Opinion
No. 1878
July 12, 1984
(1) A limitation of liability clause in a contract for a fire alarm service system should be enforced because the plaintiffs are in the best position to insure themselves
(2) A provision in a contract survives a modification as to some other term.
Anita Weinstein, Esquire, for Plaintiff
Cary L. Sandler, Esquire, for Defendant
MEMORANDUM OPINION
Presently before this Court is defendant's Motion for Partial Summary Judgment and plaintiffs' Answer to this Motion. In consideration of both and their accompanying memoranda, this Court grants the defendant's Motion. The effect of the granting is to limit the defendant's liability to the amount of $250.00 or to a sum equal to ten percent (10%) of the annual service charge, whichever is greater. The Court states the reasons for its action below.
This action arises from a fire which occurred on November 22, 1978 on the premises of Four Penn Center Plaza, a complex operated as an office building. The plaintiffs, Four Penn Center Plaza Building Corporation and Reliance Insurance Company, were the owners of real and personal property at the above premises. The defendant, AFA Protective Systems, Inc., furnished a fire alarm service system for the premises. The plaintiffs and defendant entered into a contract on November 27, 1973 which was in full force and effect on November 22, 1978, the date of the fire.
On January 27, 1981, the plaintiffs filed a complaint against the defendant alleging, inter alia, that the fire could not be contained due to the following: defendant's failure to properly install its equipment; defendant's failure to properly operate its equipment; and defendant's failure to follow the prescribed procedure for notification in the event of fire. Plaintiffs based their claims on trespass and assumpsit theories -- specifically, breach of warranties, negligence and strict liability under Restatement (Second) of Torts § 402A.
Defendant raised, by way of New Matter, the limitation of liability clauses contained in the aforesaid contract. The relevant clauses appear below:
4. It is understood that the contractor is not an insurer, that insurance, if any, shall be obtained by the subscriber and that the amounts payable to the contractor 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 subscriber's property or the property of others located in subscriber's premises. The subscriber does not desire this contract to provide for full liability of the contractor and agrees that the contractor shall be exempt from liability for loss or damage due directly or indirectly to occurrences, or consequences therefrom, which the service is designed to detect or avert: That is, the contractor should be found liable for loss or damage due to a failure of service in any respect, its liability shall be limited to a sum equal to ten percent of the annual service charge or $250., whichever is the greater, and that the provisions of this paragraph shall apply if loss or damage, 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 the contractor, its agent or employees.
5. If during the life of this contract subscriber desires contractor to assume liability beyond that indicated above, a rider to this contract will be entered into by the parties hereto providing for contractor's additional liability and subscriber will agree to pay the contractor such additional service charges as are consonant with contractor's additional cost, in which event clause No. 4 above will be null and void, provided however, that such rider and additional obligation shall in no way be interpreted to hold contractor as an insurer.
Defendant now makes this Motion for Partial Summary Judgment and offers the following reasons for support:
(1) the parties' contract contained a limitation of liability clause, which is valid and enforceable; and
(2) to permit plaintiffs to recover despite this limitation of liability clause would excuse them from having to insure their property and shift the risk of their loss to defendant, when they are in the best position to insure themselves against any possible losses.
Plaintiffs' Answer to the Motion for Partial Summary Judgment is supported by the following:
(1) the clause is void, as it is against public policy and it is unenforceable under Pennsylvania law; and
(2) plaintiffs' modification of the original 1973 contract in 1975 failed to incorporate the clause.
The Court examines the reasons proffered by the defendant and finds that he relies primarily on two Pennsylvania cases: Wedner v. Fidelity Security Systems, Inc., 228 Pa. Superior Ct. 67, 307 A.2d 429 (1973); and LoBianco Property Protection, Inc., 292 Pa. Superior Ct. 346, 437 A.2d 417 (1981). Plaintiffs argue that not only are these cases distinguishable, but they should not be followed since they are not majority opinions.
In Wedner, supra, the plaintiff-furrier suffered a loss in excess of $46,000 from a burglary of his commercial premises. The lower court held that the plaintiff was bound by a clause limiting the defendant's liability to the annual service charge of $312. Judges WATKINS, JACOBS and SPAULDING, in the opinion in support of affirmance of the holding, reasoned that the clause should be enforced because the contracting parties were both "experienced, established business persons." The plaintiff, "had a choice as to how to protect his property, and whether or not he should obtain insurance." Judges CERCONE, WRIGHT and HOFFMAN, in their opinion in support of reversal, reasoned that the clause was invalid. Since the limitation was a sum equal to the yearly service charge, "the clause in effect works a recission of the contract, completely freeing defendant from proper performance of its terms and requiring only a return of the service charge when defendant has failed to properly perform thereunder. The contract thus becomes, in effect, an illusory one with defendant not being bound to perform and plaintiff not being entitled to performance by defendant."
Applying such reasoning to this case, it seems that the clause limiting defendant's liability does not render the contract illusory. Defendant could not at its option escape its duty of performance. Plaintiffs remained entitled to performance, that is, to require defendant to repair the alarm system so that it would work. Like the plaintiff in Wedner, plaintiffs were capable of assuming the risk of loss that the contract levied upon them; they "had a choice as to how to protect (their) property, and whether or not (they) should obtain insurance." Part of the clause directed that the plaintiffs had this option.
In LoBianco, the validity of an exculpatory clause in a burglar alarm contract was upheld to preclude a system subscriber's recovery beyond the cost of repairs to the burglar alarm system. The appellant sought to recover $35,815.00 as the value of jewelry stolen from her home when the alarm system, installed by the defendant, failed to work. The plaintiff brought her action on two counts alleging breach of warranty and strict liability under 402A. The Court stated that:
We therefore conclude, as have courts in other states, that the clause limiting appellee's liability to the cost of repairing the burglar alarm system should be enforced. This conclusion moreover, is consistent with the Uniform Commercial Code's underlying purposes and policies in that it "permits the continued expansion of commercial practices through custom usage and agreement of the parties", and conforms to the "law among the various jurisdictions." (437 A.2d at 421.)
The LoBianco Court further precluded recovery on a theory of strict liability stating the following:
The purposes thus stated would not be served by applying Section 402A to the present case. Homeowners are not "otherwise defenseless victims" of burglar alarm manufacturers in the same sense that a buyer of an automobile, for example, may be the victim of the automobile manufacturer. If the property is valuable, the homeowner may insure it. To apply Section 402A to the present case would in practical effect excuse the homeowner from having to insure the property and would shift the risk of its loss to the burglar alarm manufacturer. This would represent a less, not more, equitable allocation of the risk. The homeowner, not the manufacturer, knows what property is in the home, and its value; the manufacturer does not. Even if the manufacturer were to find out what property was in the home before installing the burglar alarm system, the homeowner could, and probably would, add other property, without notice to the manufacturer. As between the homeowner and the manufacturer, the manufacturer is more "defenseless" than the homeowner. If the homeowner buys a silver service or a stereo system, at least he can get insurance against its loss; but the manufacturer cannot, for it will not know that the service or stereo has been put in the home. Thus, it may not be said that "the risk of injury can be insured by the manufacturer and distributed among the public as a cost of doing business." Ray v. Alad Corp., supra. Nor may it be said that the manufacturer ought to protect itself by increasing its charge, in that way distributing the risk. That would mean that a homeowner with personal property of only modest value would be required to pay for his burglar alarm system a price high enough to protect the manufacturer against loss it might incur if the homeowner with personal property of great value were burglarized. Those of modest means would be subsidizing the rich. (437 A.2d at 424-425.)
Although Wedner and LoBianco were not decided by a majority court and do not have binding precedential value, they still have persuasive value. Each Superior Court decision upheld the decision of the Common Pleas Court when it found the limitation of liability clause valid and enforceable. Each Superior Court opinion presented careful and concise reasoning, which this Court will adopt to apply in the instant case.
Other jurisdictions have upheld clauses limiting liability in fire alarm contracts, in similarly wellreasoned opinions. Abel Holding Co., Inc. v. American District Telegraph Co., 138 N.J. Super. 131, 350 A.2d 292 (1975); Atkinson v. Pacific Fire Extinguisher Co., 40 Cal. 2d 192, 253 P.2d 18 (1953). In Abel, supra, the Superior Court of New Jersey upheld the validity of a limitation of liability clause which was identical to the clause involved in the instant case. Abel was a suit for property damage and loss of profits allegedly suffered as a result of a large fire on a pier. The theories of recovery were negligence, breach of contract, breach of express and implied warranties, and strict liability in tort. In upholding the validity of the clause, the Court rejected the plaintiff's contentions that the clause was invalid on the basis that it adversely affected the public interest and that it was unconscionable.
In Atkinson, supra, a limitation of liability clause was also upheld. Atkinson involved a fire loss resulting in the owner of the premises seeking damages from defendant, who had installed an automatic fire detection system in plaintiff's mill under a lease containing the clause. The validity of the clause was upheld here, in realization of the extreme difficulty in fixing actual damages the parties are executing. In no event, can the contracting parties predict what portion of losses resulting from a fire is the proximate result of the failure of the detection system. The Court observed that "for the small compensation received, the owners of the system could not afford to assume responsibilities such as are assured in the case of fire insurance coverage."
The Atkinson Court, however, did not end its analysis there. The Court further stated:
On the other hand, while the plaintiffs could not and did not expect the defendant to furnish the security which fire insurance would afford, they were entitled to some compensation for the defendant's breach of contract although they had no way of knowing either the nature or the extent of a loss which might result after the defendant's breach. In view of the fact that neither party could foresee what the consequences of a breach would be, it was entirely reasonable for them to agree upon the stated amount which by the statute is then presumed to be the damages sustained because of a breach. (253 P. 2d at 21.)
Such a statement relates directly to the instant case and supports the defendant's second contention -- that the limitation of liability clause should be enforced because the plaintiffs are in the best position to insure themselves. Neither party could have predicted what the consequences of a fire would be, nor what portion of loss from a possible fire would be the proximate result of the failure of defendant's detection system. Together, the parties agreed upon an amount as damages, which was stated in the limitation of liability clause. The defendant even provided the plaintiffs with an option whereby the defendant would assume liability beyond that stated amount. However, the plaintiffs chose not to exercise this option. The risk of loss should, therefore, then fall on the plaintiffs' insurance carrier, not on the defendant's.
Addressing the plaintiffs' contentions, this Court examines a letter which, the plaintiffs claim, modifies the contract. Because the modification failed to incorporate the clause found in the original contract, they argue, the defendant cannot use the clause as a defense.
Such an argument is defeated by the following principles: A provision in a contract survives a modification as to some other term, Encyclopaedia Britannica, Inc. v. Cowan, 142 Pa. Superior Ct. 534, 16 A.2d 433 (1940). A contract, one item in which is modified by a parties' agreement, remains the same as the old contract in every respect, Witkofski v. Daniels, 329 Pa. 452, 198 A. 19 (1938).
Moreover, each of the parties stated in its memorandum that the contract was to be enforced in its entirety, including the modifications made. Plaintiffs' specifically stated: "It is admitted that the contract, together with its modifications was in full force and effect up to and including November 22, 1978, the date of the fire." (Page 2 of Plaintiffs' Reply Brief to Defendant's Motion for Summary Judgment.)
Plaintiffs also cite a Rider in support of its argument that the limitation of liability clause contained in the original contract should not be enforced. The citation is for the purpose of stressing that the above modification does not incorporate the original contract. Plaintiffs quote words of the Rider which specifically incorporate the contract by reference, implying that the modification, in order to be enforceable, should do the same. Yet, the plaintiffs fail to realize that although the modification does not also specifically incorporate by reference, it does so pursuant to contract principles.
Finally, since before the Court is a Motion for Summary Judgment, the principles by which the disposition of a Motion is determined must be examined. Summary Judgment is granted only in the clearest cases, where the right to such a judgment is clear and free from doubt. Thompson Coal Co. v. Pike Coal Co., 488 Pa. 198, 412 A.2d 466 (1979). The judgment should only be rendered when there is no genuine issue as to any material fact and when the moving party is entitled to a judgment as a matter of law. Pa. R.C.P. 1035(b); Rybas v. Wapner, 311 Pa. Superior Ct. 50, 457 A.2d 108 (1983); Vend-A-Matic, Inc. v. Frankford Trust Co., 296 Pa. Superior Ct. 492, 442 A.2d 1158 (1982).
The issues central to cases involving limitation of liability clauses have been established by the Third Circuit: to be effective, these limitations must be drawn to reflect the intent or understanding of the parties and must specifically address the type of remedy and form of redress which they seek to limit or eliminate. Keystone Aeromantics Corp. v. RJ Enstrom Corp., 499 Fed. 2d 146 (3d Cir. 1974); Posttape Associates v. Eastman Kodak Co., 537 Fed. 2d 751 (3d Cir. 1976); Pennsylvania Glass Sand Corporation v. Caterpillar Tractor Company, 652 Fed. 2d 1165 (3d Cir. 1981).
Here, the intention of the parties to restrict damages was articulated with particularity. The modifications did not affect the articulation. Also, the limitation of liability clause specifically addressed the type of remedy and form of redress.
The limitation of liability clause being valid and enforceable and there existing no genuine issues as to any material facts, the Motion for Partial Summary Judgment is granted.
ORDER
AND NOW, to wit, this 12th day of July, 1984, upon consideration of defendant's Motion for Partial Summary Judgment and plaintiffs' Answer thereto, it is hereby ORDERED and DECREED that said Motion is Granted and that defendant's liability is limited to the amount of $250.00 or a sum equal to ten percent (10%) of the annual service charge; whichever is greater.