Court puts teeth into service contract language

For years, the first question posed by an oilheat dealer upon receipt of a claim for a leaking tank or oil line was: "Doesn't the language in the service contract mean ANYTHING?" And for years, our response as lawyers has been a definite "MAYBE", in large part because the courts had not ruled whether a service contract drafted by the industry could limit a dealer's liability in the case of leaking tanks or lines. However, a recent decision by a Superior Court Justice in Middlesex County took a significant step toward changing that "MAYBE" to a "YES."

The case, Donahue v. Commerce Insurance Company, et al., involved a homeowner's claim against two oilheat dealers arising out of a leaking underground oil line and a leaking outdoor above-ground 275 gallon oil storage tank.

The relevant facts are fairly straightforward. In 1988, the plaintiffs purchased their house, which had an outside oil tank connected to a burner in a crawl-space under the house by an underground oil line. On various occasions in early 1993, the plaintiffs smelled fuel oil in and around their home. On March 31, 1993, after a series of heavy rains, the plaintiffs discovered a significant amount of fuel oil in the crawl space. They called their fuel oil dealer, with whom they had a delivery and service contract, who excavated the underground line and found a crack in a compression fitting. The company removed the line and red-tagged the system. The plaintiffs fired this dealer, believing it should have identified the source of the leak earlier. The system was shut down over the spring, summer and early fall of 1993 during the initial phase of the cleanup.

The plaintiffs hired a second dealer in the fall of 1993, and entered into another delivery and service contract. The second dealer installed a new furnace and above-ground line, and delivered oil to the outside tank on two occasions in November and December, 1993. On January 4, 1994, the plaintiffs noticed their outside tank was leaking oil out of the bottom. They called the dealer, who installed a magnetic patch, pumped out the tank and again shut the system down.

The plaintiffs ultimately sued both dealers, claiming that they were negligent in their inspections of the heating systems, and that they breached their respective service contracts by not conducting a reasonable inspection and finding the source of the leak before it occurred. Both service contracts excluded inspection or maintenance of "inaccessible equipment," and the second dealer's contract specifically excluded liability for the "condition and maintenance of the fuel tank," and "tank or oil line leakage", placing that responsibility solely on the customer. Both oilheat dealers filed motions for judgment in their favor based upon the clear language of the service contracts.

In a refreshing ruling which held that the service contracts actually mean what they say, Justice Judith Fabricant agreed:

[I]n this case both [oilheat dealers] rest their arguments on the plain terms of their contracts contending that those contracts define the scope of their duties, under either [negligence] or contract theories, and that the breaches alleged by the plaintiffs fall clearly outside the scope of the duties created by the contracts. This Court agrees.

Justice Fabricant found that the underground oil line was "inaccessible equipment" and therefore excluded under the service contract. She also held that the second dealer had no duty to inspect or repair the outdoor above-ground storage tank because the service contract placed the responsibility for the condition and maintenance of the fuel tank, oil lines and piping expressly on the customer. Both dealers were granted judgment by the court.

The decision, which became final after the plaintiffs withdrew their notice of appeal to the Massachusetts Appeals Court, provides dealers with some confidence that their service contracts can be important to their business and can protect them against lawsuits alleging negligent maintenance or inspection or breach of contract.

There are additional steps, such as having the customer sign an acknowledgment on the contract that he has read, understood and accepted its terms, that dealers can take to limit their risk. However, each contract is different and should be reviewed in detail by counsel to determine how its protections can be strengthened.

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