Superior Court of New Jersey, Appellate Division; 150 N.J. Super. 301; 375
A.2d 687;
April 18, 1977, Argued
May 4, 1977, Decided
PROCEDURAL POSTURE: Defendant fire protection equipment company sought
review of a decision in the trial court (New Jersey), which declined to
enforce the limitation of liability clause in a contract for equipment
signed by defendant and plaintiff corporation.
OVERVIEW: Plaintiff corporation purchased a fire protection system from
defendant fire protection equipment company. The parties signed a contract,
and the equipment was installed in a restaurant that plaintiff was preparing
to open. During the preparations for the opening of the restaurant, the
system suddenly discharged a white dust all over the kitchen. There was no
fire. A few days later it happened again. Plaintiff brought an action for
damages, and a jury found that the system had a defective component and had
been negligently installed. After the trial at a special hearing, the trial
judge ruled that a clause in the purchase contract limiting defendant's
liability to the purchase price of the equipment or plaintiff's interest in
the equipment was unenforceable as unconscionable. On appeal, the court
affirmed and held that there was no written waiver of the implied warranty
of merchantability or fitness for use as was required for waiver under N.J.
Stat. Ann. § 12A:2-316. The court also held that the clause was not
enforceable because it did not apply to defective equipment or negligent

OUTCOME: The court affirmed the trial court's judgment, which declined to
enforce the limitation liability clause in a contract for equipment signed
by defendant fire protection equipment company and plaintiff corporation.
The court held that the clause did not apply to a defect in the equipment or
to defendant's negligence, there was no written waiver of implied
warranties, and the contract provision was unconscionable.

COUNSEL: [***1]

Mr. Rollin S. Neal argued the cause for appellant (Mr. Samuel A. Gennet,

Mr. John P. Fusciello argued the cause for respondent (Mr. Lawrence A.
Leven, on the brief).

JUDGES: Bischoff, Morgan and King.


OPINION: [*304] [**689] Defendant appeals from a trial court order
declining enforcement of a contractual limitation of liability clause on the
ground of its unconscionability. The order was entered following a special
nonjury hearing held after rendition of a jury verdict which, by special
verdict, found defendant negligent in its installation of a fire protection
system sold plaintiff and further found that plaintiff's damage was caused
by defendant's incorporation into the system of a defective component part.
Damages in the amount of $ 5,985 were stipulated.

Plaintiff is a corporation which, in December 1972 and January 1973, was in
the process of opening a bar-restaurant in Rochelle Park, N.J.A fire
protection system for the new enterprise purchased from defendant Fireco
Equipment Company was installed on the premises on January 26, 1973. On the
day following installation, January 27, 1973, during preparations for the
opening [***2] of the restaurant, the fire protection system suddenly
discharged a white dust all over the kitchen. No fire precipitated this
occurrence. Opening day was delayed. On February 1, 1973, a few days later,
during renewed preparations for opening the restaurant, the system again
discharged white powder without fire having triggered operation of the
system. Damages to property and clean up costs amounted to $ 5,985. As
noted, the jury concluded that defendant had been negligent in its
installation of the system in that a defective component had been
incorporated into the system.

Following trial a hearing was held to determine whether the limitation of
liability clause in the purchase and maintenance contracts was to be
enforced. The trial court declined enforcement, and this appeal ensued.

Part I of the agreement, entitled "Installation Proposal and Conditional
Sales Agreement for Fire Control System," contains the following provision
found on the reverse [*305] side of the agreement under the heading
"Distributor's Guarantee":
a) For a period of five (5) years, and provided always that the maintenance
contract is continued in full force and effect, distributor guarantees
[***3] the equipment installed by it and agrees, upon occurrence of any
damage caused by defective operation, to indemnify purchaser for all loss in
an amount not exceeding the purchase price. Damage shall be construed to
mean only such amount as would be necessary to repair or replace the loss or
reconstitute the premises subject to the purchase price. Notwithstanding,
distributor shall in no way be responsible for any loss attributable to a
mal-function of the system or systems described in the contract, beyond the
actual interest of the purchaser in the said system.

Part II of the agreement, entitled "Service and Maintenance Contract,"
contains the following provision found on the front side of that agreement
under an emphasized heading reading, "Release for Equipment Installed and/or
Manufactured by others":
If system was installed and/or manufactured by others the following is
agreed by purchaser hereinafter designated as the Releasor and Fireco
Equipment Co., Inc. hereinafter designated as the releasee; for and in
consideration of FIRECO's agreed maintenance and inspection service
performed as agreed to and described above and in further consideration of
mutual [***4] covenants herein contained, and in consideration of fact that
if the servicing of this equipment by the releasee for the releasor, is
equipment previously installed and/or manufactured by one other than
releasee, releasor has remised, released and forever discharged, and by
these presents does remise, release and forever discharge the said releasee
from any failure of operation due to defective conditions in said systems
and equipment.

[**690] The limitation clause in the sales agreement, the first of the two
clauses quoted above, found in the paragraph entitled "Distributor's
Guarantee," purports to limit damages recoverable from malfunction of the
equipment to the purchase price or to "the actual interest of the purchaser
in the said system." Defendant interprets this latter phrase to refer to the
amount of the purchase price actually paid [*306] by purchaser at the time
damage occurs. Since plaintiff had only paid $ 200 on account of the total
price of $ 603.75 when these incidents occurred, defendant contends it is
liable only for that lesser amount. Defendant does not insist upon
enforcement of the full release contained in the maintenance agreement
although [***5] it is undisputed that defendant was not the manufacturer of
the system it installed and the maintenance agreement provides for a full
release in those circumstances.

Several features of the provision upon which defendant relies mandate
affirmance. First, the limitation of liability is contained in a paragraph
entitled "Distributor's Guarantee." In that guarantee defendant undertook to
warrant performance of the equipment for a five-year period; failure of such
performance would render defendant liable for damages caused thereby but not
to an extent exceeding the purchase price or the "actual interest of the
purchaser in the said system." Nothing in this express guarantee suggests
its dependence upon the existence of a defect in the equipment existing at
the time of sale or installation or its negligence in installation. Even if
a defect were to arise after installation, and independent of defendant's
negligence in installation, the limited liability described in this
guarantee would attach. Second, nothing in the clause in question or,
indeed, in the sales contract as a whole, suggests that any implied
warranties of merchantability or fitness for use have been waived. That such
[***6] warranties were not waived is made clear by the total failure to
comply with the conditions for such a waiver contained in N.J.S.A.
12A:2-316, which at least requires such waivers to be in writing. Third,
since the limitation of damages clause is contained in the paragraph
providing for the express guarantee, it can only be read to apply to claims
made on the basis of that express guarantee; it has no application to claims
made for breach of the implied warranty of fitness for use which was not
waived and is not inconsistent with the express guarantee. See Collins v.
Uniroyal, 64 N.J. 260 [*307] (1974). Since the jury's verdict was founded
upon a finding of a defect existing in the equipment on the date it was sold
and installed and upon defendant's negligence in installing it, and not
solely upon the express guarantee, the limitation of damages provision
contained in the express guarantee has no application. Similarly, it has no
application to damages caused by defendant's negligence. See Carbone, et al.
v. Cortlandt Realty Corp., 58 N.J. 366 (1971). Plaintiff can therefore
recover the full extent of the stipulated damages.

Moreover, we agree with the [***7] trial judge's conclusion that the
limitation on the recoverable consequential damages was unconscionable for
the reasons given in its oral opinion. The limitation clause was concealed
in a provision clearly suggesting that it was conferring upon the purchaser
a benefit in the form of a guarantee; nothing in the heading suggests the
presence of a sharp limitation on defendant's overall liability hidden
therein. The meaning of the clause is obscure; at one point it limits
defendant's liability to the purchase price; at another it limits it to "the
actual interest of the purchaser in the said system," whatever that means.
Finally, although defendant magnanimously waives reliance upon the release
contained in the maintenance contract, it is clear that it does so only
because its enforcement would be so inequitable that defendant could, in no
event, prevail. Hence, although the sales contract limits damages to the
purchase price paid, even that limited liability is conditioned upon the
existence of a maintenance contract; by entering the maintenance contract,
however, the purchaser waives its right to recover any damages at all for
malfunction of the equipment. In these [**691] [***8] circumstances, and
entirely apart from the trial court's conclusion that the merchandise sold
was "consumer goods" within the meaning of N.J.S.A. 12A:2-719(3), the trial
judge's conclusion of unconscionability as a basis for declining enforcement
was entirely merited.

[*308] Abel Holding Co. v. American Dist. Tel. Co., 138 N.J. Super. 137
(Law Div. 1975), aff'd 147 N.J. Super. 263 (App. Div. 1977), relied upon by
defendant, is inapposite. That case, as well as similar ones cited by
defendant, concerns the validity of limitation clauses where the damages
result from forces from which the equipment sold was designed to protect,
not from damages caused by the equipment itself, as occurred in this case.
In Abel the damage was caused by fire, not by malfunction of the fire
detection mechanism. The claim in Abel was that because of the inadequate
operation of the fire detection system, the damage was greater than it
should have been. Similarly, in Foont-Freedenfeld v. Electro-Protective, 126
N.J. Super. 254 (App. Div. 1973), aff'd 64 N.J. 197 (1974), the loss was
caused by a burglary which defendant's burglar alarm system was purchased to
avoid, [***9] not by the burglary equipment itself. In this case, however,
the loss was not caused by fire, but by the equipment installed to protect
against fire loss. Hence, the extreme difficulty or impracticability of
anticipating the extent of loss flowing from different kinds of fires as it
affects property of different values, and losses from burglaries, is not
present in this case and the essential justification for that kind of
limitation clause is therefore absent. Moreover, although a purchaser can
arrange for his own protection against fire by purchase of a fire policy,
and hence not rely upon the liability of the fire protection company, he
will not ordinarily foresee what occurred in this case and obtain protection
against damages caused directly by the fire protection equipment itself.