In a recent case before the United States District Court for the Northern District of Illinois, an interesting question arose as to whether the defendant, the company providing security, could be responsible for a decrease in value of the property because of a loss that the plaintiff contended was the fault of the security company.
The plaintiff intended to sell the large industrial facility as a turnkey operation. The plaintiff contracted with the defendant security company to provide security at the facility, but according to its complaint, the security company did not prevent thefts of expensive electronic controls and other items from the facility. The plaintiff filed a complaint for breach of contract seeking $4 million, which it estimated to be the difference between the price at which it would have sold the facility if the thefts had not occurred and the actual sale price.
The security company filed a motion to dismiss the complaint for failure to state a claim upon which relief could be granted, contending primarily that the plaintiff cannot recover the decrease in the facility market value as general contract damages.
Under a Master Services Agreement (MSA), the defendant was to provide various services at the plaintiff-owned facility. The plaintiff contended that during a second visit that “a significant amount of controls and equipment had gone missing” since their first visit. The plaintiff contended that approximately 175 items were stolen, “rendering some equipment worthless and others significantly devalued.” Therefore the plaintiff contended that since the thieves stole so many of the electronic controls, the theft precluded the plaintiff from selling the facility as a turnkey operation.
One of the provisions of the MSA provided that, “other than pursuant to the Liability Cap Exceptions, neither party shall be liable to the other party, or any of its subsidiaries and affiliates, or their respective officers, directors, employees, agents and representatives for punitive, special, exemplary, incidental or consequential damages in connection with or arising out of the agreement regardless of whether such claim may be based on contract, warranty, tort (including negligence), or strict liability.”
The complaint by the plaintiff attempted to seek a decrease in the facility’s market value rather than lost profit, alleging that an appraiser estimated that the theft diminished the facility’s value by approximately $3.5 million and that further the buyers of the property negotiated a $400,000 reduction in the facility’s purchase price after learning of the theft.
The plaintiff alleged that it contracted with the defendant with the intent to maximize the value of the facility and that the defendant knew that it intended to sell the facility.
The court indicated that the defendant’s awareness that the plaintiff intended to sell the facility “in and of itself, is insufficient, as a matter of law to impose liability on the defendant for loss of market value of the facility even as to special damages. To obtain special damages (which the MSA precludes), the court pointed out that plaintiff must go beyond showing that the defendant knew what it intended to do and demonstrate that the defendant contemplated at the time of the contract’s execution that it assumed legal responsibility for these damages upon a breach of the contract.
The court further pointed out that the plaintiff’s analysis runs into the “well established principle that contract damages are measured at the time of the breach.”
Therefore, the court granted the defendant’s motion to dismiss the complaint, although, the court indicated that the plaintiff may amend its complaint. Consequently, the case may or may not proceed.
QWe are presently negotiating with a potential subscriber to install a very comprehensive system in their business. The subscriber is attempting to get our company to remove the limitation of liability provision in our contract. We have advised the subscriber that we have contacted our insurance carrier and they will not provide insurance if we remove the provision. The subscriber has indicated that their insurance company is concerned that our employees may do significant damage to their property while installing and/or maintaining the system. Any suggestions?
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To ask Les Gold a question, e-mail SDM@bnpmedia.com.
First, I would not remove the limitation of liability provision even if your insurance carrier agrees to it. If there is a loss and the carrier cancels your insurance, you are then faced with the dilemma of having a contract with your subscriber, without the limitation of liability provision and without insurance.
As a suggestion for a resolution to the problem, you may suggest to your potential subscriber that you leave the limitation of liability provision in place, but add a provision that in the event that any of your employees cause any damage or injury to person or property while on your premises, then the limitation of liability provision will not apply. In that type of a situation, it is not a matter of errors and omissions whereby the system fails to operate or fails to detect an intrusion, but it is strictly a liability issue whereby your employees may have damaged property or created injury to individuals, which has nothing to do with the alarm system being operative or inoperative.