In a recent case before the United States District Court for the Eastern District of Michigan, the court clarified multiple issues frequently faced by alarm companies in court.

In the case, the defendant, an alarm company, installed an alarm system at the plaintiffs’ jewelry store. Under the terms of the agreement, the alarm company agreed to supply alarm monitoring services at the plaintiffs’ jewelry store, while the plaintiffs agreed to pay a monthly charge for alarm services and a central station alarm receiving and notification service from the alarm company. After the installation of the system, unknown individuals broke into the store, disabled the alarm system, removed an exterior security camera, cut the store’s phone lines and destroyed the inside security system panel. The burglars stole a significant amount of jewelry and collectibles whereupon the plaintiffs instituted the action against the alarm company.

The plaintiffs alleged that the alarm company, while soliciting the plaintiffs’ business, represented that the customer monitoring centers would help protect the plaintiffs 24 hours a day, 7 days a week; the alarm system was efficient; and the system had the ability to protect the plaintiffs’ property. The agreement specified that the services would include “line security” and that the alarm company would also provide a “central station receiving and notification service, including a burglar alarm, hold-up alarm and a supervisory system.” The plaintiffs further alleged that they entered into a second binding agreement with the alarm company entitled, “Central Station Burglar Alarm System Certificate,” and that the UL certificate included line security. The alarm company filed a motion to dismiss all the allegations.

In discussing the matter, the court noted that the plaintiffs alleged three tort claims; negligence and gross negligence, fraud and fraudulent misrepresentation, and false advertising. The alarm company maintained that the action should be dismissed as it did not owe the plaintiffs any independent duties and that the claims for negligence and gross negligence failed because the alarm company’s obligations arose solely from its contract with the plaintiffs.

The negligence and gross negligence claims: The court indicated that the alarm company’s duties to provide the services arose solely from the agreement between the plaintiffs and the alarm company. There was no duty of common law for the alarm company to provide alarm services to the plaintiffs. The claims for negligence and gross negligence rested upon the defendant’s failure to meet the contractual obligations of the agreement and the UL certificate. There was no independent duty or adequate ground for a claim of negligence or gross negligence. Therefore the court granted the alarm company’s motion to dismiss the negligence and gross negligence claims.

The fraud and fraudulent misrepresentation claims: The plaintiffs alleged three separate and specific instances of fraud: fraud in the inducement, fraudulent misrepresentation in the agreement and fraudulent misrepresentation in the UL certificate. The alarm company argued that all of the plaintiffs’ fraud claims fell under breach of contract.

The court pointed out that under Michigan law, to constitute actionable fraud, plaintiffs must show: (1) that the defendant made a material representation; (2) that it was false; (3) that when the defendant made the representation, he knew that it was false, or made it recklessly, without any knowledge of its truth, and as positive assertion; (4) that the defendant made it with the intention that it should be acted upon by plaintiff[s]; (5) that the plaintiff[s] acted in reliance upon it and (6) that [plaintiffs] thereby suffered injury.

The court indicated that the agreement between the plaintiffs and the alarm company precluded the plaintiffs from relying on the statements and representations made by the alarm company. Citing a section of the agreement, all in capital letters it stated,


The merger and integration clause explicitly stated that the plaintiffs agreed that they were not relying on any statements and representations made outside of the agreement. Because the plaintiffs signed the agreement, they could not show that their reliance on the alleged fraudulent misrepresentations, made before the agreement, was reasonable.

The court further pointed out that the alarm company’s statements that its products were efficient, reliable and would protect the plaintiffs’ property were examples of opinion and puffery. An opinion will not, although proved erroneous, be regarded as fraud.

Therefore the alarm company’s motion to dismiss the plaintiffs’ claim for fraudulent inducement was granted.

With reference to allegations of fraudulent statements in the agreement, i.e., that the alarm company would electronically and continuously monitor the plaintiffs’ telephone lines; that upon receipt of an alarm signal the alarm company would immediately dispatch the police and a guard to plaintiffs’ premises and if the telephone lines were cut the alarm company would immediately receive notice and dispatch the police and a guard to the plaintiffs’ premises, the court pointed out that an action for fraudulent misrepresentation must be predicated upon its statements relating to a past or an existing fact. Each of the representations related to services the alarm company would perform pursuant to the agreement. The statements where the alarm company breached its promises to the plaintiffs and its future promises were contractual and did not constitute fraud. Therefore, the fact that the alarm company did not satisfy these representations may be the basis for a breach of contract claim, but could not constitute a claim for fraud. Therefore, the alarm company’s motion to dismiss the plaintiffs’ claim for fraudulent statements in the agreement was granted.

With reference to the allegations that defendant made fraudulent representations in the UL certificate, i.e., “defendant (1) falsely claimed that its alarm system would meet the UL standards and (2) failed to install ‘line security’ equipment at the plaintiffs’ premises, despite the representation in the UL certificate that ‘all connecting wiring and equipment has been installed,’” the court pointed out that there were two separate representations: (1) the alarm system, including all connecting wiring and equipment had been installed and (2) the alarm system would be maintained in compliance with requirements established by UL. The court pointed out that taking the factual allegations in the light most favorable to the plaintiffs, this statement is a false, material representation of a past or present fact. The court pointed out that a fraud claim cannot be brought where it is factually indistinguishable from a breach of contract claim. Here the plaintiffs’ fraud claim was not factually distinguishable from the breach of contract claim. Therefore they did not form the basis for a tort claim and the alarm company’s motion to dismiss the plaintiffs’ claims for fraudulent statements in the UL certificate was granted.

The false advertisement claim: Regarding the claims that the system was reliable and never failed: it would be there for its client “24 hours a day, 7 days a week”; it had rapid alarm response, and it offered 24-hour monitoring by trained professionals, the court pointed out that “an honest expression of opinion will not, although proved erroneous, be regarded as fraud.” Therefore, the court granted the defendant’s motion to dismiss plaintiffs’ claims based on false advertising.

The limited liability provision provided that the plaintiffs did not desire the contract to provide for full liability of the alarm company and agreed that the alarm company should be exempt from liability for loss, damage or injury due directly or indirectly to occurrences or consequences that the service or system was designed to detect or avert, and that if the alarm company should be found liable for loss, damage or injury due to a failure of service or equipment in any respect, its liability would be limited to a sum equal to 10 percent of the annual service charge or $1,000, whichever was greater as the agreed upon damages and not as a penalty.

The court determined that the liquidated damage clause was enforceable, and the court also found that the limitation of liability clause was not so unreasonable that it shocked the conscience, so the court upheld the liquidated damage provision.

With reference to the breach of the UL certificate, the court held that the UL certificate did not create a new contract between the parties, but rather carried out the contract already agreed to in the agreement. There were representations and obligations contained in the UL certificate and the UL standards that must be followed. These, however, did not make up a new contract and were merely the written expression of the terms contemplated by the parties when they contracted for “upgrade UL certificate to include alarm security” in the original agreement. The UL certificate was not a separate and independent contract and was, therefore, subject to the liquidated damage clause. Therefore the alarm company’s motion to dismiss with prejudice the plaintiffs’ claims under the agreement, to the extent that they exceeded $1,000, was granted.

With a properly written agreement along with a firm defense, the alarm company safely navigated the numerous issues presented in this single case.


Readers Ask
Q: I run an alarm company. One of my subscribers has a five-year agreement. We have provided the service, but he has not paid. There is a balance due of 38 months on the contract. Can I go after the subscriber for the full balance of the monthly payment for the balance of the term?


A: The law may vary from state to state. However, it is probably the law in most states that you can recover the full amount of the monthly contract price for the period of time in which you provided service. With reference to the balance of the term, the 38 months remaining on the contract term, you are probably only entitled to your loss of profit. The issue in court, of course, is proving what your actual loss of profit was.