In a recent case before the U.S. District Court of Appeals, contracts once again took center stage, this time focusing on whether or not contracts can impose a social duty. 

The defendant alarm company installed an alarm system. The alarm services contract entered into by the plaintiff contained a limitation of liability provision that capped the damages.  After the system was installed, the alarm company’s technician removed a defective smoke detector from the home that was not replaced for more than three years until a fire broke out, which caused damage to the plaintiff’s personal property. The plaintiff made a claim under their homeowner’s insurance policy and was paid for a portion of the loss by their carrier. The plaintiff and their insurer then filed a claim against the alarm company. The lower court granted the defendant alarm company’s motion for summary judgment with respect to the contract claim, but denied the motion for summary judgment with reference to the tort claim.

The court pointed out that the contract between the parties contained a limitation of liability provision that gave the plaintiff customer the option to increase the limit of liability by offering to pay an additional amount. The contract also stated that, “under no circumstances shall the company be liable to the customer or any other person for incidental or consequential damages of any nature in excess of $500…whether alleged to result from breach of warrant, negligence, strict liability or otherwise.” 

On the appeal, the plaintiff contended that the court erred when it found the $500 limitation of liability clause enforceable, claiming that the clause was unreasonable and should not be applied because it limited the recovery to $500, the approximate value of the annual service charge. The plaintiff also claimed that they were not sophisticated parties experienced with business dealings, and their damages were specifically to their personal belongings, not to commercial property.

The court pointed out that it did not wish to minimize the plaintiff’s loss, nor was it insensitive to their plight. The homeowners clearly experienced the kind of hardship and loss that may well be the greatest fear of all homeowners and further acknowledged that the plaintiff was not sophisticated and did not have the same level of bargaining power as the alarm company.

However, the court’s ruling indicated that the homeowner had a choice as to how to protect their property and whether or not they should obtain insurance. The court pointed out that the relatively low yearly service fee that the customer paid reflected the fact that the provider was not the customer's insurer and was not in the business of assessing risk. 

While the provider clearly breached its duty to the customer under the contract by failing to replace the defective smoke detector, its obligations to the customer arose solely out of the contract. The alarm company’s contract imposed a duty to monitor, maintain and repair the alarm system, and the alarm company clearly breached that duty when it failed to replace the defective smoke detector. However, the alarm company’s obligation arose solely out of the contract and did not equal a social duty. The court pointed out, “We know of no legal theory that would allow us to impose some objective social duty on an alarm company outside of the duties imposed by a contract, and we are unconvinced by the plaintiff customer's attempt to have us recognize such a duty. There simply is no separate ‘tort’ duty to monitor an alarm system.” 

Therefore, the court affirmed the district court’s order granting summary judgment in part and limiting the recovery to $500 pursuant to the limitation of liability clause in the contract. With reference to the plaintiff’s tort claim, the court reversed the decision of the district court and granted summary judgment in favor of the alarm company.


Readers Ask

Q: I recently received a notice from U.S. Immigration and Customs Enforcement (ICE) that I am employing an undocumented worker, which may be true. Do I have an exposure? 


A: When you hire a new employee, you are required to fill out and file an I-9 form with the Federal Government within three days. If the employee provides you with the appropriate information and you file the I-9, there should be no exposure. If you have reason to believe the information submitted is not true or the documents are not real, then you should not hire the applicant. To do so could lead to potential exposure and a potential fine.    


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