A recent case was decided by the U.S. Court of Appeals, Eleventh Circuit, involving the limitation of liability in an Admiralty case law. Although Admiralty law may differ from the law utilized in the security alarm industry, the principles described in the case are important.

In the case at hand, the plaintiff was the owner of a yacht. The plaintiff purchased various equipment from the defendant. The parts were warranted and included terms disclaiming the defendant’s liability in the event the “the part has been installed, repaired or altered other than by defendant in any way that
… defendant’s judgment would affect the performance of reliability of the part.” 

The plaintiff hired the defendant to perform an overhaul of the water jets and to replace the yacht’s existing guide vanes with those purchased from the defendant. In addition, the contract for the overhaul and installation contained a limitation of liability provision which provided, “in no event shall the liability exceed twenty percent of that total price of the purchase order that gives rise to the claim.” 

The defendant performed the repairs and in addition paid a third party to balance the impellers. After the repair, the plaintiff continued to experience vibrations and observed other problems. 

The plaintiff brought the action against the defendant alleging a breach of express and implied warranty for the sale of its parts and work conducting the overhaul. The plaintiff also alleged a violation of the Magnuson-Moss Warranty Act (MMWA). During the jury trial, the defendant moved for judgment on all counts, specifically arguing that the plaintiff failed to present any evidence that the parts supplied by the defendant were defective. The court denied the defendant’s motion on the breach of warranty, but granted the defendant’s motion to dismiss under the MMWA.

The jury then found that the defendant breached the implied warrant for workmanlike performance and awarded the plaintiff damages of $103,038.26. The court then reduced the amount of the final judgment to 20 percent of its total pursuant to the limitation of liability provision in the agreement. 

The plaintiff then appealed to the U.S. Court of Appeals.

The issues before the court became whether the limitation of liability clause was enforceable under Admiralty law; whether the District Court erred in calculating the damages pursuant; and whether the District Court erred in dismissing the MMWA claim. 

The Circuit Court applied a three-part test to determine whether a limitation of liability clause is enforceable in a Maritime Contract.  The clause must clearly and unequivocally indicate the party’s intentions; not absolve the repairer of all liability and still provide a deterrent to negligence; and the “businessmen” must have equal bargaining power. The court pointed out that a contract to repair a vessel invokes Admiralty jurisdictions. The court further determined that to have unequal bargaining power, there must be some evidence that the party holding the superior bargaining power exerted that power: The plaintiff in this case was a sophisticated businessman familiar with the maritime industry and with equal bargaining power as the defendant. 

Whether the terms of the limitation of liability clause are a sufficient deterrent to negligence is a “fact-specific inquiry … considering the liability risk compared to the overall obligations under the contract.” In the case, the defendant was required to pay 20 percent of the purchase order price, and provide uncompensated labor and replacement parts to conduct repairs under warranty. Considering the plaintiff’s overall obligations under the service agreement, the court indicated that they agreed with the District Court’s findings that these potential liabilities were a sufficient deterrent to negligence.

Therefore the court affirmed the District Court’s determination that the limitation of liability clause was enforceable under Admiralty law.

With respect to the MMWA, the court pointed out that the act is designed to protect consumers from deceptive warranty practices in the sale of “consumer products” or “service contracts.” The court affirmed the District Court orders dismissing the count under the MMWA and enforcing the limitation of liability clause in the service terms.

 

Readers Ask

I just entered into a contract with a new subscriber, a large commercial company. They want me to have my insurance company include them as an additional insured on the policy. Can I, and should I?

To ask Les Gold a question, e-mail sdm@bnpmedia.com.

 

Answer

First, call your insurance carrier and see if they will include the company as an additional insured. If yes, determine if there will be an additional cost. If your carrier will agree and your subscriber agrees to pay the costs, there should be no problem. If there is a subsequent claim, any defense you may have against your subscriber would remain in effect as between you and your subscriber.