Schrier v. Beltway Alarm Co.

ALPERT, Judge. Appellants, Eugene and Sheila Schrier, filed suit against the Beltway Alarm Co. in the Circuit Court for Prince ²⁸⁵ George’s County to recover damages for injuries Mr. Schrier sustained during a robbery of Veteran’s Liquors, Inc., a liquor store conducted in corporate form in which appellants were principal shareholders. The trial court held valid and enforceable a $250.00 limitation of liability provision in the parties’ contract and granted summary judgment in favor of Beltway for claims in excess of that amount. Pursuant to Md. Courts & Jud.Proc.Code Ann. § 4-402 (1984), the court also dismissed appellants’ claim for lack of subject matter jurisdiction, the amount in controversy having been adjudicated as being less than $500.

The pertinent facts are not in dispute. In September 1977 Mr. Schrier, on behalf of Veteran’s Liquors, entered into an “Alarm Protection Agreement” with Beltway Alarm Co. for the installation and maintenance of a “central station connected hold-up” system. Appellant agreed to pay a $287.00 installation fee, and $49.50 per month for a 3-year service contract. In November 1980, the parties entered into a second contract calling for monthly payments of $65.85 for continued maintenance of the system.

Both contracts contained language limiting appellee’s liability in the event of loss or damage due to a breach of contract or negligence in performance by Beltway. Specific pertinent language of the controlling 1980 contract will be provided in our discussion infra. Mr. Schrier was shot and severely wounded on August 31, 1981 during the course of a hold-up of his liquor store. In the suit filed against Beltway subsequent thereto, Mr. Schrier alleged that he had activated two alarm buttons during the robbery but prior to the shooting.

The Schriers filed counts in negligence, breach of contract, and breach of warranty, alleging that Beltway delayed 14 minutes in notifying the police department of the alarm, and that but for this delay Mr. Schrier would not have been shot. In this appeal, the Schriers contend that: I. Paragraph 8 of the contract is an invalid liquidated damages clause. ²⁸⁶ II. The limitation of liability clause is void as a matter of public policy.

III

Appellants have a cause of action in negligence.

IV

Appellants are not bound by the liquidated damages provision of the contract. We find no merit in any of appellants’ theories; therefore, we affirm. I. Preliminarily, we note the parties’ difficulty in characterizing the nature of Paragraph 8. Although the language appears to be standard in the alarm industry, Fireman’s Fund Am.

Ins. Cos. v. Burns Elec. Sec. Servs., Inc., 93 Ill.App.3d 298 , 417 N.E.2d 131 , 417 N.E.2d 131, 132 (1981), the companies’ desire to “cover all the bases” by characterizing the language as both liquidated damages and a limitation of liability has no doubt contributed to the problem. As we explain, however, “there is no real distinction for present purposes between a liquidated damage clause, a limited [liability] clause and an exculpatory clause.” General Bargain Center v. American Alarm Co., 430 N.E.2d 407, 412 (Ind.App.1982).

Paragraph 8 of the Agreement sub judice provided in part: STATUS OF PARTIES, LIMITATION OF LIABILITY, LIQUIDATED DAMAGE PROVISION AND INDEMNITY AGREEMENT. * * # * * sjs (b) Subscriber acknowledges that it is impractical and extremely difficult to fix the actual damages, if any, which may proximately result from a failure to perform any of the obligations herein or a failure of the system to operate because of, among other things: The uncertain amount or value of Subscriber’s property or the property of others which may be lost or damaged; the uncertainty of the response time of the police or fire department; the inability to ascertain what portion, if any, of any loss ²⁸⁷ would be proximately caused by Company’s failure to perform any of its obligations or failure of its equipment to operate; the nature of the services to be performed by Company; (c) Subscriber understand [sic] and agrees that if Company should be found liable for any loss or damage due from a failure to perform any of its obligations or a failure of the equipment to operate, Company’s liability shall be limited to a sum equal to the total of six monthly payments or Two Hundred Fifty Dollars ($250.00) whichever is the lesser, as liquidated damages and not as a penalty and this liability shall be exclusive and shall apply if loss or damage, irrespective of cause of origin, results directly or indirectly to persons or property from performance or nonperformance of any of the obligations herein or from negligence, active or otherwise of Company, its employees or agents; ... Some courts have designated contract provisions similar to this as exculpatory, others as a limitation of liability, and still others label it as a liquidated damages clause. Regardless of the nomenclature, courts have uniformly upheld these contract clauses. See, e.g., Central Alarm v. Ganem, 116 Ariz. 74 , 567 P.2d 1203 (App.1977); Guthrie v. American Protection Indus., 160 Cal.App.3d 951 , 206 Cal.Rptr. 834 (1984); Bargaintown of D.C., Inc. v. Federal Eng’g Co., 309 A.2d 56 (D.C.App.1973); Stefan Jewelers, Inc. v. Electro-Protective Corp., 161 Ga.App. 385 , 288 S.E.2d 667 (1982); Fireman’s Fund Am.

Ins. Cos. v. Burns Elec. Sec. Servs., Inc., 93 Ill.App.3d 298 , 48 Ill.Dec. 729 , 417 N.E.2d 131 (1980); General Bargain Center v. American Alarm Co., 430 N.Ed.2d 407 (Ind.App.1982); Alan Abis, Inc. v. Burns Elec. Sec. Servs., Inc., 283 So.2d 822 (La.App.1973); New England Watch Corp. v. Honeywell, Inc., 11 Mass.App. 948 , 416 N.E.2d 1010 (1981); St. Paul Fire & Marine Ins.

Co. v. Guardian Alarm Co., 115 Mich.App. 278 , 320 N.W.2d 244 (1982); Foont-Freedenfeld Co. v. Electro-Protective Co., 126 NJ.Super. 254, 314 A.2d 69 (1973), aff'd, 64 N.J. 197 , 314 A.2d 68 (1974); Florence v. ²⁸⁸ Merchants Cent. Alarm Co., 73 A.D.2d 869 , 423 N.Y.S.2d 663 (1980); Reed’s Jewelers, Inc. v. ADT Co., 43 N.C.App. 744 , 260 S.E.2d 107 (1979); Lobianco v. Property Protection, Inc., 292 Pa.Super. 346 , 437 A.2d 417 (1981); Vallance & Co. v. DeAnda, 595 S.W.2d 587 (Tex.Civ.App.1980); but see Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27 , 465 N.E.2d 392 (1984). Appellants first characterize paragraph 8 as a liquidated damages clause and argue that it is invalid because it provides for a penalty. Although we disagree with appellants’ characterization of the disputed language, see infra at 289, we will address their argument because the enforceability of any type of limitation of damages clause with respect to a contract for a burglar alarm system is a question of first impression in Maryland.

Exculpatory clauses and liquidated damages clauses have been upheld in other contexts, however, and are helpful to our determination of this case. In the seminal case regarding exculpatory clauses, Winterstein v. Wilcom, 16 Md.App. 130 , 293 A.2d 821 , cert. den., 266 Md. 744 (1972), this court upheld an exculpatory agreement that relieved Wilcom of all liability for negligent conduct relating to activities at the "75-80 Drag-A-Way,” a track where “automobile timing and acceleration runs were conducted on two racing lanes.” Although Drag-A-Way had employees in a tower to detect any hazards on the track, no one warned Winterstein of a “cylinder head approximately 36" long, 6" wide and 4" high, weighing approximately 100 pounds ... which was not visible to him when he commenced the race” but was visible to the employees in the tower. Winterstein hit the cylinder, lost control of the car, jumped a ditch, drove up an embankment and turned over. He sustained “serious, painful and permanent injuries.” Id. at 133, 293 A.2d 821 .

Winterstein sued Wilcom, d/b/a Drag-A-Way for his injuries, alleging negligence. On the basis of the exculpatory “Release” signed by Winterstein, the trial court entered summary judgment ²⁸⁹ for Drag-A-Way. Affirming the summary judgment, we explained: It is clear that the exculpatory provisions involved in the case before us whereby Winterstein expressly agreed in advance that Wilcom would not be liable for the consequences of conduct which would otherwise be negligent were under the general rule recognizing the validity of such provisions. There was not the slightest disadvantage in bargaining power between the parties.

Winter-stein was under no compulsion, economic or otherwise, to race his car. He obviously participated in the speed runs simply because he wanted to do so, perhaps to demonstrate the superiority of his car and probably with the hope of winning a prize. This put him in no bargaining disadvantage____ The short of it is that as to the releases here the effect of the exemptive clauses upon the public interest was nil. We find that each release was merely an agreement between persons relating entirely to their private affairs.

In the absence of a legislative declaration, we hold that they were not void as against public policy. Id. at 138-39 , 293 A.2d 821 . Likewise, it is well-settled that liquidated damage clauses are recognized and enforced in Maryland. Blood v. Gibbons, 288 Md. 268 , 418 A.2d 213 (1980); Cowan v. Meyer, 125 Md. 450 , 94 A. 18 (1915).

The parties to a contract may stipulate to a specific amount of damages to be recovered by either for a breach of the agreement by the other. Traylor v. Grafton, 273 Md. 649 , 332 A.2d 651 (1975). Breach of the contract, not an injury sustained by the other party, imposes the liability to pay the contractual damages. Id.; Cowan, supra.

If, however, as appellants herein argue, the contract provision is actually intended as a penalty, it will not be enforced. Id. The following statement of the rule is still the law today: [W]here the parties, at or before the time of the execution of the contract, agree upon and name a sum therein to be paid as liquidated damages, in lieu of anticipated damages ²⁹⁰ which are in their nature uncertain and incapable of exact ascertainment, the amount so named in the agreement will be regarded as liquidated damages and not as a penalty, unless the amount so agreed upon and inserted in the agreement be grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract. And whether it is excessive or whether the damages are incapable of exact ascertainment should be determined from the subject matter of the contract considered in the light of all the surrounding facts and circumstances connected therewith and known to the parties at the time of its execution.

That these questions should be considered and determined from the contract itself, its subject-matter and the surrounding facts and circumstances connected therewith with which the parties are confronted at the time of its execution, is made necessary in order to ascertain the intention of the parties, which is one of the essential factors in deciding whether the stipulation is for liquidated damages or is a penalty. It may afterwards be disclosed that the damages actually sustained are more or less than those anticipated at the time of the execution of the contract. If more, this fact would not characterize or stamp the stipulation as a penalty unless it was so exorbitant as to clearly show that such amount was not arrived at in a bona fide effort, made at or before the execution of the contract, to estimate the damages that might have been reasonably expected to result from a breach of it, and that it was named as a penalty for such breach. And on the other hand, if the amount stipulated was found to be inadequate, a greater amount could not be recovered for such breach, because of the agreement between the parties that the amount so named should be in lieu of the damages resulting therefrom.

Baltimore Bridge Co. v. United Rwys. & Elec. Co., 125 Md. 208, 214-15 , 94 A. 18 (1915). See Traylor v. Grafton, supra; Blood v. Gibbons, supra. ²⁹¹ Paragraph 8(b) of the agreement sub judice addresses the parties’ inability to ascertain the extent of the damages that might be incurred as a result of a failure of the alarm system. This difficulty was recognized by courts outside Maryland, see, e.g., Better Food Mkts., Inc. v. American Dist.

Tel. Co., 40 Cal.2d 179 , 253 P.2d 10, 15 (1953) (“The impracticability or extreme difficulty in fixing actual damages appeared as a matter of law.”); Fireman’s Fund Am. Ins. Cos. v. Burns Elec.

Sec. Servs., Inc., 93 Ill.App.3d 298 , 48 Ill.Dec. 729 , 417 N.E.2d 181 , 132 (1981) (“The chance of a burglary and the potential loss depended not only on the quality of the alarm but on many factors peculiar to Henry Kay [plaintiff’s insured] and within Henry Kay’s knowledge and control.”); Vallance & Co. v. DeAnda, 595 S.W.2d 587, 590 (Tex.Civ.App.1980) (“The possible consequences of a breach by a burglar alarm company are numerous ... [and] the nature and extent of a future loss [are] difficult to predict.”). See also Abel Holding Co. v. American Dist. Tel. Co., 138 NJ.Super. 137, 350 A.2d 292 (1975) (Discussing the difficulty of fixing amount of future damages for failure of fire alarm system).

We agree with the reasoning of these courts and find no merit in appellants’ argument that paragraph 8 is invalid as a penalty. Its caption notwithstanding, 1 we conclude that the contract clause at issue is a “limitation of liability” and not liquidated damages. Although every valid agreement for liquidated damages operates as a form of limitation, a contractual limitation of liability to an agreed maximum should be distinguished from a penalty or liquidated damages. 5A Williston on Contracts § 781A (3d ed. 1961). Liquidated damages is a “specific sum of money agreed upon as the amount of damages to be recovered for a ²⁹² breach of the agreement.” Traylor, 273 Md. at 661 , 332 A.2d 651 .

This distinction was also noted in Restatement of Contracts § 339, comment g (1932): An agreement limiting the amount of damages recoverable for breach is not an agreement to pay either liquidated damages or a penalty. Except in the case of certain public service contracts, the contracting parties can by agreement limit their liability in damages to a specified amount, either at the time of making their principal contract, or subsequently thereto. Although paragraph 8 refers to “liquidated damages,” the obvious purpose of the provision is clearly to limit Beltway’s liability to the specified $250.00 amount. The controlling language is contained in subsection (c): if Company should be found liable for any loss or damage due from a failure to perform any of its obligations or a failure of the equipment to operate, Company’s liability shall be limited to a sum equal to the total of six monthly payments or Two Hundred Fifty Dollars ($250.00) whichever is the lesser, as liquidated damages and not as a penalty.

Thus, 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. See Central Alarm v. Ganem, 116 Ariz. 74 , 567 P.2d 1203, 1207 (App.1977) (“if the loss to the customer was $150, the expressed mutual assent was that recovery should be $150 and not $312,” [the company’s maximum liability under the contract]); accord General Bargain Center v. American Alarm Co., 430 N.E.2d 407, 411 (Ind.App.1982); Vallance & Co. v. DeAnda, 595