Transcript Indemnity and Exculpatory Clauses Richard Warner

Indemnity and Exculpatory
Clauses
Richard Warner
Patco v. People’s United Bank
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“The eBanking agreement stated that Ocean
Bank did not “assume[ ] any responsibilities”
with respect to Patco's use of eBanking, that
“electronic transmission of confidential
business and sensitive personal information”
was at Patco's risk, and that Ocean Bank
was liable only for its gross negligence,
limited to six months of fees.”
Patco v. People’s United Bank
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“Use of Ocean National Bank's eBanking for
Business by any one owner of a joint account
or by an authorized signor on an account,
shall be deemed an authorized transaction on
an account unless you provide us with written
notice that the use of Ocean National Bank's
eBanking for Business is terminated or that
the joint account owner or authorized signor
has been validly removed form [sic] the
account.”
Are these provisions enforceable?
Patco’s Facts
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Patco used eBanking for weekly payroll.
A key logger stole passwords and answers to
security questions.
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Six withdrawals totaling $588,851.26.
If the bank’s security procedures were
commercially reasonable, the bank has no
liability.
This is the effect of UCC 4A.
Risk Profiling
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“Risk Profiling: The system entailed the building
of a risk profile for each customer . . . based on
a number of different factors, including the
location from which a user logged in, when/how
often a user logged in, what a user did while on
the system, and the size, type, and frequency of
payment orders normally issued by the customer
to the bank. The Premium Product noted the IP
address that the customer typically used to log
into online banking and added it to the customer
profile.”
Precautions Patco Did Not Use
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“In May 2009, bank personnel did not monitor
the risk-scoring reports received as part of the
Premium Product package, nor did the bank
conduct any other regular review of transactions
that generated high risk scores. In May 2009,
the bank had the capability to conduct manual
review of high-risk transactions through its
transaction-profiling and risk-scoring system, but
did not do so. The bank also had the ability to
call a customer if it detected fraudulent activity,
but did not do so.”
The Withdrawals
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May 7: $56,594. “The risk-scoring engine
generated a risk score of 790 for the transaction,
a significant departure from Patco's usual risk
scores, which generally ranged from 10 to 214.”
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(1) “Very high risk non-authenticated device”; (2) “High
risk transaction amount”; (3) “IP anomaly”; and (4)
“Risk score distributor per cookie age.”
May 8: $115,620.26, from the same IP address.
May 11: $99,068 / 720
May 12: $91,959 / 563
May 13: $113,647 / 785
The Holding
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“(1) Ocean Bank did substantially increase the risk
of fraud by asking for security answers for every
$1 transaction . . . (2) When it had warning that
such fraud was likely occurring in a given
transaction, Ocean Bank neither monitored that
transaction nor provided notice to customers . . .
(3) Because it had the capacity to do all of
those things, yet failed to do so, we cannot
conclude that its security system was
commercially reasonable. (4) . . . it was these
collective failures taken as a whole, rather than
any single failure, which rendered Ocean Bank's
security system commercially unreasonable.”
Enforceability of the Provisions
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“It is unclear, however, what, if any,
obligations a commercial customer has when
a bank's security system is found to be
commercially unreasonable.”
Why?
Types of Clauses
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Exculpatory clause: immunizes a person
from the consequences of his/her negligence.
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The type of clause in Patco.
Indemnity clause: holds the indemnitee
harmless from liability by requiring the
indemnitor to bear the cost of any damages
for which the indemnitee is held liable.
Waiver of liability: protects a beneficiary from
liability under certain conditions when
services he or she received are found to be
not as promised.
Comment of the Drafters of UCC 4A
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Funds transfers involve competing
interests—those of the banks that provide
funds transfer services and the commercial
and financial organizations that use the
services, as well as the public interest. These
competing interests were represented in the
drafting process and they were thoroughly
considered.
Comment of the Drafters of UCC 4A
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The rules that emerged represent a careful
and delicate balancing of those interests and
are intended to be the exclusive means of
determining the rights, duties and liabilities of
the affected parties in any situation covered
by particular provisions of the Article.
Consequently, resort to principles of law or
equity outside of Article 4A is not appropriate
to create rights, duties and liabilities
inconsistent with those stated in this Article.
The Public Policy Question
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Given the clear public policy behind 4A,
should the bank be able to avoid liability
through the exculpatory clause?
Damage Waivers
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Consequential (indirect) damages generally
may be waived.
Direct damages generally may not be waived.
Liability for reckless or intentional actions
cannot be waived.
Liability for a defective product cannot be
waived.
Exculpatory and Indemnity Clauses
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General rule: the clause is enforceable if
reasonable.
 It must not contravene public policy.
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This is the question in Patco.
It must be clear and understandable.
The releasing party must know and
understand the risk released.
There must be no unacceptable disparity
in bargaining power.
UCC § 2-719. Contractual Modification or
Limitation of Remedy.
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(1) . . . (a) the agreement may provide for
remedies in addition to or in substitution for
those provided in this Article and may limit or
alter the measure of damages recoverable
under this Article, as by limiting
the buyer's remedies to return of the goods and
repayment of the price or to repair or
replacement of non-conforming goods or parts;
and, (b) resort to a remedy as provided is
optional unless the remedy is expressly agreed
to be exclusive, in which case it is the sole
remedy.
UCC § 2-719
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(2) Where circumstances cause an exclusive
or limited remedy to fail of its essential
purpose, remedy may be had as provided in
this Act.
(3) Consequential damages may be limited or
excluded unless the limitation or exclusion is
unconscionable. Limitation of consequential
damages for injury to the person in the case
of consumer goods is prima facie
unconscionable but limitation of damages
where the loss is commercial is not.