Summary
In Samson Sales, defendant Honeywell, Inc. entered into a contract with plaintiff Samson Sales, Inc. under which Honeywell would provide burglar alarm services in exchange for $1500 at installation plus $150 per month for five years.
Summary of this case from Hitachi Med. Sys. Am., Inc. v. Empire Imaging, P.C.Opinion
No. 83-1593
Decided July 3, 1984.
Damages — Contracts — Installer and maintainer of burglar alarm system — Exculpatory clause limiting liability — Liquidated damage clause unenforceable as penalty, when.
O.Jur 3d Damages §§ 128, 129, 135.
Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof. ( Jones v. Stevens, 112 Ohio St. 43, paragraph two of the syllabus, followed.)
APPEAL from the Court of Appeals for Cuyahoga County.
The plaintiff-appellee, Samson Sales, Inc., entered into a contract with Morse Signal Devices whereby Morse installed a burglar alarm system at the plaintiff's pawn shop in exchange for $1,500 at the time of installation and $150 each month thereafter for a period of five years. Subsequently, Morse Signal Devices was purchased by the defendant-appellant, Honeywell, Inc., which assumed responsibility under the agreement. While the contract was in force, a burglary occurred at Samson's business establishment, but Honeywell refused to pay any more than $50 toward the loss.
The plaintiff commenced this action in the Court of Common Pleas of Cuyahoga County seeking damages in the amount of $68,303 for loss of merchandise occasioned by the burglary. Samson alleged that Honeywell had breached the contract by negligently failing to transmit a burglar alarm signal to the police or to its designated representative, as specifically required by Paragraph (8) of the contract, which provided as follows:
"Company, on receipt of a Burglar Alarm Signal from the premises of the Subscriber, agrees to transmit the alarm promptly to Headquarters of the public Police Department and to make reasonable efforts to notify the Subscriber, or his designated representative, by telephone, at the phone number and address supplied to Company in writing by Subscriber. * * *"
In defense of the action, Honeywell claimed that its liability, whether based upon negligence or breach of contract, was limited to liquidated damages in the amount of $50 as set forth in Paragraph (18) of the contract, which specifically provided as follows:
"* * * It is agreed by and between the Parties that Company is not an insurer; and that this Agreement in no way binds Company as an insurer of the premises or of the property of the Subscriber, and that all charges are based solely on the value of the service, maintenance and installation of the system. In the event of loss or damage to Subscriber resulting by reason of failure of the performance of such service or the failure of the system to properly operate, Company's liability, if any, shall be limited to the sum of Fifty Dollars ($50.00) as liquidated damages and not as a penalty and this liability shall be exclusive."
The cause came on for hearing before the court of common pleas on September 16, 1982, after which that court entered a summary judgment for the plaintiff, but limited damages to the sum of $50. Samson appealed, and the judgment of the court of common pleas was reversed by the court of appeals. In reversing the trial court, the court of appeals rested its conclusion upon two grounds: (1) that the provision for liquidated damages, under the facts of this case, was in the nature of a penalty, and (2) that the small standard print of the contract, as prepared by Morse Signal Devices, provided "an irreconcilable internal contradiction between the clear-cut promises found in paragraph 8 and the exculpatory clause which modifies the substantive provisions of paragraph 18."
This cause is now before this court pursuant to the allowance of a motion to certify the record.
Mr. Seymour Gross, for appellee.
Messrs. Walker Thomas and Mr. Michael A. Thomas, for appellant.
The only issue of any consequence in this appeal is whether the exculpatory clause limiting Honeywell's liability to $50 is valid and enforceable.
While some jurisdictions have rejected such contract provisions on policy grounds, clauses in contracts providing for reasonable liquidated damages are recognized in Ohio as valid and enforceable. Lange v. Werk (1853), 2 Ohio St. 519; Jones v. Stevens (1925), 112 Ohio St. 43; 30 Ohio Jurisprudence 3d (1981) 136-137, Section 128. However, reasonable compensation for actual damages is the legitimate objective of such liquidated damage provisions and where the amount specified is manifestly inequitable and unrealistic, courts will ordinarily regard it as a penalty. Sheffield-King Milling Co. v. Domestic Science Baking Co. (1917), 95 Ohio St. 180, paragraph one of the syllabus; Miller v. Blockberger (1924), 111 Ohio St. 798; 30 Ohio Jurisprudence 3d (1981) 138, Section 129. Hence, Honeywell's standard reference "to the sum of Fifty Dollars ($50.00) as liquidated damages and not as a penalty" is by no means conclusive or controlling in this case. Doan v. Rogan (1909), 79 Ohio St. 372; Lange v. Werk, supra; 30 Ohio Jurisprudence 3d (1981) 142, Section 135.
Whether a particular sum specified in a contract is intended as a penalty or as liquidated damages depends upon the operative facts and circumstances surrounding each particular case, but time has apparently had no undermining influence upon the guiding principles initially set forth in Jones v. Stevens, supra, where the court held at paragraph two of the syllabus:
"Where the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof."
With reference to the initial test suggested in Jones, the court of appeals expressly noted that "the damages here are patently estimable," and this finding is attuned to the indisputable fact that the damages in this case would be as readily ascertainable as the damages in a multitude of other conceivable situations involving negligence and/or breach of contract. As to the second guideline recommended by this court, the stated sum of $50 in the contract involved in this case is manifestly disproportionate to either the consideration paid by Samson or the possible damage that reasonably could be foreseen from the failure of Honeywell to notify the police of the burglary. And with particular emphasis upon the third condition proposed in Jones v. Stevens, supra, it is beyond comprehension that the parties intended that damages in the amount of $50 should follow the negligent breach of the contract.
In other words, an examination of the minute type used in the standard contract issued by Morse, as well as a fair construction of the contract provision as a whole, fails to evince a conscious intention of the parties to consider, estimate, or adjust the damages that might reasonably flow from the negligent breach of the agreement. See, particularly, American Financial Leasing Co. v. Miller (1974), 41 Ohio App.2d 69 [70 O.O.2d 64]. Surely, Samson, which apparently had some business experience, did not pay $10,500 for the mere possibility of recouping $50 if Honeywell provided no service at all under the terms of the contract. Characteristically, therefore, and by way of analysis, the nominal amount set forth in the contract between Samson and Honeywell has the nature and appearance of a penalty.
Accordingly, the judgment of the court of appeals is affirmed.
Judgment affirmed.
CELEBREZZE, C.J., W. BROWN, SWEENEY, HOLMES, C. BROWN and J.P. CELEBREZZE, JJ., concur.
KERNS, J., of the Second Appellate District, sitting for LOCHER, J.