Unlike a true liquidated damages clause, under a "limitation of liability" clause: (1) damages, not merely breach of contract, must be proved; and (2) liability varies according to the extent of the injury up to the stated maximum. Unlike a liquidated damage clause, it is immaterial whether a limitation of liability is a reasonable estimate of probable damages resulting from a breach. A limitation of liability is not a penalty in that it does not normally operate in terrorem to induce proper performance.
Appellants, husband and wife, and appellee alarm company entered into a maintenance agreement pursuant to a contract to provide alarm to appellants’ liquor store. The contract contained a clause limiting appellee’s liability in case of its breach or negligence. During a robbery of the store, the husband activated two alarm buttons but alleged that the company delayed 14 minutes in notifying the police. The husband has been shot and he alleged that if it were not for the delay, he would not have been shot. Appellants then sought to recover damages from appellee for injuries the husband sustained. The trial court granted summary judgment in favor of appellee for claims in excess of a limitation amount in the parties’ contract and dismissed the claim. The appellate court affirmed the trial court's order.
Could appellants husband and wife recover damages from an appellee alarm company for injuries the husband sustained during a robbery of their liquor store for breach of contract under which the appellee company limited its liability in the event of breach of negligence?
The contract clause at issue was a "limitation of liability" and not liquidated damages. Although every valid agreement for liquidated damages operated as a form of limitation, a contractual limitation of liability to an agreed maximum should be distinguished from a penalty or liquidated damages. The parties' contract was valid and binding on appellants because the parties reached a commercially sensible arrangement. The parties were not in an unequal bargaining position. In as much as the contact limited appellee's liability for damages arising out of breach of contract or negligence, appellant had no independent cause of action in tort or contract against appellee.