Indemnification and no-liability clauses of Agreements between Subsidiary and Parent Companies found procedurally and substantively unconscionable under New York law. Blackrock Capital Inv. Corp. v. Fish, 799 S.E.2d 520 (W. Va. 2017).
The parties in this case are (i) a broker involved in the business connecting buyers and sellers of businesses who often takes an ownership stake in the sold businesses, (ii) an investor to partner with the broker in purchasing a metal processing plant (together, the “Parent Companies”) and (iii) a subsidiary that the Parent Companies set up to formally purchase and operate the processing plant (the “Subsidiary”). Following their purchase of the processing plant, industry guidelines for the operation of such a business were not followed and multiple fires and explosions at the processing plant killed several workers. Injured employees and family members of deceased employees brought action against the Subsidiary and the Parent Companies for recklessly operating the processing plant. The Subsidiary asserted a cross-claim against the Parent Companies for contribution or indemnification and sought a declaration that contractual indemnification and no-liability clauses in the management agreements executed between the Subsidiary and the Parent Companies (the “Agreements”) were unconscionable, while the Parent Companies sought to enforce those clauses.
The appeals court found that two clauses in the Agreements which (i) require the Subsidiary to indemnify the Parent Companies from any claims arising out of the Agreements and (ii) prevent the Parent Companies from being liable to the Subsidiary in any instance to be procedurally and substantively unconscionable, affirming the circuit court’s opinion on summary judgment.
To the point of procedural unconscionability, the court found that the Subsidiary did not truly bargain for the clauses in question and that there was no genuine meeting of the minds, noting that (i) the Subsidiary’s directors were all principals of the Parent Companies, (ii) the president of the Subsidiary appointed by the Parent Companies stepped down as president immediately following the execution of the Agreements and (iii) the attorneys who drafted the Agreements were employed by the Parent Companies and the Subsidiary had no independent representation.
The court further determined that the two clauses were substantively unconscionable as the two clauses lacked mutuality of obligation. The court highlighted that the Subsidiary would have to indemnify the Parent Companies even if the Subsidiary initiated the suit and that the no-liability clause prevented the Parent Companies from ever being liable to the Subsidiary. The court noted that these provisions were written in favor of the Parent Companies without a reciprocal provision regarding liability or indemnity for the Subsidiary, creating the practical effect that the Subsidiary could never sue the Parent Companies, even for breach of the Agreements.
