Samson Sales, Inc. v. Honeywell, Inc. – Case Brief
Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St.3d 27, 465 N.E.2d 392 (1984).
Facts: Samson Sales (P) contracted with Morse to have a burglar alarm system installed at Samson Sales’ pawn shop. Honeywell (D) assumed responsibility for the agreement when it purchased Morse. A burglary took place at Samson’s shop and Honeywell refused to pay more than $50.
P sued D and sought $68,300 for the value of lost merchandise. P alleged that D was negligent in failing to alert the police after it received the alarm signal. D claimed that its liability was limited to liquidated damages of $50 as per the terms of the contract. The court entered summary judgment in favor of P but limited damages to $50. P appealed. The court of appeals held that the provision for liquidated damages was a penalty, and the small standard print of the contract, prepared by Morse, contradicted the clear promises in paragraph 8 and the exculpatory clause which modified the substantive provisions of paragraph 18. D appealed.
Issue: What must the amount of liquidated damages in a contract be based upon in order to avoid being determined to be a penalty clause?
Holding and Rule: The sum in a liquidated damages clause must be a reasonable estimate of the damages incurred or it will act as a penalty clause.
Reasonable compensation for actual damages is the objective of liquidated damage provisions. If the parties have agreed on the amount of damages, ascertained by estimation and adjustment, and have expressed this agreement in clear and unambiguous terms, the amount so fixed should be treated as liquidated damages and not as a penalty, if the damages would be (1) uncertain as to amount and difficult of proof, and if (2) the contract as a whole is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intention of the parties, and if (3) the contract is consistent with the conclusion that it was the intention of the parties that damages in the amount stated should follow the breach thereof.
Under these facts, the damages herein are easily estimable. The stated sum of $50 is manifestly disproportionate to the consideration paid or the possible damage that reasonably could be foreseen from the failure to notify the police of the burglary.
Notes: In this case the amount paid by P over the contract term and the protection it received from D in the event of D’s failure to perform the contract was grossly disproportionate. A clause in the contract limiting liability to a reasonable amount may have been deemed valid.