SW Legal studies in Business

Exculpatory Clause in Commercial Contract Enforced to Limit Liability
Description Appeals court held that in a commercial contract where an exculpatory clause clearly limited the liability of one party to a maximum of $1,000, the clause will be enforced and the liability limited to the agreed upon sum.
Topic Contracts
Key Words Exculpatory Clauses; Commercial Dealings
C A S E   S U M M A R Y
Facts Chicago Steel had a contract for ADT Security to provide a fire alarm monitoring system for its plant. ADT maintained the alarm system and inspected it four times a year for $3,472. The contract stated that ADT was not an insurer and was exempt from liability for damage to Chicago Steel property. The contract also specifically limited ADT's liability to a maximum of $1,000. Soon after the system was installed, there was a fire that caused substantial damage. Chicago Steel sued ADT on the basis that the alarm system was defective, failed to detect the fire, failed to adequately monitor water flow in the sprinkler system, and failed to signal ADT to call the fire department. The suit was for breach of contract and for negligence. The trial court dismissed the suit. Chicago Steel appealed.

Affirmed. The exculpatory clause in the contract precluded Chicago Steel from claiming negligence and breach of contract. An exculpatory clause is enforced if: 1) it clearly spells out the intention of the parties; 2) there is nothing in the social relationship between the parties that suggests it should not be enforced, and 3) it is not against public policy. Here, the terms of the contract were clear and precise. Both parties had equal bargaining power. Chicago Steel declined the opportunity to pay for an allocation of additional liability to the fire alarm service. There was no fraud involved. This is a commercial deal in which sophisticated parties dealt with each other and are bound by the terms of their agreement.

Citation Chicago Steel Rule and Die Fabricators Co. v. ADT Security Systems, Inc., 763 N.E.2d 839 (App. Ct., Ill., 2002)

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