The Industry's Top 4 Legal Concerns
LIQUIDATED DAMAGESAll alarm companies should recognize the necessity of including an exculpatory clause or liquidated damage clause in their alarm contract. Most jurisdictions -- whether state or federal -- that have decided the issue, have upheld the validity of such clauses. The jurisdictions generally recognize that alarm companies are not insurers, that the cost of the alarm service is far less than that which would be paid to an insurance company for insuring the subscriber's goods and that the clause is a valid agreement between two parties entering into a contract.
However, exculpatory clauses are not absolute and they do not protect the alarm company in all instances. Generally speaking, courts will not enforce these clauses if your customer suffers losses because your conduct was intentional, reckless, fraudulent or illegal. Companies should recognize that although such clauses cover most losses they are not protected from all losses and their goal should be to make the language of the clause as inclusive as is permitted in each jurisdiction. To make sure that the clause will be enforced companies should consider the following:
- If the clause is on the back page of a contract, the company should refer to it by number in bold, highlighted print immediately above the signature of the subscriber. It is even a good idea, if possible, to place it on the front of the contract right above the signature line in conspicuous print.
- While some companies have thought about the possibility of having the clause initialed, that is not generally a good idea. If the salesperson forgets to have the clause initialed and the contract is somehow approved and the system installed, there will not be a liquidated damage clause protecting the company.
In sum, companies should set forth, with particularity, not only what the clause covers but the reasons that the parties are entering into such agreement (i.e., that it is impossible to predict the nature of the damages that might ensue from a loss at the time that the contract is entered into) and the clause should cover all of the types of services offered by the company (installation, maintenance, repair, monitoring and other services) and the clause should refer to claims based upon not only breach of contract and negligence but strict liability and warranty.
INDEMNIFICATION PROVISIONSMost contracts include provisions whereby the subscriber indemnifies the alarm company from claims made by third persons. The law firm at which I am employed often receives questions about whether these provisions can be stricken from the contract. Our answer is invariably, "no." The third party indemnity provision is the other side of the coin of the exculpatory clause/limitation of liability/liquidated damage clause. It protects the alarm company from claims of persons who have property in the protected premises which are not owned by the subscriber and which are lost through a criminal act. Generally, courts have held such clauses not to be unconscionable and to be enforceable. The courts have simply held that there is nothing inherently unfair about a reallocation of risk between consenting parties. The courts upholding the clause have held that the alarm customer is in a better position to insure property under its protection than is the alarm company.
As a result and because alarm companies cannot know what is within the protected premises and do not schedule items in the same way that insurance companies do when quoting their insurance rates, it is recommended that the third party indemnity provision never be stricken from the contract and that the potential subscriber be advised that they are in a better position to know what is within their premises and to insure against its loss.
AUTOMATIC RENEWAL PROVISIONSMost alarm contracts contain an automatic renewal or "evergreen" provision that generally provides that the contract will automatically renew itself if the alarm company is not given notice or does not give notice that the subscriber or the company wishes to cancel the contract within a given period of time before the end of the term.
These provisions are necessary not only to protect the alarm company but to protect the subscriber. These provisions protect the subscriber in that they preclude the alarm company from terminating the service at the end of the term without the knowledge or consent of the subscriber. For example, it may well be that, were there not such a term in the contract and were the subscriber not alerted to the term ending, the service could be terminated when that was not the intent of the subscriber. In addition, giving notification prior to the end of the term might not work since any such notification either might get lost in the mail or the subscriber might be away from his premises for an extended period of time and not receive such notice. Thus, the "evergreen" provision, especially in alarm contracts that are protecting both the life and safety of the subscriber and his property, are important to both the subscriber and the alarm company.
Companies should be sensitive to whether or not their particular jurisdiction has statutory legislation that relates to automatic renewal provisions. Your jurisdiction may have specific provisions requiring the alarm company to give specific notice prior to the end of the term and in such circumstances that notice must be given in order for the automatic renewal provision to be enforced. In jurisdictions where there is not such statute or legislation, courts have held that such a provision for automatic renewal is not unconscionable and is enforceable.
As with the exculpatory clause it is recommended that the automatic renewal provision be referred to on the front page of the contract and that it provide that the contract "will automatically renew from year to year thereafter unless cancelled by either party in writing at least thirty days before the end of the original term or any renewal term."
IMPLIED WARRANTIESIn most jurisdictions statutes provide certain implied warranties (as opposed to those expressly given by the alarm company in the contract) that may generally be categorized as warranties of fitness for a particular purpose, or merchantability. What these statutes generally state is that whether or not an express warranty is given with reference to a sale of goods, whatever is "sold" must work and be usable.
Most alarm contracts are service contracts and it can be argued they are not for the sale of goods. (See Feary vs. Aaron Burglar Alarm, 32 Cal. App. 3d, 553). In Feary, the court actually determined that the agreement between the parties was not for the sale of a burglar alarm because certain provisions in the contract were inconsistent with the concept of sale, i.e., the alarm company's right to remove the system and materials associated with the system upon termination or cancellation of the monitoring and service agreement and the customer's liability for damage to the equipment. Thus, in order to avoid the implied warranty issue, it is best to couch the terms of the contract in terms of a service contract rather than as a contract for the sale of any equipment. That might well be done by providing that if the service provided by the alarm company is terminated for any reason, the alarm company is authorized to disconnect whatever is necessary to deactivate the system and to enter the premises of the subscriber to disconnect the system from the monitoring company and remove the equipment. In addition, each contract should set forth precisely what warranties are and are not given, and whether those warranties are limited or otherwise. Finally, a reference to such warranty clauses should be made conspicuously on the front side of the contract at or near the place for the subscriber's signature.