SAFE-DEPOSIT CONTRACT CLAUSE LEAVES BANK ON THIN ICE FOLLOWING GEM CAPER

May 16, 2003

By Steven P. Garmisa
Hoey Farina & Downes 
sgarmisa@felahfd.com

The "interesting issue" in a case where more than $1 million in loose diamonds and jewelry was stolen from safety deposit boxes rented by three jewelers, according to Justice Robert Cahill, was whether the jewelers and Firstar Bank Illinois could change -- by contract -- the nature of their relationship from bailor-bailee to landlord-tenant.

This was a million-dollar question because a limitation of liability would have been enforceable in a bailor-bailee relationship but would be void under the Illinois Landlord Tenant Act.

In a 2-1 decision, Cahill (joined by Justice Anne M. Burke) opted for freedom of contract.

Since the rental agreement for the safety deposit boxes provided that "the relationship of the bank and the lessee being hereby agreed to [will] be that of landlord and tenant, not as bailee and bailor," the majority ruled the Landlord Tenant Act applied to void the exculpatory clauses. Jewelers Mutual Insurance Co. v. Firstar Bank Illinois, 203 Ill. App. LEXIS 377 (March 31).

"In the fall of 1996," Cahill recounted in delivering the majority opinion, "more than $1 million worth of loose diamonds and fine jewelry were stolen from three safety deposit boxes that defendant Firstar Bank Illinois rented to jewel dealers at one of its Chicago branches."

Two lawsuits were filed against Firstar alleging breach of contract. One was filed by an insurance company, Jewelers Mutual, as subrogee, while the plaintiff in the second case was an apparently uninsured jeweler.

In both cases, "The bank admitted in its answer to the complaint that it was negligent in allowing unauthorized persons access to the safety deposit box," Cahill explained. Nevertheless, "In both cases the bank moved for and was granted summary judgment based on an exculpatory clause in the box rental contract."

On appeal, the plaintiffs argued that under Illinois public policy "even a clearly worded exculpation of negligence is void."

The form contracts the jewelers signed contained a limitation that read: "It is understood that said bank has no possession or custody of, nor control over, the contents of said safe and that the lessee assumes all risks in connection with the depositing of such contents; that the sum above mentioned is for the rental of said safe alone, and that there shall be no liability on the part of said bank, for loss of, or injury to, the contents of said box from any cause whatever unless lessee and said bank enter into a special agreement in writing to that effect, in which case such additional charges shall be made by said bank as the value of contents of said safe, and the liability assumed thereof may justify. The liability of said bank is limited to the exercise of ordinary care to prevent the opening of said safe by any person not authorized and such opening shall not be inferable from loss of any of its contents."

None of the jewelers paid for the "special agreement" that would have expanded Firstar's liability.

Relying on the portion of the contract stating that "the relationship of the bank and the lessee being hereby agreed to [will] be that of landlord and tenant, not as bailee and bailor," the plaintiffs argued the exculpatory clause was void under the Landlord Tenant Act.
This statute, 765 ILCS 705/1, states, "Every covenant, agreement or understanding in or in connection with ... any lease of real property, exempting the lessor from liability for damages for injuries to person or property caused by or resulting from the negligence of the lessor ... in the operation or maintenance of the demised premises or the real property containing the demised premises shall be deemed to be void as against public policy and wholly unenforceable."

Concluding the act didn't apply, the trial judges granted the bank's motions for summary judgment.

In reversing, Cahill explained (with citations and quotation marks omitted):

"By defining their relationship as landlord and tenant, the parties subjected their relationship to the act. 765 ILCS 705/1. The act invalidates exculpatory clauses that excuse a landlord from liability for his own negligence. Courts presume parties contract in light of existing law. If they claim to define their relationship by contract as that of landlord and tenant, we must presume that they intended to take advantage of the benefits conferred by the act, along with the limitations imposed by the act. Lastly, logical inference would negate an intent to exculpate the bank from its own negligence since the whole purpose of renting a safe deposit box is for reasons of security.

"All that aside," Cahill continued, "even if the contract was not ambiguous with regard to the bank's attempt to exculpate itself from liability, such effort would fail by reason of its invocation of the act.... In the absence of contractual language to the contrary, laws and statutes in existence at the time the contract is executed are considered part of the contract."

Cahill agreed with Jewelers Mutual's contention that "just as parties may choose which state's substantive law should apply, the parties here chose that this state's landlord-tenant substantive law should govern their relationship."

"The interesting issue here," Cahill noted, "is whether parties to a contract may define their relationship as something other than what it would be in the absence of an express contractual term. Although the dissent focuses on the characterization of the safety deposit box rental, our analysis turns on the parties' own definition of their relationship. In the context of this case, whether a safety deposit box is real property or personalty is largely irrelevant.

"If the contract between the bank and the renters of the boxes had not expressly defined their relationship as landlord and tenant, the law would require us to look at the nature of the relationship and define it as the law has defined such relationships in the in past -- generally, in the case of safety deposit boxes, as bailor and bailee."

An "instructive" case was Motors Insurance Corp. v. American Garages Inc., 98 Misc. 2d 887, 414 N.Y.S.2d 841 (N.Y. App. Term 1979). In the New York case, Cahill explained, "A customer garaged a car under a contract that provided 'that the relationship between the garage and the customer was to be considered that of landlord and tenant, not bailor and bailee.' The court held that, although 'the ordinary relationship between a customer and a garage owner is that of bailor and bailee,' the parties were free to define their relationship otherwise by contract. Where the language of the agreement clearly shows an intent to create a landlord-tenant relationship, the contract may be conclusive of that relationship."

Cahill acknowledged the line of Illinois cases "characterizing the lease of a safety deposit box as a bailment."

Yet, he said, "Construing the contract as a whole, we cannot agree that the parties' relationship was that of bailor and bailee where the contract specifically provides that the parties' relationship is that of landlord and tenant.

"The only relevance of a bailor-bailee argument as opposed to a landlord- tenant argument in the context of this case (the property went missing whether it was bailed or not) is whether the exculpatory clause is valid. If the parties are bailor and bailee, the exculpatory clause is valid. If landlord and tenant, the exculpatory clause is against public policy. Here the parties chose to define their relationship by contract. We note in passing that the contract was drafted by the bank, which chose its terms.

"Here, the paragraph defining the parties' relationship as landlord and tenant was not in violation of law or public policy. But in so defining their relationship they subjected themselves to the law governing landlord and tenant. That law in Illinois is the act."

With a detailed dissent, Justice Margaret Stanton McBride concluded:
"I would affirm the decision of the trial courts in these consolidated appeals because I believe the rental agreements were not leases of real property subject to the Landlord and Tenant Act ... and the exculpatory clause used in these two agreements was clear and unambiguous, and was not otherwise against public policy. Therefore, the rental agreements should be enforced as written.
"In my opinion, the majority has incorrectly concluded that the rental of a safety deposit box is a lease of real property and thus governed by the Landlord and Tenant Act."

Disagreeing, the majority ruled that by forming "a landlord-tenant relationship, the parties necessarily agree to be bound by the laws governing that relationship. A contrary result would require that we ignore the landlord- tenant language in the contract."

Based on this ruling, the orders granting Firstar's motions for summary judgment were reversed.

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