In June 1887, a wool merchant walked into the Western Union office in Philadelphia.
He sends a coded message through Western Union to one of his agents across the country.
Unfortunately, Western Union makes a few mistakes and changes a letter in one of the words.
The message is received by the agent and the mistake by Western Union ends up costing the merchant $20,000 (equivalent to about $662,198 today).
The message that the agent received was “…buy 500,000 pounds of wool”. So that is what he did.
But the message the merchant sent was “bought 500,000 pounds of wool”.
The wool merchant then sues Western Union, and the dispute goes all the way to the US Supreme Court.
The Court rules that the merchant could not recover more than $1.15—the price of sending the original message.
Why?
Because Western Union had a limitation of liability clause in their contract, which limited its liability for these types of claims to the amount the customer paid for the service.
Seems harsh? But these clauses are standard in contracts, including most tech contracts, for good reason:
💡 Vendors cannot do business if a single mistake can send them into bankruptcy. (Maybe they shouldn’t be in business in the first place, but one mistake shouldn’t destroy a business.)
💡 This is especially true for vendors that provide low-cost services at scale.
💡 Vendors cannot always control how customers will use their services or for what purpose. Should the vendor take all the risk for how customers use their service?
On the flip side, here’s why these clauses are also beneficial to customers:
💡 Vendors need some protection so that we, as customers, can enjoy good services at competitive prices.
💡 If vendors had to assume unlimited liability, they would charge much higher prices to cover potential risks.
💡 The risk of unlimited liability would discourage many people from starting businesses in the first place.
While it's crucial for customers to be protected, a fair limitation of liability helps create a sustainable environment where both vendors and customers can thrive.
Download "10 SaaS Contract Basics You Must Know!" for a deeper dive into the SaaS basics that all SaaS attorneys should know.
Source of photo:
United Telegraph Workers.
Western Union Telegraph Company
Archives Center, National Museum of American History
The case mentioned is Primrose v. Western Union Tel. Co., 154 U.S. 1 (1894) -
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