An interesting case involving a limitation of liability provision was recently appealed after a jury trial verdict for a judgment in favor of the plaintiff. The plaintiff kept substantial assets in a safe deposit box at a bank. She signed a one-page safe deposit rental agreement, which expressly noted that the plaintiff acknowledged receipt of a copy of the safe deposit box rules and regulations. Despite these form-written assurances in the contract, the plaintiff was not given a copy of the safe deposit rules and regulations.
The rules and regulations purportedly in effect when the plaintiff opened her safe deposit box inform the customer of a number of things. Significantly, they remind the customer that during the pendency of the box rental relationship, only the customer knows what is in the box and that the box’s contents should be privately insured. Further, the consumer is warned that because the bank cannot verify the contents of the box, the bank’s liability for any loss in connection with the box for whatever reason shall not exceed 10 times the annual rent charge (the limitation of liability provision).
The rules and regulations further allow the bank, upon prior notice to the renter, to relocate the box to another banking center of the bank’s choosing if the safe deposit facility closes. If the bank sends notice to the renter but the renter does not remove the contents, the bank shall not be liable for loss, damage or breakage to the contents of the box during relocation.
In 2013 the bank decided to close its branch and although written notice to box holders was stipulated in the agreement, the plaintiff claimed not to have received them. The bank claimed to have sent four written notices to the plaintiff; however, it did not produce copies of the letters that it had sent. No bank witness testified to having prepared and/or mailed a notice to the plaintiff.
The bank called renters of the safe deposit boxes to inform them of the branch closure, but the list of customers used by the bank did not have any notations next to the plaintiff’s name, although other customers had notations next to their names after they were called. The plaintiff testified that she was never called.
The bank had written procedures regarding drilling and inventorying safe deposit boxes. These procedures were not followed at the branch. Instead the bank decided to open the plaintiff’s box one day and had the locksmith and one employee remove the contents and place them in a bag, label the bag with the plaintiff’s information and store it in the bank vault. The unsecured bag remained in the vault for three days, during which time seven people were in and out of the vault. The bank employees filled in a form attesting that the items listed were removed in the plaintiff’s presence, even though that was not a true statement. When the plaintiff went to the branch to retrieve her jewelry she learned that her safe deposit box had been drilled open and its contents sent to the bank’s centralized storage facility. The plaintiff asked to see the inventory and complained that the items were incorrectly inventoried and several items were missing.
At this point I will only discuss the limitation of liability and liquidated damages aspects of the appeal.
The trial court enforced the limitation of liability provision in the bank safe deposit box rental agreement’s rules and regulations. It found that this provision was neither unconscionable nor against public policy. The appellate court ruled that the trial court judgment was subject to de novo review and for the reasons discussed below, the court reversed.
Unconscionability has both a procedural and a substantive element. The procedural element focuses on oppression or surprise. Oppression arises from an inequality of bargaining power that results in no real negotiation and an absence of meaningful choice. Surprise involves the extent to which the supposedly agreed upon terms are hidden in the form drafted by the party seeking to enforce them. The substantive element considers the effects of the contractual terms and whether they are overly harsh or one-sided.
In this case, the contract at issue was one of adhesion. This agreement was a standardized contract imposed upon the plaintiff without an opportunity to negotiate its terms. And the limitation of liability provision is buried in small print in a five-page document that contained several other provisions. As for surprise, the facts here show that although incorporated by reference, the rules and regulations containing this limitation of liability were never shown to the plaintiff or even available for her review at the time that she entered into the box rental agreement. There is no serious question here that the element of procedural unconscionability has been met.
As for substantive unconscionability in this case, the trial court ruled that the limitation was necessary where, as here, the bank rents out safe deposit boxes without knowledge of their contents or the value of the contents. Citing Civil Code section 1840, the court found that liability of a depository for negligence cannot exceed the amount which it is informed of by the depositor, or has reason to suppose the thing deposited to be worth.
This statutory provision, however, has been held inapplicable to protect a safe-deposit company from liability for the actual value of a deposit lost by its negligence where the very manner of conducting its business contemplates that it shall not know nor be informed of the value or character of the contents of the box.
More importantly, in this case the bank breached these rules and regulations by drilling open the plaintiff’s box without having first provided her the contractually required notice. Having beached one of its provisions, the bank now argues that the contract’s limitations for the consequences of that breach — i.e., the theft or loss of the plaintiff’s valuables — ought to be enforced for reasons wholly inapplicable to this case.
Despite its bolded “Liquidated Damages” title, the limitation of liability in the bank contract went beyond a liquidated damages provision in the event of breach of contract. Rather it limited damages from a loss for “whatever” reason, to 10 times the monthly rental rate. As a limitation of liability for negligence, this provision is contrary to the general policy in California to hold persons responsible for injuries caused through want of ordinary care.
For a liquidated damages provision to be enforceable, the amount selected must “represent a reasonable endeavor by the parties to estimate fair compensation for the loss sustained.” In this instance, the liquidated damages amount does not represent a reasonable endeavor by the parties to estimate a fair average compensation for the loss; it is unenforceable. Therefore, the judgment was reversed.