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

Alarm contract legal talk for alarm businesses dealing with liability issues


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...")

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