Merten v. Nathan , 108 Wis. 2d 205 ( 1982 )

SHIRLEY S. ABRAHAMSON, J.

This is a review of an unpublished decision of the court of appeals filed on July 8, 1981, affirming a judgment of the circuit court for Ozaukee county, Charles L. Larson, reserve Circuit Judge. Bonnie Merten, the plaintiff, brought an action for personal injuries suffered while taking a horseback-riding lesson at Burgundy Ridge Farms. The circuit court granted summary judgment to all defendants, holding that the exculpatory contract signed by the plaintiff relieved the defendants from liability arising from injuries incurred by the plaintiff during a riding lesson. The court of appeals affirmed the judgment of the circuit court. We reverse.

In this court, as in the circuit court and the court of appeals, the plaintiff attacks the validity of the exculpatory contract. Although many facts relating to the incident causing the injury are contested, the facts relevant to our determination of the validity of the exculpatory contract are undisputed.

The plaintiff, Bonnie Merten, had never ridden a horse before communicating with the defendant Kerry Nathan, an instructor at Burgundy Ridge Farms (also a defendant), to arrange for riding lessons. After the first lesson, a private one largely for evaluation purposes, the plaintiff signed a five-paragraph exculpatory contract titled “EQUESTRIAN RELEASE OF ALL CLAIMS.”¹ While there appears to be some dispute as to when the exculpatory contract was signed, it is undisputed that the contract was executed prior to the incident in which the injury occurred.

The third paragraph of the exculpatory contract, and the key provision for purposes of this review, reads as follows:

“IT IS EXPRESSLY UNDERSTOOD by the undersigned that Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton, have no insurance covering equestrian activities and that the undersigned would not be permitted to engage in equestrian activities without this release whereby the undersigned irregardless of fault, agrees to fully release Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton and their employees and agents from any and all responsibility as a result of accident or injury.”

After the injury, the plaintiff learned that, contrary to the representation set forth in the exculpatory contract quoted above, Burgundy Ridge Farms did have a liability insurance policy which covers injuries plaintiff received during her equestrian activities.

The defendant Burgundy Ridge had begun using the “equestrian release of all claims” at a time when it was uninsured. Prior to the execution of the instant exculpatory contract, Burgundy Ridge purchased a liability policy with limits of $300,000 per occurrence which apparently covers risks from which defendants sought release under the exculpatory contract. Nevertheless the defendants continued to use the exculpatory contract. Defendant Peter Nathan, president of Burgundy Ridge, testified that the premium ($3,120) was paid from the general receipts of the business which included fees from riding lessons.

In their answer to the complaint, the defendants, including the insurer, Illinois Employers Insurance of Wau-sau, raised the exculpatory contract as an affirmative defense and moved for summary judgment. The circuit court granted defendant’s motion for summary judgment, and the court of appeals affirmed. The court of appeals concluded that the exculpatory contract in this case did not fall within any of the categories of exculpatory contracts void on grounds of public policy and that the elements of fraudulent misrepresentation were not proved.² Moreover the court of appeals refused to hold that instructors of dangerous sports cannot shift the risk to the participant unless the exculpatory contract particularizes the risks to be shifted.

The sole issue before this court is whether the exculpatory contract bars plaintiff’s recovery. The plaintiff urges us to hold that exculpatory contracts, that is, contracts which relieve a party from liability for harm caused by his or her own negligence, are void as contrary to public policy.³ In the alternative the plaintiff asks us to declare the exculpatory contract in the instant case unenforceable. Because we conclude that the instant contract is unenforceable, we do not reach the broader question of the validity of exculpatory contracts in general.

Although many jurisdictions have held exculpatory contracts valid, it is well accepted that such contracts are not favored by the law, that such contracts are to be construed strictly against the party seeking to rely on them, 6A Corbin on Contracts sec. 1472, p. 602 (1962), 15 Williston on Contracts sec. 1705A (3d ed. Jaeger, 1972), and that courts examine the facts and circumstances of each exculpatory contract with special care to determine whether enforcement of the exculpatory contract in the individual case contravenes public policy, College Mobile Home Park & Sales v. Hoffmann, 72 Wis. 2d 514, 519, 520, 241 N.W.2d 174 (1976).⁴ This view toward exculpatory contracts reflects the courts’ accommodation between principles of contract law and tort law.

The law of contracts is based on the principle of freedom of contract, on the principle that individuals should have the power to govern their own affairs without governmental interference. The courts protect each party to a contract by ensuring that the promises will be performed. The law protects justifiable expectations and the security of transactions.

The law of torts is directed toward compensation of individuals for injuries sustained as the result of the unreasonable conduct of another. Tort law also serves the “prophylactic” purpose of preventing future harm; payment of damages provides a strong incentive to prevent the occurrence of harm.

Adherence to principles of contract law would generally lead a court to enforce an exculpatory agreement without passing on the substance of the agreement.⁵ Adherence to principles of tort law would tend to make a court reluctant to allow parties to shift by contract the burden of negligent conduct from the actor to the victim who has no actual control or responsibility for the conduct causing the injury. The rules governing exculpatory contracts reflect the uneasy balance between these principles of contract and tort law.

The court of appeals described four situations in which exculpatory contracts have been declared void on public policy grounds: a contract arises out of a business generally thought suitable for public regulation; the party seeking exculpation is engaged in performing a service of great importance to the public; the party seeking exculpation holds itself out as willing to give reasonable public service to all who apply; and the party invoking exculpation possesses a decisive advantage of bargaining strength.

The Restatement (Second) of Contracts sets forth the following situations in which exculpatory contracts are unenforceable on grounds of public policy:

“ (1) A term exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy.

“ (2) A term exempting a party from tort liability for harm caused negligently is unenforceable on grounds of public policy if

(a) the term exempts an employer from liability to an employee for injury in the course of his employment;

(b) the term exempts one charged with a duty of public service from liability to one to whom that duty is owed for compensation for breach of that duty, or

(c) the other party is similarly a member of a class protected against the class to which the first party belongs.

“ (3) A term exempting a seller of a product from his special tort liability for physical harm to a user or consumer is unenforceable on grounds of public policy unless the term is fairly bargained for and is consistent with the policy underlying that liability.” Sec. 195, Restatement (Second) of Contracts (1979).

The exculpatory contract in the instant case does not fall within any of the categories of exculpatory contracts violating public policy set forth in the decision of the court of appeals or in the Restatement (Second) of Contracts. These categories, however, are not intended as an exhaustive list of situations in which exculpatory contracts are unenforceable on the grounds of public policy. Comments a and b, sec. 195, Restatement (Second) of Contracts, p. 66 (1979). Public policy is a broad, not easily defined concept. It embodies the community common sense and common conscience. Public policy is “that principle of law under which freedom of contract or private dealings is restricted by law for the good of the community.” Higgins v. McFarland, 196 Va 889, 86 S.E. 2d 168, 172 (1955).

We are presented in this case with an exculpatory contract which includes a misstatement of fact by the party seeking the release. The fact misstated goes to the essence of the contract, that is, how and why the risks of loss are to be shifted from the prospective negligent actor to the victim. The language of the exculpatory contract in the instant case clearly ties the nonexistence of insurance to the requirement that persons who wish to ride release the defendants from liability. The message conveyed to any reasonable reader by the statement that the defendants “have no insurance covering equestrian activities” is clear. The defendants were explaining why a prospective student would have to bear the risk of any injury. The defendants were telling the prospective student: “We do not have insurance to cover your injuries. If you want to ride, you must exempt us from liability so that we do not face possible financial ruin.” But the explanation was false. A truthful statement would be that the defendants have insurance coverage and that there would be no or limited effect on the defendants if they bore the risk of loss. There can be no question that a statement that the defendants have no insurance protection is highly relevant to a reasonable student’s decision to sign a contract which allocates to the student the losses arising out of equestrian activities.

When the party seeking an exculpatory contract includes in the contract a false statement about a fact which is relevant to a reasonable person’s decision whether to execute a release allocating losses, the principles of contract law do not weigh heavily in favor of enforcement of the exculpatory contract, and the goals of tort law weigh against enforcement of the exculpatory contract. Freedom of contract is premised on a bargain freely and voluntarily made through a process of bargaining which has integrity. If we were to enforce an exculpatory contract based on a false statement of fact relevant to a reasonable person’s decision whether to execute the release, we would open the door to sharp practice. Misstatements by the party seeking the release raise the strong suspicion of inequitable motive and overreaching and of lack of good faith or fair dealing on the part of the party seeking the release and of oppression of the party executing the release. Even though all the elements of misrepresentation or mistake cannot be proved in a case involving an exculpatory contract (and in this case more specifically, defendants assert that the plaintiff cannot prove she relied on their misrepresentation), relief should be granted from an exculpatory contract when the probability of unfairness exists. In view of the public policies of protecting free and voluntary bargaining and of imposing liability on persons whose conduct creates an unreasonable risk of harm, we conclude that it would be contrary to public policy to enforce an exculpatory contract when the bargaining process involves a mistake or deception which is relevant to a reasonable person’s decision to execute a release allocating losses. Accordingly we hold that the exculpatory contract in the instant case is unenforceable.

We reverse the decision of the court of appeals and remand the cause to the circuit court for further proceedings not inconsistent with this opinion.

By the Court. — Decision of the court of appeals reversed; judgment of the circuit court reversed and cause remanded to the circuit court for further proceedings not inconsistent with this opinion.

1 The full text of the Exculpatory contract is as follows:

EQUESTRIAN RELEASE OF ALL CLAIMS

KNOW ALL MEN BY THESE PRESENTS:

The undersigned, being of lawful age, desires to participate in equestrian activities on property at the Burgundy Ridge Farms, Inc. The undersigned acknowledges that there are dangers and risks of injury inherent in these equestrian activities, but still desires to participate in these activities.

THEREFORE, the undersigned, for and in consideration of the opportunity to participate in these equestrian activities and for other good and valuable consideration, does hereby forever release, acquit and forever discharge Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton, their employees, agents and all other persons, corporations, associations, or partnerships from any and all claims, actions, causes of action, demands, rights, damages, costs, loss of service, expenses and compensation whatsoever which the undersigned may hereinafter incur on account of, or in any way growing out of, any and all known or unknown, foreseen or unforeseen bodily and personal injuries and/or property damage or the consequences thereof resulting from any accident, casualty or event involving the undersigned and arising out of equestrian activities.

IT IS EXPRESSLY UNDERSTOOD by the undersigned that Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton, have no insurance covering equestrian activities and that the undersigned would not be permitted to engage in equestrian activities without this release whereby the undersigned irregardless of fault, agrees to fully release Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton and their employees and agents from any and all responsibility as a result of accident or injury.

FURTHER AND BY WAY OF INDEMNITY the undersigned hereby expressly understands and agrees to indemnify and save harmless Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton, their employees and agents, against any and all further claims or damages, costs or expenses incurred by Burgundy Ridge Farms, Inc., Peter W. Nathan, Joseph and Kathleen Patton, their employees and agents, as a result of any accident or injury which might occur while the undersigned is engaging in equestrian activities and which may result from the negligence of the undersigned, Peter W. Nathan, Joseph and Kathleen Patton, Burgundy Ridge Farms, Inc., their employees or agents, third parties or any ¡combination thereof.

The undersigned further declares and represents that no promise, inducement or agreement not herein expressed has been made to the undersigned and that this release contains the entire agreement between the parties hereto and that the terms of this release are contractual and not a mere recital.

THE UNDERSIGNED HAS READ THE FOREGOING RELEASE AND FULLY UNDERSTANDS IT. (Emphasis added.)

2 The elements of fraudulent misrepresentation rendering a contract voidable are: (1) there must be a statement of fact which is untrue; (2) the false statement must be made with intent to defraud and for the purpose of inducing the other party to act upon it; and (3) the other party must rely on the false statement and must be induced thereby to act to his injury or damage. The court of appeals held on a motion for summary judgment that there was no indication in the pleadings, the affidavits or the depositions that the plaintiff relied on the false statement and that she had •been induced to act on the basis of the false statement.

We have recognized that even honest misrepresentation is grounds for rescission of a contract because “ ‘it would be unjust to allow one who has made false representations, even innocently, to retain the fruits of a bargain induced by such representation.’ ” Whipp v. Iverson, 43 Wis. 2d 166, 171, 168 N.W.2d 201 (1969), quoting Williston on Contracts sec. 1500, p. 4189 (1937). See also, First National Bank & Trust Co. v. Notte, 97 Wis. 2d 207, 293 N.W.2d 530 (1980); Restatement (Second) of Contracts sec. 164 (1979).

Because we hold the exculpatory contract invalid on other grounds, we need not reach the question of whether either innocent or fraudulent misrepresentation or mutual mistake of fact exists and whether the issue of the plaintiff’s reliance can be decided in this case on a motion for summary judgment.

3 Plaintiff, citing Ruppa v. American States Ins. Co., 91 Wis. 2d 628, 638, 284 N.W.2d 318 (1979), asserts that this court has never directly ruled on the validity of exculpatory contracts. In Ruppa this court expressly stated it would not reach the question of whether a release relieving defendants of liability is void as being contrary to public policy.

4 For previous cases dealing with exculpatory contracts, see, e.g., Queen Ins. Co. of America v. Kaiser, 27 Wis. 2d 571, 575, 135 N.W.2d 247 (1965) (exculpatory clause in a lease); College Mobile Home Park & Sales v. Hoffmann, 72 Wis. 2d 514, 516, 241 N.W.2d 174 (1976) (exculpatory clause in a lease); State Farm Fire & Casualty Co. v. Home Ins. Co., 88 Wis. 2d 124, 128, 276 N.W.2d 349 (Ct. App. 1979) (exculpatory clause in a lease); Arnold v. Shawano County Agr. Society, 106 Wis. 2d 464, 317 N.W.2d 161 (Ct. App. 1982), petition for review granted May 3, 1982 (exculpatory contract dealing with participation in an automobile race). See also, Dykstra v. McKee & Co., 100 Wis. 2d 120, 301 N.W.2d 201 (1981), and cases cited therein, holding an indemnity contract indemnifying a party against its own negligence is not void as against public policy.

5 “[I]f there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts, when entered into freely and voluntarily, shall be held sacred, and shall be enforced by courts of justice.” Baltimore & Ohio Sw. R. Co. v. Voight, 176 U.S. 498, 505 (1900). See Pound, Liberty of Contract, 18 Yale L.J. 454 (1909).