Samson Sales, Inc. v. Honeywell, Inc.

Supreme Court of Ohio · 1984 · Contracts

ContractsLiquidated damagesExculpatory clausesliquidated damagespenaltyexculpatory clauseunenforceable penaltyreasonable compensation

Facts

Honeywell's standard contract contained a clause limiting its liability to $50, referring to that amount as liquidated damages and not as a penalty. Samson paid $10,500 under the contract. The claimed breach was Honeywell's failure to notify the police of a burglary. The enforceability of the $50 limitation was the central dispute.

Issue

Whether the contractual clause limiting Honeywell's liability to $50 is valid and enforceable as a liquidated damages provision, or instead constitutes an unenforceable penalty.

Rule

In Ohio, clauses providing for reasonable liquidated damages are valid and enforceable, but only when they reflect reasonable compensation for actual damages rather than a penalty. Under Jones v. Stevens, a stipulated sum is treated as liquidated damages if the damages are uncertain as to amount and difficult to prove, the contract as a whole is not manifestly unconscionable, unreasonable, or disproportionate in amount, and the contract is consistent with an intent that the stated damages follow from breach. A label stating that a sum is liquidated damages and not a penalty is not conclusive.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Columbus, Ohio, Rosedale Archive Storage hired Beacon Watch Systems, a fictional alarm-monitoring company, to monitor a warehouse for three years at a total price of $18,000. The standard-form contract provided that if Beacon Watch failed to perform, Rosedale's sole recovery would be $100, described in bold text as "liquidated damages and not a penalty."

If Beacon Watch entirely failed to notify anyone during a break-in and Rosedale sued for its actual losses, how should a court most likely treat the $100 clause under the majority's approach?

Explanation. The majority held that a stipulated sum is enforceable only if the Jones conditions are met: damages must be uncertain and difficult to prove, the amount must not be manifestly unconscionable, unreasonable, or disproportionate, and the contract must reflect an intent that the stated amount follow the breach. A statement that the amount is "liquidated damages and not a penalty" is not conclusive. Here, $100 is nominal compared with the $18,000 paid and the foreseeable loss from total nonperformance, so the clause has the character of a penalty rather than reasonable compensation.