Good Contracts: Still a Keeper

A recent California federal court decision holds important lessons for the industry. In Valenzuela v. ADT Security Services Inc., the plaintiff, an ADT subscriber operating a jewelry store, sought to recover damages in excess of $800,000 for jewelry and cash allegedly stolen in a burglary at the subscriber’s premises. Following discovery, the trial court enforced the liquidated damages clause in ADT’s subscriber agreement, limiting the company’s liability to $1,000. The case reminds us that an enforceable, well-crafted subscriber contract—including limitation of liability provisions—can save companies from tremendous time, aggravation, expense and damage to reputation.

The plaintiff operated a jewelry store in a strip mall. ADT installed and monitored a burglar alarm at the store, which transmitted signals to central station over a POTs line. After hours, the plaintiff stored jewelry and cash in a “man-sized” safe with multiple hardened steel plates and concrete liners. They eventually upgraded their system to add cellular communications as back up to the POTs lines and added a 360-degree motion detector. After ADT installed the upgrade, for reasons that are not clear, the system no longer transmitted signals over POTs lines. In addition, because of what ADT characterized in its brief as a “computer glitch,” ADT coded plaintiff’s newly created cellular monitoring account as “out of service,” meaning that ADT would not dispatch police in response to signals from the system. Although the system transmitted and received test signals periodically over the course of several months, ADT never realized its error, either in terms of the system failing to transmit signals over POTs lines or in inadvertently coding the cellular system as “out of service.”

Several months after the upgrade, burglars breached the roof above plaintiff’s shop, accessing the crawlspace and cutting the lines to store’s video system. A ceiling panel fell, tripping the 360-degree motion detector. ADT received a signal over the cellular system but, because the system was “out of service,” only logged the signals and took no further action. During the course of the night, the burglars used cutting tools to open the safe, making off with what plaintiff alleged to be more than $800,000 in cash and jewelry.

 

Liquidated damages clause

After the parties completed discovery, ADT asked the court to dismiss plaintiff’s complaint without a trial, arguing that based on the evidence presented, the “liquidated damages” clause in its written subscriber agreement limited its responsibility to the subscriber to $1,000 as a matter of law. The subscriber argued that the provision didn’t apply because ADT’s actions constituted “gross negligence”—important because most states enforce limitation of liability clauses in cases of negligence but not gross negligence. The difference between negligence and gross negligence is often one of degree, and in my experience, any savvy plaintiff’s lawyer in an alarm liability case is likely to produce an “expert” report stating that the alarm company’s conduct constituted gross negligence. (For more on the differences between negligence and gross negligence and how subscribers try to avoid limitation of liability clauses, read my LegalWatch blog on SecurityInfoWatch.com.

In Valenzuela, however, the trial court dismissed the case, finding the subscriber could not prevail on gross negligence because under California law ADT’s obligations arose solely from the subscriber contract, and not from any independent duty arising under the law of negligence. The court then enforced the liquidated damages provision, limiting ADT’s damages for any breach of contract to the agreed-upon amount of $1,000.

The subscriber argued the actions of ADT’s installation technician in assuring plaintiff the system worked after the upgrade amounted to fraud, entitling plaintiff to avoid the contractual risk protections as a matter of law. The court rejected that argument as well, probably because the subscriber failed to raise the argument until late in the case. On appeal, the federal circuit court affirmed the trial court’s ruling in enforcing the liquidated damages provision.

The bottom line for the industry is that courts will continue to enforce risk allocation clauses in electronic security contracts. This means that well-drafted contracts will go a long way to dissuade subscribers, insurers and their lawyers from pursuing claims against your company. Making sure your contracts have the necessary protections to limit your company’s liability now can save you thousands—or hundreds of thousands—of dollars in the long run.

 

 

Eric Pritchard is a partner in Kleinbard Bell & Brecker LLP, Philadelphia. This column does not constitute legal advice; contact an attorney with specific questions.

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