The most closely followed case in the security industry in many years (Synnex v. ADT) has been decided by the Superior Court of New Jersey, Appellate Division. The main issue before the court was whether an exculpatory clause in a contract for the sale of a burglar alarm system, which requires the buyer to rely solely on its own insurance for any loss from theft, is contrary to public policy and unenforceable in light of a statute that subjects sellers of alarm systems to licensing and regulatory controls.

The plaintiff’s insured requested the alarm company (in this case, ADT) to design and install a burglar alarm system for a building. The alarm company submitted a series of proposals. The parties reached an agreement concerning the system and the purchase price, and the alarm company submitted its form contract to the plaintiff’s insured, which both parties signed.

A secondary issue resulted from a provision in the contract which stated, “this agreement is not binding unless approved in writing by an authorized representative of the alarm company.” Although the plaintiff’s insured signed the agreement and the sales representative of the alarm company signed, it was not signed by an authorized representative of the alarm company.

The contract included a broad exculpatory clause, which stated that the alarm company is not an insurer and that insurance, if any, shall be obtained by the customer.

It stated:

• the customer agrees to look exclusively to customer’s insurer to recover from injury or damage in the event of any loss or injury and waives all right of recovery against the alarm company.
  
  
• that if alarm company should be found liable for loss, damage or injury due to a failure of service or equipment in any respect, its liability shall be limited to a sum equal to 10 percent of the annual service charge or $1,000, whichever is greater, as the agreed upon damages and not as a penalty.

Subsequent to the installation of the system, there was a break-in and a substantial quantity of computers and computer equipment was taken. The insurance company paid for the loss and filed the action for subrogation in the name of its insured to recover the amount of money paid.

The trial court ruled that the absence of the signature of an authorized representative of the alarm company on the original contract precluded the alarm company from relying upon the exculpatory clause.

The court found that even if the contract had been signed by the alarm company’s authorized representative, the exculpatory clause would not have been effective because it was contrary to public policy as expressed in a 1997 amendment to the Electrical Contractors’ Licensing Act, which extended the statute to alarm companies.

The Appeal

The alarm company appealed claiming that the exculpatory clause was part of its contract for the sale of a burglar system to the plaintiff’s insured, even though the contract was not signed by a person designated as an authorized representative of the alarm company. Further ADT argued that the exculpatory clause is not contrary to public policy.

The appellate court reversed the judgment of the lower court holding that an exculpatory clause is not unenforceable as contrary to public policy because it simply allocates responsibility to the buyer of an alarm system to maintain insurance coverage for the theft of its property. With reference to the fact that the alarm contract was not signed by an authorized representative of the alarm company, the court pointed out that there is no doubt a party may condition its acceptance of a contract upon the approval of the “home office” or a higher level company official, and in the absence of such approval, there is no binding contract.

The court pointed out that if the party who has reserved the right to home office approval of a proposed contract indicates its unqualified acceptance in some other manner, such as by performance in accordance with the contract, the parties will be bound by the contract. In other words, the approval provision protects the seller by giving its upper level officials an opportunity to review and approve the contract before it will be bound. The seller can waive the approval requirement by an alternative form of acceptance, such as shipment of the goods or other performance in accordance with the terms of the contract.

In this case with ADT, the delivery and installation of the system and subsequent monitoring constituted an acceptance of the contract by the plaintiff’s insured. Moreover, the court pointed out that plaintiff’s insured’s receipt and payment for these goods and services reflected its understanding that it had contracted with the alarm company in accordance with the terms of the contract. Therefore, the court concluded that both parties were bound to the terms of that contract, including the exculpatory clause.

With respect to the exculpatory clause, the court pointed out that it has previously upheld the validity of exculpatory clauses in contracts for the sale of fire and burglar alarm systems similar to the one contained in the contract in question.

The rationale of upholding the validity of such exculpatory clauses is that a property owner generally will maintain insurance coverage on its property and that the property owner “is in a far better position than the alarm system seller to know the property’s value and to bargain with an insurance company for appropriate coverage and an appropriate premium.”

Of great interest in this case is the language of the court which states that the practical effect of an exculpatory clause for the sale of an alarm system is to keep an insurance company that has paid the owner for a loss from filing an action against the seller of the alarm system. The alarm contract recognizes this purpose stating that, “customer agrees to look exclusively to customer’s insurer to recover for injuries or damage in the event of any loss or injury and releases and waives all right of recovery against (the alarm company) arising by way of subrogation.”

The court disagreed with the argument that the limitation of liability provision in a home inspection contract was unconscionable and against public policy because the parties have grossly unequal bargaining status. It pointed out that although the contract between the parties was a form contract, there was no “gross inequality of bargaining power” between the parties. The customer could have negotiated for a contract without an exculpatory clause or gone to another vendor.

As set out in the contract, the purchase price of an alarm system is generally only a small fraction of the value of the property it is designed to protect. If an alarm company were subject to liability for loss of the property, it would be hesitant to sell an alarm system to a buyer with valuable property or would insist upon payment of a premium to offset its exposure to a claim. The requirement of payment of such a premium would place the alarm company in the position of selling not only an alarm system, but also a form of insurance. Furthermore, insurance coverage for loss from fire or theft is readily available and maintained by most property owners. The matter was thus reversed and the court ruled in favor of ADT.