An alarm company entered into an agreement to install a security system at a store and also agreed to provide a “central station signal receiving and notification service.” The agreement pointed out that, “In the event an alarm signal registered at the alarm company central station, the alarm company shall endeavor to notify the appropriate police or fire department and the designated representative of the customer.”

The store was burglarized, the alarm company did not inform the store of the burglary nor did they themselves respond. The burglary was not discovered until the following morning. It was determined that the phone lines had been cut on the exterior of the building and that about $1 million worth of merchandise had been stolen.

The plaintiffs filed suit alleging fraudulent misrepresentation, false advertising, breach of contract, and also negligence or gross negligence by the alarm company by installing a poorly designed alarm system, by failing to install the line security feature, and by failing to protect the store or alert police on the night of the burglary.

The district court issued an order dismissing all of plaintiffs’ claims except its breach of contract claim. However, the court held that the agreement’s liquidated damage clause would limit the plaintiffs’ damages to $1,000. 

On appeal, the court pointed out that under Michigan law, the alarm company did not owe the plaintiffs a statutory or common law duty to detect the burglary or dispatch police. The court therefore held that because the alarm company’s sole alleged breach of duty was a breach of its contractual obligation to monitor the store, the plaintiffs’ remedy, too was contractual. Therefore the court held that the district court properly dismissed the plaintiffs’ negligence claim. 

In the complaint the plaintiffs alleged, among other things, that the alarm company breached the parties’ agreement on the night of the burglary by failing to report the incident to the store’s owners or police and by failing to investigate or send its own representative to the premises. The court acknowledged that the district court did not dismiss the breach of contract claim, however, the court acknowledged the limited liability clause in the contract as being valid, capping the plaintiffs’ damage at $1,000. 

With reference to the limited liability clause and the gross negligence defense, the court pointed out that Michigan cases clearly establish that “although a party may contract against liability for harm caused by ordinary negligence, a party may not insulate himself against liability for gross negligence or willful and wanton misconduct.” Gross negligence is defined as “conduct so reckless as to demonstrate a substantial lack of concern for whether an injury results.” However, the court pointed out that Michigan law did not recognize a negligence cause of action when a defendant failed to perform its contractual obligations. To bring a negligence claim under these circumstances, a plaintiff must show that the defendant owed the plaintiff a separate and distinct duty not arising solely from the contract, or that defendant created a “new hazard” through actions other than the mere failure to perform. Therefore the court held that the district court properly dismissed the plaintiffs’ gross negligence claim and properly applied the limitation of liability clause.


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Q: We have a five-year contract with our customer who has a retail store. The customer moved without notice to us and apparently a new tenant has moved in. I don’t know if they bought the store or just signed a new lease with the landlord. We have attempted to bill them for the monthly service. They refused to pay. Are they responsible for the balance of the lease? 


 A: Unless they assumed the obligations of your agreement with the former tenant of the location, you will be hard pressed to look to them for payment, unless, of course, they have used the system and got the benefit of the system, in which event you certainly would be entitled to a reasonable value of the service provided. You can always look to the original contract party of the agreement for the loss of profit, provided, of course, you can locate the party. I would suggest that you pay a visit to the new tenant, sit down with them, find out the basis upon which they acquired the business and if they did not assume your contract, then, of course, try and work out a sweetheart deal with them to retain the account.