Sommer v. Federal Signal Corp., 57 N.Y.2d 140 (1982)

In commercial contracts, limitation of liability clauses are enforceable if clearly written and not obscured, even if they result in minimal recovery, absent a statute or special relationship warranting relief.

Summary

Sommer contracted with Federal Signal for an alarm system. The contract limited Federal Signal’s liability to $50 for failure to perform. After a burglary, Sommer sued, claiming significant losses. The New York Court of Appeals held that the limitation of liability clause was enforceable. The court reasoned that in a commercial setting, parties are free to contract as they wish, and clear limitations of liability are upheld unless obscured or unconscionable. Since the clause was conspicuous and the contract was negotiated between businesses, the limitation was valid, even if the damages were minimal compared to the actual loss.

Facts

Plaintiffs Sommer, operating a commercial establishment, entered into a contract with Federal Signal Corporation for the provision of a burglar alarm system. The contract contained two key clauses: one limiting Federal Signal’s duty solely to notifying the police and the subscriber upon receiving a signal indicating illegal entry, and another explicitly limiting Federal Signal’s liability for any losses sustained due to burglary or any other cause to $50 as liquidated damages. A burglary occurred at Sommer’s premises, resulting in significant losses. Sommer claimed Federal Signal failed to properly respond to the alarm signal, leading to the loss.

Procedural History

Sommer sued Federal Signal to recover damages exceeding the $50 limit stipulated in the contract. The lower courts initially addressed the issue of liability based on the contract’s terms. The Appellate Division directed summary judgment for the plaintiffs, limiting recovery to $50, based on the contractual limitation of liability. The case then was appealed to the New York Court of Appeals.

Issue(s)

Whether a limitation of liability clause in a commercial contract for a burglar alarm system is enforceable where the clause is clear and conspicuous, despite resulting in minimal damages compared to the actual loss sustained by the subscriber.

Holding

Yes, because in a commercial setting, parties are free to contract as they wish, and a clear, conspicuous limitation of liability clause is enforceable absent a governing statute or a special relationship between the parties that would warrant relieving the plaintiffs of their contract.

Court’s Reasoning

The court emphasized the freedom of contract in commercial settings. It distinguished the case from situations involving real property or construction services, where statutes like General Obligations Law § 5-323 might restrict such limitations. The court found the contract’s language clear and conspicuous, noting the uniform font size and the absence of misleading headings. The court stated that “if plaintiffs read the contract at all they were aware of the limitation, and the law’s teaching since Pimpinello v Swift & Co. (253 NY 159) has been that if they could read it, the fact that they did not is immaterial, absent evidence of fraud.” The court rejected the argument that the minimal liability was unconscionable, emphasizing that Sommer was a business capable of understanding and agreeing to the terms. The court also clarified that the erroneous reference to “liquidated damages” was not controlling, as the intent to limit liability was clear. The court referenced Gross v Sweet, 49 NY2d 102, 107, stating that there was no necessity to “resort to a magnifying glass and lexicon” to understand the terms of the contract. The absence of a special relationship between the parties further supported the enforcement of the limitation of liability clause. The decision underscores the importance of clear contractual language and the principle that businesses are presumed to understand and accept the risks associated with their agreements.