Security and the Law: Is a Merger an Assignment?
February 1, 2007
An interesting case was recently decided by the United States District Court for the Northern District of Ohio. Among others, the issues involved were whether a merger of two companies constituted an assignment of the plaintiff’s contract by the fire alarm company and the effect of a limitation of liability clause.
The plaintiff, an insurance company, brought the action against the fire alarm company to recover monies paid to its insured for damages sustained when a water pipe constituting part of a fire suppression system cracked, causing water damage to the premises. The defendant, the fire alarm company, contracted with the plaintiff’s insured to inspect and test the fire suppression system. The defendant reportedly inspected the system several months before the loss occurred.
The defendant made a motion to dismiss the action (motion for summary judgment) contending that its liability is limited due to the limitation of liability clause contained within its contract.
Of interest was the plaintiff’s argument that the contract contained a clause that prevents assignment of the contract to a third party without written consent of the other contracting party. During the course of the contracted term, the defendant merged with another company to create a new entity. The plaintiff’s insured party contended that it never consented to the assignment of the contract to the new entity. Therefore, the insurance company (the plaintiff) maintained that the limitation of liability provision in the contract was unenforceable.
The court pointed out that in Ohio, the surviving corporation in a merger is responsible for all obligations of the constituent corporation. As the obligations owed to the plaintiff’s insured by the defendant were transferred by operation of law, through merger and not by assignment, the court found that the contract was valid and enforceable. The court further declared that the parties’ own actions demonstrated that they were abiding by the terms and conditions of the original contract, which automatically renewed annually, under the same terms and conditions of the original.
With respect to the plaintiff’s claim that the clause was a liquidated damage clause and not enforceable, the court found that the clause at issue was a limitation of liability clause as it does not purport to preestimate probable damages, but limits any liability, regardless of potential damages, to the contract price. The court reasoned, however, that even though a limitation of liability is enforceable, the plaintiff contended that it should not be enforced because the defendant was grossly negligent. The court therefore determined that the acts of gross negligence alleged by the plaintiff were all factual issues for a jury to determine in deciding whether the defendant was grossly negligent warranting nonenforcement of the contract.
The court granted the defendant’s motion to dismiss on the claims for negligence and breach of warranty, but denied the motion on plaintiff’s claim for breach of contract and gross negligence, thereby ordering a trial on those issues.
What can we learn from this case? If you are an alarm service company, make sure your contract with your subscriber allows you to assign the contract without the consent of the subscriber.