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Exculpatory Language in Closing Escrow Agreement Disclaiming Agent’s Responsibility as to Compliance With Local and Municipal Requirements Was Held to be Enforceable

A Publication of Skidmore & Associates, A Legal Professional Association

On May 7, 2004, the 11th District Court of Appeals (“11th District Court”) upheld summary judgment in favor of Enterprise Title Agency, holding that an exculpatory provision in their closing escrow agreement (the “Agreement”) was not unconscionable or void as against public policy. Hurst v. Enterprise Title Agency, Inc., 157 Ohio App.3d 133 (11th Distr. 2004).

Lisa Hurst (“Buyer”) purchased a home from Frankie and Jacob Lowe (“Sellers”) in September of 1999. Buyer could not obtain financing, so the two parties entered into a land sale contract, where the Sellers would retain title to the property until the balance of the purchase price was paid. Enterprise (“Agent”) served as the escrow agent to the transaction. Sellers did not comply with a local ordinance requiring inspection of the property upon its transfer. After Buyer moved into the house, she discovered water damage, plumbing and electrical problems. She filed suit for rescission of the land sale contract and damages against Agent. She claimed that a provision in Agent’s Agreement disclaiming responsibility for compliance with a local ordinance was unconscionable and unenforceable as against public policy.

Section 1464.07 of the Mentor-on-the-Lake ordinance states that an escrow agent shall not “file for record an instrument to transfer title or disburse funds from such sale, unless the provisions of this chapter have been satisfied, including…the specific provisions of section 1464.05.” Section 1464.05 requires the seller, “to provide the purchaser…with a current certificate of inspection.” The trial court determined that although Sellers still maintained legal title to the property, an equitable interest in the property was conveyed to Buyer upon execution of the contract. Therefore, Sellers were required to comply with the ordinance.

The Agreement stated that Agent “assumes no responsibility as to compliance with any local or municipal requirements, point of sale inspections or ordinances.” Buyer claimed that this exculpatory language was unenforceable because it was unconscionable and in violation of public policy. The trial court granted summary judgment to Agent and Buyer appealed.

The Ohio Supreme Court has held that generally, the inclusion of an exculpatory clause in a contract does not violate public policy. Glaspell v. Ohio Edison Co., 29 Ohio St.3d 44, 46 (1987). The 11th District Court has also previously held that, “the freedom to contract is fundamental, and we should not lightly disregard a binding agreement, unless it clearly contravenes some established or otherwise reasonable public interest.” Zivich v. Mentor Soccer Club, Inc., 1997 WL 203646 at *10 (11th Dist. April 18, 1997). The 11th District Court looked to four factors to determine whether this exculpatory language was against public policy: (1) whether the services are necessary to a person’s living needs; (2) whether the supplier assumes a quasipublic function in providing the service; (3) whether the supplier has a monopoly in providing the specific service; and (4) whether the limitation provision is such that the customer is in a position to assent to its terms. Collins v. Click Camera & Video, Inc., 86 Ohio App.3d 826, 832 (10th Dist. 1993). The 11th District Court determined that the services of an escrow agent are not necessary to a person’s living needs nor do they provide services that are quasipublic in nature. Agent did not have a monopoly for these services and there was no evidence that Buyer could not bargain to have the provision removed from the contract. Buyer also could have chosen another escrow agent if she did not like the terms of Agent’s Agreement. Therefore, the language in the Agreement was not void as against public policy.

The 11th District Court next looked as to whether the provision was unconscionable. The 11th District Court has previously defined unconscionability as, “a contract clause…where one party has been misled as to its meaning, where a severe imbalance of bargaining power exists, or where the specific contractual clause is outrageous…[It] is generally recognized to include an absence of meaningful choice on the part of one of the parties…combined with contract terms that are unreasonably favorable to the other party.” Cross v. Carnes, 132 Ohio App.3d 157, 169 (1998). Unconscionability is generally thought of in two parts- substantive and procedural. Substantive unconscionability are factors which relate to the contract terms themselves and whether they are commercially reasonable. Collins, 86 Ohio App.3d at 834. Procedural unconscionability are factors bearing on the relative bargaining position of the contracting parties. Cross, 132 Ohio App.3d at 170. The 11th District Court found that the provision was commercially reasonable in light of Agent’s relatively small fee compared to their potential liability. Buyer also read and signed the Agreement without engaging Agent in any negotiations about its specific terms. Although Buyer did not have a college education and was a first-time home buyer, there was no evidence that she was unable to read and understand the agreement. The 11th District Court said that although education and experience are factors to consider in determining whether a clause is procedurally unconscionable, an individual is presumed competent to contract. Therefore the provision was found to be neither substantively or procedurally unconscionable.

I would like to thank Megan Reinhart for her substantial contribution to the preparation of these materials. Ms. Reinhart has been a law clerk for Skidmore & Associates for approximately one year and will be entering her third year at the University of Akron college of Law in the Fall of 2004..

This article has been prepared for the purpose of disseminating information only and should not be interpreted or construed in any way as legal advice.