The Legal Side: Liquidated Damages v. Limitation of Liability Provisions


Article

Perhaps the most important provision in a properly drafted alarm contract, from a defense standpoint, is the limitation of liability provision, or the liquidated damage clause. Though some courts treat the two provisions similarly, and will enforce either provision under the same circumstances, the limitation of liability provision and the liquidated damage clause are in fact two distinct different types of provisions.

Often the courts in a state will be willing to enforce a limitation of liability provision, but not a liquidated damage clause. Other states will favor the liquidated damage provision in an alarm contract. It is essential that you know which type of provision is preferred and enforced in your state and make certain that your alarm contracts contain the proper wording.

How do you know which provision your contract has? A "liquidated damage provision" typically contains at least some of the following wording:

The parties agree that in the event subscriber suffers any damages as a result of the alarm company’s breach of contract or negligence that it would be impractical and extremely difficult to anticipate or fix subscriber’s actual damages. Therefore subscriber agrees to accept $250.00 in full and final damages in the event of the alarm company’s breach or negligence.

Courts will enforce a liquidated damage provision where the agreement is clear in its terms, and the court further finds that the specified liquidated amount is not a penalty. To determine whether it is a penalty as opposed to estimated damages, the court would normally have to find that there was an uncertainty as to the amount of potential damages or difficulty of proof and that the contract as a whole is not manifestly unconscionable, unreasonable, and the liquidated damages is not disproportionate in amount so as to justify the conclusion that it does not express the true intentions of the parties.

A limitation of liability provision is subject to scrutiny, but there is a different analysis. The "limitation of liability provision" typically reads as follows:

Should there arise any liability on the part of the alarm company as a result of its breach of contract or negligence, the parties agree that the alarm company’s liability shall be limited to $250.00.

The analysis regarding the enforceability of a limitation of liability provision is whether the limitation on damages is so disproportionate to both the amount of the actual damages involved and the contract price so as to be unconscionable.

How it works

The following case best illustrates the analysis, and the importance of having the proper provision in your alarm contract.

Alarm Company A installs a fire alarm system in Ohio. A fire breaks out, and the alarm company receives a trouble signal. The trouble signal is not interpreted as an actual fire condition, and therefore alarm company delays reporting the signal. In the meantime, someone else reports the fire. The fire creates a loss in excess of $500,000.00, and the alarm company is sued on the theory that their delay in reporting the fire caused significant additional damage which would not have occurred except for the alarm company’s failure to properly report the alarm condition.

The alarm company, one of the nationwide companies, had a contract which incorporated language for both a liquidated damage clause and a limitation of liability provision. When the alarm company moved for summary judgment dismissing the complaint based upon its "liquidated damage/limitation of liability clause", the plaintiff argued that the clause was a liquidated damage clause and therefore not enforceable in that state (Ohio). The court did an analysis of the two clauses. Luckily for the alarm company the court chose to interpret the provision as a limitation of liability clause, and not as a liquidated damage provision, despite the fact that the clause did have the language commonly found in a liquidated damage provision. ("Impractical and extremely difficult to fix the actual damages...")

The court analyzing the contract noted that as a liquidated damage clause the alarm contract provision would not be enforced because the amount of the liquidated damage, in this case $1,000.00, was indeed disproportionate to the amount of actual damages. The court further determines that the amount of the potential actual damages could have been estimated and that the nominal liquidated amount could not possibly have been the potential actual damage contemplated by the parties.

However, as a limitation of liability provision, the liquidated amount ($1,000) was not disproportionate to the amount that the subscriber was paying for the alarm service, a much different criteria than comparing it to the actual damages ultimately suffered by the subscriber. Thus, the court in this case recognized that the alarm company could not afford to undertake a potential liability greater than the contractual limited amount in view of the price it was charging for its system and alarm service. The contract provision was therefore enforced as a limitation of liability provision.

Of course, the entire analysis could have been avoided if the alarm company had a properly worded limitation of liability provision.

Many alarm companies think they are protecting themselves by combining the language from both types of clauses into a single clause. Frankly, it’s not a good idea.

If you operate in a single state then you should find out which provision your state prefers and enforces. Sometimes it is a matter of which provision has been reviewed, addressed, and enforced in your state. Ohio, like New York, enforces the limitation of liability provision.

You can check for the leading cases in your state on my web site at http://www.kirschenbaumesq.com/casesbystate.htm.

Make sure your contract has the proper provisions to ensure your best protection. You can obtain properly worded up to date contracts at www.alarmcontracts.com.

About the author: Ken Kirschenbaum, Esq., is a New York-licensed lawyer practicing with Kirschenbaum & Kirschenbaum PC, a Long Island legal firm with a rich history of assisting clients in security and alarm related matters. Ken can be contacted via email at ken@kirschenbaumesq.com. His website, www.kirschenbaumesq.com, features a great supply of legal information and court rulings relevant to the security industry. You can also sign up for Ken's discussion list from his homepage.