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Tuesday, September 19, 2006

Limitation on Liability: Burning Down the House

Plaintiffs equipped their home in Lexington, Kentucky, with an ADT fire alarm system. ADT retained title to the alarm system and provided a monitoring service in return for a monthly fee.  Plaintiffs' house was destroyed by an accidental fire. The alarm malfunctioned and failed to inform the local fire department of the fire. Plaintiffs' contract with ADT contained the following clause limiting ADT’s liability to $250 as liquidated damages in the event of an equipment malfunction:

LIMIT OF LIABILITY--IT IS UNDERSTOOD THAT ADT IS NOT AN INSURER, THAT INSURANCE, IF ANY SHALL BE OBTAINED BY THE CUSTOMER AND THAT THE AMOUNTS PAYABLE TO ADT HEREUNDER ARE BASED UPON THE VALUE OF THE SERVICES AND THE SCOPE OF LIABILITY AS HEREIN SET FORTH AND ARE UNRELATED TO THE VALUE OF THE CUSTOMER'S PREMISES. ADT MAKES NO GUARANTY OR WARRANTY, INCLUDING ANY IMPLIED WARRANTY OR MERCHANTABILITY OR FITNESS THAT THE SYSTEM OR SERVICES SUPPLIED, WILL AVERT OR PREVENT OCCURRENCES OR THE CONSEQUENCES THEREFROM, WHICH THE SYSTEM OR SERVICE IS DESIGNED TO DETECT. IT IS IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE ACTUAL DAMAGES, IF ANY, WHICH MAY PROXIMATELY RESULT FROM FAILURE ON THE PART OF ADT TO PERFORM ANY OF ITS OBLIGATIONS HEREUNDER. THE CUSTOMER DOES NOT DESIRE THIS CONTRACT TO PROVIDE FOR FULL LIABILITY OF ADT AND AGREES THAT ADT SHALL BE EXEMPT FROM LIABILITY FOR LOSS, DAMAGE, OR INJURY DUE DIRECTLY OR INDIRECTLY TO OCCURRENCES OR CONSEQUENCES THEREFROM, WHICH THE SERVICE OR SYSTEM IS DESIGNED TO DETECT OR AVERT; THAT IF ADT SHOULD BE FOUND LIABLE FOR LOSS, DAMAGE OR INJURY DUE TO A FAILURE OF SERVICE OR EQUIPMENT IN ANY RESPECT, ITS LIABILITY SHALL BE LIMITED TO A SUM EQUAL TO 10 OF THE ANNUAL SERVICE CHARGE OR $250, WHICHEVER IS GREATER, AS THE AGREED UPON DAMAGES AND NOT AS A PENALTY, AS THE EXCLUSIVE REMEDY, AND THAT THE PROVISIONS OF THIS PARAGRAPH SHALL APPLY IF LOSS, DAMAGE OR INJURY IRRESPECTIVE OF CAUSE OR ORIGIN, RESULTS DIRECTLY OR INDIRECTLY TO PERSON OR PROPERTY FROM PERFORMANCE OR NONPERFORMANCE OF OBLIGATIONS IMPOSED BY THIS CONTRACT OR FROM NEGLIGENCE, ACTIVE OR OTHERWISE, OF ADT, ITS AGENTS OR EMPLOYEES....

Plaintiffs argued that the limitation of ADT’s liability should not be enforced. First, they contended that the contract for the alarm service was one of adhesion. The court disagreed because the contract, while a standardized form, was not a “take-it-or-leave-it” proposal. Rather, the contract provided that plaintiffs could pay ADT more to assume a greater liability – the plaintiffs, thus, could have bargained for more favorable terms.

Plaintiffs next argued that the contract was unconscionable. The court also rejected this contention, holding that the limitation-of-liability clause was not one-sided, oppressive nor unfairly surprising. While the language of the clause was located on the back of the contract document, and plaintiff signed on the bottom front of the document, near the signature block, the contract stated in bold, capital letters:

ATTENTION IS DIRECTED TO THE LIMITED WARRANTY, LIMIT OF LIABILITY AND OTHER CONDITIONS ON REVERSE SIDE.

The court noted that the language stood separate and apart from the rest of the paragraphs of the contract and was easily readable, not unduly lengthy and not couched in vague or obscure language. The court also noted that one of the plaintiffs was a “highly educated medical doctor” who read the document before signing it.

Plaintiffs also argued that the limitation of ADT’s liability was an unenforceable penalty. The court disagreed and enforced the liquidated damages clause:

Damages based on a breach of the contract by [ADT] would have been difficult, if not impossible, to ascertain because they did not contract to assume the duties of an insurer and did not know the value of the home, its contents, or the extent of any possible fire damage that might result. Additionally, the $250.00 limitation of liability amount represents nearly one year of monitoring fees and is reasonably proportionate to the damages expected from a breach of a $24.00 per month monitoring agreement. Accordingly, we hold that the $250.00 contemplated under the agreement is a proper measure of liquated damages and does not constitute an unenforceable penalty.

United Services Auto. Ass'n v. ADT Sec. Services, ___ S.W.3d ___, 2006 WL 2578019 (Ky. App
Sep. 8, 2006).

[Meredith R. Miller]

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Tracked on Sep 20, 2006 1:52:09 AM