my final offer; take it or leave it." If B agrees, and then reneges, can he avoid A's claim for damages by arguing that their agreement was "adhesive"? How is this contract different from the one at issue in Fair v. Negley? Consult Kronman, Paternalism and the Law of Contracts, 92 Yale L.J. 763 (1983).

4. In O'Callaghan v. Waller & Beckwith Realty Co., 15 Ill. 2d 436, 155 N.E.2d 545 (1958), as modified on denial of rehearing (1959), the plaintiff sued to recover for personal injuries suffered while crossing the paved courtyard between her apartment and the garage in a large apartment complex maintained and operated by the defendant. The plaintiff was a tenant in defendant's building and her lease contained an "exculpatory" clause relieving the defendant of all liability to the plaintiff for personal injury or property damage caused by any act or neglect on the part of the defendant or its agents. Over a strong dissent, a majority of the Illinois Supreme Court affirmed a lower court decision holding that the plaintiff's action was barred by the exculpatory clause. In his opinion for the majority, Justice Schaefer wrote:

A contract shifting the risk of liability for negligence may benefit a tenant as well as a landlord. (See Cerny-Pickas & Co. v. C. R. Jahn Co., 7 Ill. 2d 393.) Such an agreement transfers the risk of a possible financial burden and so lessens the impact of the sanctions that induce adherence to the required standard of care. But this consideration is applicable as well to contracts for insurance that indemnify against liability for one's own negligence. Such contracts are accepted, and even encouraged. See Ill. Rev. Stat. 1957, chap. 95½, pars. 7-202(1) and 7-315.

The plaintiff contends that due to a shortage of housing there is a disparity of bargaining power between lessors of residential property and their lessees that gives landlords an unconscionable advantage over tenants. And upon this ground it is said that exculpatory clauses in residential leases must be held to be contrary to public policy. No attempt was made upon the trial to show that Mrs. O'Callaghan was at all concerned about the exculpatory clause, that she tried to negotiate with the defendant about its modification or elimination, or that she made any effort to rent an apartment elsewhere. To establish the existence of a widespread housing shortage the plaintiff points to numerous statutes designed to alleviate the shortage, (see Ill. Rev. Stat. 1957, chap. 67½, passim) and to the existence of rent control during the period of the lease. 65 Stat. 145 (1947), 50 append. U.S.C., sec. 1894.

Unquestionably there has been a housing shortage. That shortage has produced an active and varied legislative response. Since legislative attention has been so sharply focused upon housing problems in recent years, it might be assumed that the legislature has taken all of the remedial action that it thought necessary or desirable. One of the major legislative responses was the adoption of rent controls which placed ceilings upon the amount of rent that landlords could charge. But the very existence of that control made it impossible for a lessor to negotiate for an increased rental in exchange for the elimination of an exculpatory clause. We are asked to assume, however, that the legislative response to the housing shortage has been inadequate and incomplete, and to augment it judicially.

The relationship of landlord and tenant does not have the monopolistic characteristics that have characterized some other relations with respect to which exculpatory clauses have been held invalid. There are literally thousands of landlords who are in competition with one another. The rental market affords a variety of competing types of housing accommodations, from simple farm house to luxurious apartment. The use of a form contract does not of itself establish disparity of bargaining power. That there is a shortage of housing at one particular time or place does not indicate that such shortages have always and everywhere existed, or that there will be shortages in the future. Judicial determinations of public policy cannot readily take account of sporadic and transitory circumstances. They should rather, we think, rest upon a durable moral basis. Other jurisdictions have dealt with this problem by legislation. (McKinney's Consol. Laws of N.Y. Ann., Real Property Laws, sec. 234, Vol. 49, Part I; Ann. Laws of Mass., Vol. 6; c. 186, sec. 15.) In our opinion the subject is one that is appropriate for legislative rather than judicial action.

In 1959 the Illinois legislature enacted a statute that provided:

Every covenant, agreement or understanding in or in connection with or collateral to any lease of real property, except those business leases in which any municipal corporation, governmental unit, or corporation regulated by a State or Federal Commission or agency is lessor or lessee, exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor, his agents, servants or employees, in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable.

Ill. Rev. Stat. 1967, ch. 80, par. 15a.

In Sweney Gasoline & Oil Co. v. Toledo, Peoria & Western R.R., 42 Ill. 2d 265, 247 N.E.2d 603 (1969), the Illinois Supreme Court held the 1959 statute unconstitutional on the ground that the exemption of municipal and regulated corporations constituted "a discriminatory classification without any reasonable basis." Therefore, a majority of the court concluded, the O'Callaghan case was still good law in Illinois, so that the exculpatory clause in the Railroad's lease to the Oil Company was effective. Schaefer, J., who had written the majority opinion in O'Callaghan, entered the following dissent in Sweney:

In 1958, in O'Callaghan v. Waller & Beckwith Realty Co., 15 Ill. 2d 436, 155 N.E.2d 545, this court considered the validity, at common law, of exculpatory clauses in residential leases. The case was a very close one, and two members of the court joined in a strong dissent from the opinion which sustained their validity. The prevailing opinion concluded with a request for legislative action." Other jurisdictions have dealt with this problem by legislation. [Citations.] In our opinion the subject is one that is appropriate for legislative rather than judicial action." 15 Ill. 2d at 441, 155 N.E.2d at 547. The General Assembly responded promptly, and in 1959 adopted the statute which is now held unconstitutional.

I agree that the statute as written violates the constitution, for the reasons stated in the opinion of the majority. But I regard the enactment of the statute as an expression of the public policy of the State which this court should respect, even though it cannot be given complete effect according to its terms. That statute declares "void as against public policy and wholly unenforceable" every exculpatory clause in any lease, business or residential, with the narrow and irrational exception in favor of particular lessors and lessees of business property which totally defeats its major purpose. I would hold that the statute, despite its invalidity, is an expression of public policy which fully justifies this court in now holding, as a matter of common law, that exculpatory clauses in leaseholds are void.

In 1971 the Illinois legislature reenacted the statute that had been declared unconstitutional in Sweney, with the invalid exception for municipal and regulated corporations deleted. Ill. Ann. Stat. ch. 80, §91 (Smith-Hurd Supp. 1980). The new statute has been strictly construed by the Illinois courts, but its constitutionality has not been seriously challenged.

Outside Illinois the general trend seems to be against the traditional view upholding exculpatory clauses. A few states, such as Maryland, Massachusetts, and New York, prohibit exculpatory clauses by statutes similar to the one adopted in Illinois. More importantly, the Uniform Residential Landlord and Tenant Act contains a section prohibiting exculpatory and indemnifying provisions, although it does permit some shifting of the landlord's duties to the tenant. U.R.L.T.A. §1,403 (1972). The courts have also contributed to the erosion of the traditional law on exculpatory clauses. Some courts have invalidated such clauses by finding inequality of bargaining power or unconscionability in the contract. Others have distinguished between active and passive negligence on the part of the landlord, and honored exculpatory clauses only where the latter was involved. For a discussion of the trend against exculpatory clauses in the general context of landlord-tenant relations, see Browder, The Taming of a Duty The Tort Liability of Landlords, 81 Mich. L. Rev. 99 (1982). For a more detailed analysis of the validity of exculpatory clauses see Note, Country Club Apartments v. Scott: Exculpatory Clauses in Leases Declared Void, 32 Mercer L. Rev. 419 (1980).