Liquidated damages clauses and limitation of liability clauses are common in contracts but have different roles
The insured suffers a fire or a break-in at its business and the alarm system fails to activate resulting in thousands of dollars of stolen or damaged merchandise. A claim is paid by the carrier, which then seeks to enforce its subrogation rights against the monitoring company. In response to the demand, the monitoring company says it is only responsible for a nominal amount of damages based upon a liquidated damages clause, or a limitation of liability clause in the monitoring contract. Is the carrier stuck with the nominal amount? The short answer: “Probably, but it depends.”
Liquidated damages clauses try to fix the amount of reasonable compensation for actual damages
Liquidated damages clauses and limitation of liability clauses are common in contracts but have different roles. Liquidated damages clauses try to fix, in advance, the amount of reasonable compensation for actual damages. Limitation of liability clauses restrict the amount of compensation available, regardless of the damages suffered. While the provisions both seek to limit exposure, courts treat the application of them differently.
Limitation of liability clauses restrict the amount of compensation available
In Ohio, as in many jurisdictions, liquidated damages clauses are valid and enforceable so long as the provision is intended by the parties to give reasonable compensation for damages. However, provisions that are manifestly inequitable and unrealistic will be deemed as unenforceable penalties.
In a commercial setting
Limitation of liability clauses in the commercial setting are treated differently and are generally enforceable unless the breaching party is found to be grossly negligent or the contract is shown to be unconscionable. In determining whether the clause is unconscionable, courts will look to the harshness of the terms and the bargaining positions of the parties. In the commercial setting, Courts rarely find the clauses to be unconscionable.
Examine the contract language
Each case is different. Before accepting the nominal figure, the facts and circumstances should be reviewed and the contract language should be closely examined. Keis George has been successful in recovering subrogation dollars despite attempts by companies to enforce these clauses. If you have questions pertaining to these clauses as it relates to a file you’re currently working, contact an attorney with our subrogation practice.