Brief Fact Summary. A company in the business of selling furs, contracted with an alarm company to provide burglary alarm protection. A provision in the contract limited liability to the yearly fee for the alarm service.
Synopsis of Rule of Law. The outcome of a case where a contractual provision limits recovery, turns on whether a clause is a "liquidated damages" provision, or a limited liability provision.
Issue. Should the limitation on liability in the parties' agreement be given effect?
Held. The court first observes, pursuant to Comment g of §339 of the Restatement of Contracts, parties can agree to limit their liability. This type of agreement is distinguishable from a liquidated damages clause. The court observed the inclusion of the words "liability is and shall be limited" to the yearly service charge, in the contract, was a limitation of liability not a liquidated damage clause. Although the contract uses the words "liquidated damages" the court deems that virtually irrelevant, and says the intention of the parties and the special circumstances of the case must be considered. As such, the court finds that the real question is not whether there are liquidated damages, but whether the limited liability provision is enforceable.
• The court looks to §2-719(3) of the Uniform Commercial Code ("UCC"), which provides "[c]onsequential 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." The court then recognizes a common law exception to public utilities, which applies to limiting the damages for bank deposits. It concludes, however, that burglary protection "has not yet reached the level of necessity comparable to that of banking and other public services." Additionally, the court finds the provision is not unconscionable. The court adopted the trial court's finding that "both plaintiff and defendant are experienced, established business persons. Additionally, plaintiff had for some 20 years prior to the instant contract had a similar type protection service with similar type clause, with a competitor of defendant."
Dissent. The dissenting judge, unlike the majority, found that the provision was a "liquidated damages" clause and not a "limitation of liability" clause. The judge relied upon UCC § 2-718 and UCC §2-719. The judge felt that "[i]f the parties can escape their contractual provisions for liquidated damages because the amount stated is unreasonably disproportionate (either higher or lower) to the actual damages involved, there is no logical reason why the same test of reasonableness should not apply to a contractual limitation of liability." As such, the judge would have held "that a contractual Limitation, as well as a contractual Liquidation of damages, is not binding where unreasonable and bearing no relation to the loss that would result from defendant's failure to fulfill the terms of its contract." Applying these principles here, the dissenting judge found "The limitation in this case 'to a sum equal in amount to the yearly service charge hereunder' was clearly unreasonable and arbitrary, bearing no relationship whatever to the damages flowing from defendant's breach."
Discussion. It is interesting to read the majority and dissenting opinions alongside one another, to see how the same sections of the UCC can be construed by judges in a different manner.