An interesting case was recently decided in the state of New York. The question was whether or not the defendant security company could demand arbitration as opposed to the consumer having its contract dispute handled by the judicial system. The defendant alarm company had a clause in its contract giving “either party” the right to have “an action or dispute” resolved by binding arbitration before an arbitrator instead of a judge in court.

The plaintiff filed an action in small claims court for damages for breach of contract, breach of warranty and fraud. The defendant alarm company made a motion to dismiss the action and to compel arbitration.

The contract the defendant alarm company believed could compel arbitration was executed by the plaintiff and stated that “any action or dispute between the parties, including issues of arbitrability, shall, at the option of either party, be determined by arbitration administered by Arbitration Services Inc. under its commercial arbitration rules.” Upon examination, the court pointed out that General Business Law § 399-c prohibited the use of mandatory arbitration clauses in contracts for the sale or purchase of “consumer goods.” Among other things, § 399-c (b) stated, the term “consumer goods” shall mean goods, wares, paid merchandise for services purchased or paid for by a consumer, the intended use or benefit of which is intended for the personal, family or household purposes of such consumer.”

Section d(2)a Prohibition also stated, “No written contract for the sale or purchase of consumer goods, entered into on or after the effective date of this section, to which a consumer is a party, shall contain a mandatory arbitration clause.”

Lastly, paragraph 2 b stated that, “The provisions of a mandatory arbitration clause shall be null and void. The inclusion of such clause in a written contract for the sale or purchase of consumer goods shall not serve to impair the enforceability of any other provision of such contract.”

Citing previous cases, the court pointed out that General Business Law § 399-c was designed to prevent sales contracts from having clauses pre-committing consumers to arbitrate disputes rather than small claims suits, refusal to pay for defective goods, or other remedies.

The court pointed out that clearly the contract that called for the installation of an alarm and security system in the plaintiff’s home that would be serviced and monitored by the defendant 24 hours a day was unquestionably a contract for the purchase of consumer goods by the plaintiff consumers as defined in General Business Law § 399-c. The court concluded that the clause fell within the protection of subsections 2(a) and 2(b) of the statute since it permitted the non-consumer party the right to mandate arbitration. Therefore, the defendant alarm company’s motion for an order compelling the parties to proceed to binding arbitration was denied.

It should be pointed out that normally, for contracts in the alarm industry, we discourage the use of arbitration clauses as arbitrators are not generally bound by the rules of law and arbitration provides the opportunity for subscribers to get around the protection clauses contained in the contracts. However, in this case, as it was a small claims case, the alarm dealer apparently attempted to opt for the arbitration.

The law firm representing the defendant alarm company did an outstanding job; however, the facts and the law were definitely not in their favor.




Q: My customer tampered with his burglar alarm system and there was a break in and the alarm did not go off. He is denying that he tampered with the system. Do I have any liability?

A: First, if you have a proper contract, even if you were negligent, your liability would be limited to the amount set out in the liquidated damage or limitation of liability provision in your contract. Having said that, immediately after you receive notice of a loss, you should make an inspection to determine if, in fact, the system was tampered with or if it was tampered with and not reported. In either event, your contract would get you off the hook. Further, if you received notice that the subscriber is doing any modifications, you should make an inspection to make certain that the system was not tampered with by the subscriber. There are a number of other facts that should be considered to determine what you should or should not have done that conceivably could create an issue of negligence, but as stated above, diligence in negotiating your original contract should protect you.


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