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Read up on current legal articles Electronic Signatures and Copies ARE SUBCONTRACTORS PROTECTED FROM LIABILITY? Confidentiality of Client Lists LIQUIDATED DAMAGES v. LIMITATION OF LIABILITY PROVISIONS CONTRACT ENFORCEMENT - Acceleration and Counterclaims Designing Free or nominal charge Alarm Systems contracts Who Protects The Central Station - Securing Receivables. Restrictive Covenants in Buy/Sell Agreements Outright sales and financed time payments Contracts of Adhesion and enforcement Individual Bankruptcy and Protecting Your Rights Selecting a Central Station: Considerations Central Station UL certification Central Station Support for Dealers Police Response - Contractual Obligations Collections - it's who you know Employment Contract and the Disloyal Employee Employment Law - age and sex discrimination Late charges and penalties for delinquent payment Service contracts, service slips and completion certificates Who should instruct the central station? Errors and Omissions Coverage-What's Covered? Automatic Renewal Clause Issue No third party beneficiary clause What obligation does an insurance broker have to advise and guide you regarding the adequacy of your insurance coverage? Is the relationship between you and your insurance broker considered a "special relationship" which creates "special" and continuing obligations and duties? You have a relatively new business and estimate that the value of your corporate assets do not exceed several hundred thousand dollars. You contact your insurance broker and seek advice regarding insurance coverage, liability and errors and omissions, and after hearing the various premium quotes decide on a minimum policy with the most minimum coverage available. So you start off with $300,000 in E&O insurance and five or ten years later when your business is worth several million dollars, you have the same insurance broker and you are carrying the same $300,000 E&O policy. One of your subscribers suffers a serious loss which the alarm was intended to detect, you do not have one of my standard alarm contracts, and the loss far exceeds your E&O insurance coverage. You put up a fight, the case is tried, you lose, and now there is a judgment against you for an amount which easily exceeds the value of your entire company. You begin to wonder whether you can sue your insurance broker for not recommending or at least suggesting that you increase your insurance E&O coverage. Well, the answer is, unless there are some very special facts which create a special relationship, that you cannot. An insurance broker owes no duty to advise his customer to obtain additional coverage in the absence of a request by the customer for additional coverage or a special relationship between the parties which gives rise to a duty on the part of the insurance broker to make such a recommendation. The general rule is that insurance brokers have a duty to obtain only the coverage requested by their client, within a reasonable time, or to inform the client of the broker’s inability to place the insurance. Insurance brokers have no continuing duty to advise, guide or direct the client to obtain additional coverage. The rationale for this general rule is that insured are in a better position to know both their own assets and their ability to protect themselves more than an insurance broker. Thus, insured, and not the broker, are the final decision makers in such risk management determinations. In fact, insurance agents or brokers are not personal financial counselors and risk managers, and there is no "guarantor status." It has further been recognized that the insurance agent--insured relationship is not a generally recognized professional relationship in which continuing obligations to advise might exist but, rather, is nothing more than an ordinary commercial relationship which does not usually give rise to a duty to provide such on-going guidance. The duty is thus defined by the customer’s request for coverage. To be sure, your insurance broker plays an important role in your business, and it is sheer folly, despite the fact that you may be using my standardized contracts, to conduct your business without Errors and Omissions Insurance. If your insurance broker is not taking a pro active role in assisting you in deciding on your insurance coverage needs, give me a call so that I can recommend a new broker. Counterclaims, meritorious or frivolous, continue to be used as a strategic device to defend against collection actions brought by alarm companies against subscribers who have breached their contract. More often than not counterclaims, interposed by subscribers who are now defendants in lawsuits brought by you, are without merit. Often these counterclaims are poorly drafted and typically have no factual support. Counterclaims typically allege that the equipment never worked, that monitoring response was too slow, that repair service was too slow or ineffectual, that false alarms annoyed the police resulting in fines, or annoyed the subscribers at all times of the day and night. It is not unusual for these counterclaims to fail to plead any loss by the subscriber which the alarm system was designed to detect. So why are counterclaims so often interposed in collection actions? Defendants and their attorneys reason that collection actions are often handled on a contingency basis, therefore the alarm company has little or no legal fees in commencing the collection action. However, alarm companies typically have to pay for legal professional services in the defense of counterclaims. Counterclaims also complicate the issues in a lawsuit, cause more legal work to be done, thus resulting in additional expense and fees. The subscriber hopes the counterclaim will cause the alarm company to withdraw the collection action. So what can you do to reduce or eliminate counterclaims? Hot off the press is a decision which we just achieved in my office. The order granted our motion dismissing a counterclaim. The Court held as follows: "A party may move for judgment dismissing one or more causes of action asserted against him on the ground that...with respect to a counterclaim, it may not properly be interposed in the action." [statute omitted] At paragraph number thirteen of the contract signed by the parties, the document states that: "In any action commenced by [alarm company] against lessee, lessee shall not be permitted to interpose any counterclaim." —"A waiver of the right to assert a setoff or counterclaim is not against public policy and has been enforced by this Court." [citations omitted] A provision prohibiting counterclaims in actions brought by you is easily inserted into your contract. You should find it effective in deterring counterclaims, and you should be successful in having courts dismiss counterclaims (see my order form at Of course, the provision does not eliminate lawsuits against you, but your subscribers will be compelled to bring separate actions for their meritorious claims. Residential sales require a three day cooling off period, and also require you to give a copy of the signed contract to the consumer. The Code of Federal Regulations, 16 CFR section 429. The Federal regulation specifically does not preempt or supersede state laws that provide for stricter requirements. The Federal regulation and most state laws require the three day notice for cooling off for "door to door" sales. This is required for sales, monitoring and service contracts. The only exception is where the transaction takes place solely at your place of business and not at the residence. Your residential contracts must have the three day Notice of Cancellation, and it must be in 10 point type directly above the customers signature. You must also provide a filled out Cancellation Notice that your customer can use to actually cancel within the three days. The form of this notice is statutory. The customer gets two copies of this notice. Subscribers have the right to cancel until they have received the three day notice of cancellation. They are required to return anything you have delivered if they cancel. The only way the subscriber can waive the three day notice of cancellation is by a written letter in the subscriber's handwriting, which must be separate than the contract, stating that the installation must be done immediately and specifically waving the cooling off period. Electronic Signatures and Copies Can you introduce an electronic signature into evidence in a court of law? Many of you know that I have become a great proponent and user of email (and if you're not getting my email articles, email me and ask to be added to the list). It facilitates doing business; its faster and cheaper. So you put your contracts on computer and send it out to a prospective subscriber who after review adds its name to the signature line and sends it back to you (or however its done for those of you who are more technical than me). The system gets installed and some payments are made and ultimately a lawsuit follows. Can you rely on the contract as having been signed by the subscriber? Is the subscriber bound by the contract? New York has a new law which became effective March 26, 2000. State Technology Law, Chapter 57-A of the Consolidated Laws, Article I, entitled Electronic Signatures and Records Act provides, in section 106, that: "Admissibility into evidence: In any legal proceeding where the provisions of the civil practice law and rules are applicable, an electronic record or electronic signature may be admitted into evidence pursuant to the provisions of article forty-five of the civil practice law and rules including, but not limited to section 4039 of such law and rules." A related issue is the use of electronic copies in court in place of an original document. New York, like many other states, has adopted the Uniform Photographic Copies of Business and Public Records as Evidence Act. In New York a reproduction created by any process which stores an image that does not permit deletions or changes without leaving a record, when authenticated by competent testimony as to how the reproduction was made, is admissible into evidence as an original. As with original documents questions of authenticity and authority will continue to be raised as defenses, and we can expect case law to develop this interesting area of law. One thing you can count on, you need to keep up with the times and learn how to use electronic communication to grow your business. ARE SUBCONTRACTORS PROTECTED FROM LIABILITY? Subcontractors routinely work without contracts in the alarm industry. Whether installing burglar, fire or other electro protective devices, subcontractors are often happy to get work and give little thought on anything other than getting paid when they are done with the job. Recently a subcontractor called me because he had been asked by the General Contractor (in this case another Installing Alarm Company who had the contract with the subscriber) to obtain a certificate of insurance naming the General Contractor as additional insured. Not an unusual request. However, the subcontractor’s insurance company refused to issue the certificate unless the subcontractor could produce a contract with the General Contractor in which the General Contractor agreed to hold the subcontractor harmless. Under these circumstances it would be highly unlikely that a General Contractor would agree to indemnify and hold the subcontractor harmless. In fact, since the subcontractor was the one actually doing the work it is more likely that the subcontractor should be required to indemnify the General Contractor. Putting aside the question of who should indemnify whom, perhaps a more important question for the subcontractor, and its insurance carrier if it has one, is what liability and exposure does the subcontractor face? Typically the subcontractor does not have a contract with the subscriber directly. The subcontractor relies on the contract between the General Contractor and the subscriber. So, lets skip to what happens after the job is completed, everyone’s paid, and the subscriber suffers a loss. Lets use a burglary loss just to keep it simple, as opposed to a multi building fire that destroys life and property. In our hypothetical lets also assume that experts can establish that several protective devices where improperly wired into the panel and were undetected until after the burglary, and that it was through the unprotected areas that the burglars gained access and committed their deeds. The subscriber’s lawyers do their homework and find out the name of the subcontractor. A lawsuit names the General Contractor and the subcontractor. The General Contractor relies on several defenses. First it claims that it has no liability because it was the subcontractor who actually did the installation and was negligent. Secondly the General Contractor produces its contract with the subscriber which contains an exculpatory clause and limitation of liability provision. The General Contractor is off the hook. Now the subcontractor. Unfortunately he can not claim someone else did the work. He also can not produce any contract with any protective provisions; or can he? The only contract that the subcontractor can look to is the one between the General Contractor and the subscriber. Either it provides some protection or it doesn’t. A properly drafted alarm contract (see contains a provision that provides that the Alarm Company has the right to subcontract services required under the contract, and that the protective provisions of the contract extend to protect the subcontractors. If that provision is in the General Contractor’s contract then the subcontractor will escape liability. Without the contractual protection to rely on the subcontractor will most certainly face a trial, the cost of which will likely put him out of business, not to mention the impact of a sizable award against him. A subcontractor should be certain that the General Contractor’s agreement with the subscriber contain language protecting the subcontractor. There should always be a written contract between the General Contractor and subcontractor, but it is unlikely that the General will indemnify the sub. A subcontractor should also take the precaution of having errors and omissions insurance with a reputable company, and the subcontractor needs to know the requirements of the insurance policy to trigger coverage. If a contract is a requirement for coverage than the subcontractor needs to be sure to satisfy the carrier’s underwriters in that regard by finding out if the contract between the General Contractor and subscriber will satisfy the coverage requirements. Otherwise a sub may need to get the subscriber to sign a contract, something that the General Contractor ( and subscriber) is likely to object to. Why is there such a problem with this topic? Alarm contracts have automatic renewal clauses in them. Some contracts are for an initial term of 3 to 5 years, some 10 or more. The renewal can be for 1 year, 5 years, or whatever you make it. An automatic renewal clause should and will be enforced (its legal) unless: 1. there is a statute that prohibits it 2. there is legal case law that refuses to enforce it (usually on the grounds that the particular provision is unconscionable [shocks the conscience of the court). I am not aware of a Federal law that deals with the automatic renewal clause (if you know of one let me know the statute). Some states do have statutes that deal with the issue. In New York for example an automatic renewal clause is not enforceable unless the provider of the service (the alarm company) sends a separate notice advising the customer of the provision. The notice has to be sent by certified mail or personally delivered between 15 and 30 days prior to the renewal date. Failure to give the notice renders the automatic renewal provision unenforceable. Check the statutes in your state to find out if there is a similar provision that you must comply with. If there is no state law provision then you only need to be concerned that your contract term does not run afoul of common sense or decency. A 5 year initial term with a 10 year renewal written in obscure print buried in the contract may not be enforced. I think you get the idea. The standardized contracts that I offer to the trade are 5 year initial term and 5 year renewal. We have not had difficulty with those terms. We have also had success with 10 year initial term contracts with 5 year renewals. For a list of the standardized contracts see our web site at Some alarm companies have a policy of sending out new contracts rather than relying on their renewal provision. Unless the new contract is for an extended period and the renewal is for a shorter period, like one year, I don’t see the wisdom in going to the trouble of preparing and sending a new contract. If you are required to send a notice of the automatic renewal you should comply with that; after all, the new contract may not get signed and returned. Another little mistake I think some companies make is to send out a new contract and call it a renewal contract. The phrase "renewal contract" has caused many different types of problems in litigation. One thing you need to be mindful of is that the contract, now labeled a "renewal contract" may have several provisions in it that have triggering events that will not be taking place with the renewal contract, such as an installation of equipment, or a provision that says the contract is for 5 years after the installation of equipment. In a renewal situation that provision can cause the subscriber to claim that the equipment was installed long time ago when the first contract was signed and therefore the 5 years ran before the renewal contract was even signed, thereby permitting the subscriber to cancel anytime; not a position you need to litigate and one you can easily avoid by knowing what is in your contract. If your contract has an automatic renewal provision in it then I suggest you rely on it. If you want to have a new contract signed during the term of an existing contract that is fine. You should probably offer some incentive for a subscriber to sign a new contract, such as a free inspection, free piece of equipment, an upgrade in equipment or a rate freeze or decrease. Giving something for the new contract will help establish your consideration and avoid an issue that the subscriber was duped into signing a new long term contract. Let a sense of fairness be your guide. Confidentiality of Client Lists Recently an alarm client emailed me and asked whether subscriber lists are confidential. More specifically, whether a former employee could leave with the customer list in his personal computer data base. I provided a rather lengthy analysis that concluded with the thought that the list was probably not confidential. The following recently published case illustrates the legal concepts. Plaintiff moved for a preliminary injunction to enjoin the defendant's use of an alleged confidential client database allegedly misappropriated from plaintiff while defendant was in plaintiff's employ. The court denied the motion because the plaintiff failed to demonstrate a likelihood of success in the case, and failed to provide any evidentiary support showing that defendant misappropriated the database or that it was being used to compete against plaintiff. The court also found that the plaintiff's claim that the list was not public information and constituted a trade secret was not proved, and that there was no proof that the list was confidential. Another issue in the case was a restrictive covenant not to solicit the former employer's customers for one year after leaving the employ. This court found that such provisions are "disfavored" by the law and will only be enforced to extent necessary to prevent disclosure of trade secrets or confidential information, or where the former employee's services are unique or extraordinary, which was also not proven in this case. Of course not every customer list is public information, and certainly information about each customer is not public information. But whether the list and information constitutes trade secrets entitled to confidential information status (and this entitled to proprietary protection) often will depend on the nature of the employers business, the effort that went into developing the list and how confidential the employer actually kept the information from competitors and employees. The typical alarm company provides pretty much the same services as its competitors, and provides its services to the same type of customers. The prospective list of customers can be found in the phone book or by walking down the street. Of course the precise type of alarm, pricing and specific services would not be common knowledge to competitors, but protecting that information, including the list, needs to be weighed against the strong public policy that favors open competition in the market place. For sure your former employees cannot copy or remove your records, but proving that they have and are using the information to unfairly compete is easy to allege but very difficult to prove. Without the such proof you are unlikely to prevail in an action to enjoin competition. Assuming you do not provide a service that is so unique that only a select clientele that you have developed after much effort uses the service what steps can you take to make it more difficult for your former employees to unfairly compete against you? Start with an employment contract that clearly provides an agreement between you and the employee that your customer list and customer information are confidential and trade secrets. And, you should treat that information that way. Your employees should have access to only the information they need to perform their job. If access is to be available then the employment contract should address that and express the employee's unique position and need for the access. Copies and personal files should not be permitted. If you do not treat your information as confidential then don't expect a judge to at a later date. The more information you have for a customer the more likely a judge is going to recognize that you put a great deal of effort creating the database. In other words a customer list that merely lists name and address would not really contain anything more than the phone book. The fact that such customer have your alarm service would not likely make it special enough to identify or protect as a trade secret. However if that list also contained contacts, type of alarm, dates of contracts, pricing, and other pertinent information that would be particularly helpful to a competitor and yet unavailable, you have a better chance of convincing a judge that it is confidential and entitled to protection. Each case needs to be evaluated on its own facts. The legal principles are fairly well defined; its the application that causing so much confusion. Keep in mind that the way you treat the information and conduct yourself and your business will undoubtedly be a factor to a judge asked to protect the information as a trade secret and prevent its use against you. A 14 year old girl was raped by an unknown assailant who forced his way into her apartment. She was alone and when she looked through the door peephole. She thought the man was a delivery man from UPS. The building had a history of significant criminal activity, including loitering, robberies, drugs, and sexual assaults. The building’s intercom system was broken, as was the front door locks, and they had been broken for a long period of time. The landlord had in fact already been reprimanded by NYC officials and agreed to fix the violations regarding the intercom and lock. The plaintiff (little girl who had been raped) sued the building owner on the grounds that the owner had negligently breached its duty to take precautions against foreseeable criminal assaults on tenants. The motion court granted the motion to dismiss the action based on the current law that since plaintiff could not identify her assailant nor be certain how he gained entry into the building she could not demonstrate a triable issue of fact as to whether he was an intruder rather than a tenant or guest of a tenant. On appeal, the Appellate Division reversed, reinstated the complaint, and is now sending the case to trial. The reason for the reversal is a change in the law in New York State based on decisions by our highest Court. Landlords have a duty to take minimal precautions against foreseeable criminal activity by third parties. A tenant victimized by a criminal in the building may recover damages from the landlord, if the failure to provide adequate security was a proximate cause of the assault. Many prior cases established the well accepted principle that if the victim could not identify the assailant ruling out the possibility that he was a tenant or guest, there could be no action against the landlord even where there was proof of broken locks and intercoms and no security. This standard has now been rejected as an overly stringent burden of proof. The new standard needed to overcome a motion for summary judgment to dismiss the complaint (and at trial to establish liability) is that a plaintiff must present evidence from which intruder status may reasonably by inferred. Thus a plaintiff need not rule out all other possibilities, but merely show that the evidence renders it more likely than not that the assailant was an intruder who gained access to the premises through a negligently maintained entrance. The new decisions by the courts will most certainly encourage building owners and their insurance carriers to take building security more serious. The potential exposure for liability is staggering and landlords will no longer be able to take comfort in law that has recently fallen out of favor. You should bring this change of law to the attention of your building owner subscribers and encourage them to increase their building security. Front door locks and intercoms are mandatory in NYC. CCTV, proper lighting, and panic alarms make sense. LIQUIDATED DAMAGES v. LIMITATION OF LIABILITY PROVISIONS Perhaps the most important provision in a properly drafted alarm contract, from a defense standpoint, is the limitation of liability provision, or liquidated damage clause. Though some courts treat the two provisions similarly, and will enforce either provision under the same circumstances, the limitation of liability provision and the liquidated damage clause are in fact two distinct different types of provisions. Often the courts in a state will be willing to enforce a limitation of liability provision, but not a liquidated damage clause. Other states will favor the liquidated damage provision in an alarm contract. It is essential that you know which type of provision is preferred and enforced in your state and make certain that your alarm contracts contain the proper wording. How do you know which provision your contract has? A "liquidated damage provision" typically contains at least some of the following wording: The parties agree that in the event subscriber suffers any damages as a result of alarm company’s breach of contract or negligence that it would be impractical and extremely difficult to anticipate or fix subscriber’s actual damages. Therefore subscriber agrees to accept $250.00 in full and final damages in the event of alarm company’s breach or negligence. Courts will enforce a liquidated damage provision where the agreement is clear in its terms, and the court further finds that the specified liquidated amount is not a penalty. To determine whether it is a penalty as opposed to estimated damages, the court would normally have to find that there was an uncertainty as to the amount of potential damages or difficulty of proof and that the contract as a whole is not manifestly unconscionable, unreasonable, and the liquidated damages is not disproportionate in amount so as to justify the conclusion that it does not express the true intentions of the parties. A limitation of liability provision is subject to scrutiny, but there is a different analysis. The "limitation of liability provision" typically reads as follows:
Should there arise any liability on the part of the alarm company as a result of its breach of contract or negligence, the parties agree that the alarm company’s liability shall be limited to $250.00. The analysis regarding the enforceability of a limitation of liability provision is whether the limitation on damages is so disproportionate to both the amount of the actual damages involved and the contract price so as to be unconscionable. The following case best illustrates the analysis, and the importance of having the proper provision in your alarm contract. Alarm company installed a fire alarm system. A fire broke out, the alarm company received a trouble signal which was not interpreted as an actual fire condition, and there was a delay by the alarm company to report. In the meantime, someone else reported the fire. There was an loss in excess of $500,000, and the alarm company was sued on the theory that their delay in reporting the fire caused significant additional damage which would not have occurred except for the alarm company’s failure to properly report the alarm condition. The alarm company, one of the nationwide companies, had a contract which incorporated language for both a liquidated damage clause and a limitation of liability provision. When the alarm company moved for summary judgment dismissing the complaint based upon its "liquidated damage/limitation of liability clause", the plaintiff argued that the clause was a liquidated damage clause and therefore not enforceable in that state (Ohio). The Court did an analysis of the two clauses. Luckily for the alarm company the Court chose to interpret the provision as a limitation of liability clause, and not as a liquidated damage provision, despite the fact that the clause did have the language commonly found in a liquidated damage provision. (Impractical and extremely difficult to fix the actual damages...") The Court analyzing the contract noted that as a liquidated damage clause the alarm contract provision would not be enforced because the amount of the liquidated damage, in this case $1,000, was indeed disproportionate to the amount of actual damages, and the amount of the potential actual damages could have been estimated; the nominal liquidated amount could not possibly been the potential actual damage contemplated by the parties. However, as a limitation of liability provision, the liquidated amount ($1,000) was not disproportionate to the amount that the subscriber was paying for the alarm service, a much different criteria than comparing it to the actual damages ultimately suffered by the subscriber. Thus, the Court in this case recognized that the alarm company could not afford to undertake a potential liability greater than the contractual limited amount in view of the price it was charging for its system and alarm service. The contract provision was therefore enforced as a limitation of liability provision. Of course, the entire analysis could have been avoided if the alarm company had a properly worded limitation of liability provision. Many alarm companies think they are protecting themselves by combining the language from both types of clauses into a single clause. It’s not a good idea. If you operate in a single state then you should find out which provision your state prefers and enforces. Sometimes it is a matter of which provision has been reviewed, addressed, and enforced in your state. Ohio, like New York, enforces the limitation of liability provision. For further information on alarm contracts see our site at. CONTRACT ENFORCEMENT - Acceleration and Counterclaim A vital component of the alarm business is to actually collect payments in exchange for services. Breach of contract by subscribers is an issue every claim company experiences. Litigation often follows. Here is a recent case for your consideration. The plaintiff (alarm company) sued the defendant (a home owner) to recover payments due under a monitoring contract. The plaintiff was hoping to collect $1,438,89 – a figure derived from calculating all money due over the promised five years stated in the contract. The defendant interposed a counterclaim based on breach of contract, claiming a defective installation. In other words, the home owner also sued the alarm company for "installing a defective alarm." Relying on the acceleration clause, the plaintiff demanded $27.00 per month for a five year period for alarm monitoring services. At trial the judge focused on the contract to determine two issues: the defendant’s right to counterclaim, and the plaintiff’s right to recover the balance of the contract payments. The contract provided that should the company institute legal action to collect money, the purchaser waives the right to interpose a counterclaim. Stated verbatim, the contract reads: "As aforesaid, in any action or legal proceeding arising directly or indirectly, from this sale or any guaranty hereof, Purchaser and any guarantor waive trial by jury; Purchaser shall not be permitted to interpose any counterclaim..."Secondly, in addition to waiving its rights to a counterclaim, the purchaser agreed to an acceleration of the payments in the event of default. The contract reads: "In the event Seller institutes legal action to recover any amounts owed by Purchaser to Seller hereunder, the parties agree that the amount to be recovered, and any judgment to be entered, shall include the full accelerated unexpired term of the agreement..."Concentrating on the counterclaim, the judge noted that, as a general rule, a clear waiver of the right to asset a counterclaim is consistent with public policy under New York law, in the absence of fraud. The judge found that since the defendant did not assert fraud, and since the contract clearly and unequivocally waived his right to impose a counterclaim, the counterclaim should be dismissed. The judge then treated the acceleration clause as a liquidated damage provision. He noted that it is well established that stipulated liquidates damages will be upheld only where they bear a reasonable relation to the actual amount of probable damage, otherwise, it is considered a penalty and will not be enforced. In this case, the Judge found it unreasonable to charge the defendant for five years worth of service where only several months of monitoring was provided. It was established at the trial that the defendant paid for the installation of the alarm system and that monitoring payments ceased a few months thereafter. Only $128.84 was the amount due and owing for services already rendered when monitoring was terminated, and that’s all the judge was willing to award. I have recommended that you replace the acceleration clause with a liquidation damage clause. The difference is that the liquidation damage clause will ask for something less than the full amount that would have been paid had there been no breach. Keep in mind that the liquidated damages needs to be a fair estimate of damages, not the full amount that would be paid (unless that is the proper measure of damages). In my contracts I have settled on 80% of the full amount. The acceleration clause was one of the first provisions to be found in alarm contracts, and it is commonly found in most alarm contracts today. Overcome your resistance to change and try the liquidation damage clause; I think you will have better success with your collection cases. Designing Free or nominal charge Alarm Systems contracts There continues to be interest in selling (or giving away) free alarm system installations to subscribers. How can these transactions properly be designed to provide maximum protection and account value to alarm companies? The transaction typically involves a residential subscriber. (commercial subscribers usually lease the alarm system and the lease would therefore provide for no installation charge and a monthly charge which would include continued lease of the equipment, monitoring and service). However, the residential transaction usually involves a sale of the system, equipment installed, and then a monitoring contract. I have found that the preferred procedure is to have a separate contract for installation, monitoring and service. (that's three separate contracts). Though this does require more paperwork sometimes, not every transaction starts with the sale, and the separate contracts permits you to use the one that you need. If you are contracting for just monitoring, or just service, you don't have to try and modify an all in one contract. The free alarm system contract provides for a standard alarm system at a standard price. What you want to include in the standard installation is a business decision, as is the price you want to specify for that standard installation. The contract then has a provision that waives (or discounts) the standard price. That waiver is however conditioned on the subscriber entering into and fully performing a standard monitoring contract. The monitoring contract is designed to tie into the sales contract. The monitoring contract provides that if the monitoring contract is breached by the subscriber then the alarm company can recover not just the monitoring charges, but the waived installation charge as well. The sales and monitoring contracts for the free systems look very much like the standard alarm and standard monitoring contracts except for the waiver provision and the reference in each contract (sales and monitoring) to the other. If you are ordering the sales and monitoring contracts and want the ones designed for the free installation, please let us know when you place the order so that we can send the proper contracts. Contract orders that do not specifically request the free alarm system provision will be sent the standard sales and monitoring contracts, which make no provision for waiving any charges. For an order form see Alarm Contracts . You need to send a separate email to advise that you want the free system provision. Unfortunately a request that the contract be free cannot be recognized. :-)
Valuation of Equipment A minor change has been made to the standard lease and the standard monitoring contracts. Alarm Contracts Both of these contracts provide for the "agreed value of equipment." The change is that the provision now reads "agreed value of installed equipment." The purpose of the provision and the reason for the change follows. The provision is found in the lease and monitoring contracts. In both of these contracts the subscriber is not being asked to pay for the equipment; in each case the equipment is leased. So why bother with agreed valuation? It's in case there is a default by the subscriber in the contract. In the event of default the contract provides that at the alarm company's option the subscriber can be required to permit removal of the equipment, or be charged and required to pay the "agreed value." By agreeing to this agreed value the idea is that in a lawsuit for breach of contract the alarm company will not have to prove the value of the equipment since the value has been agreed to. This could avoid the necessity of a judge holding a hearing to determine valuation, reason enough to include the provision in the contract. Subscribers should not complain about the provision since they are not being asked to pay the price, and even though the price kicks in if there is a default, few subscribers will consider this when entering into the contract because they are not focused on defaulting and the default provisions. Most will be primarily interested in when you can do the installation and how much it will actually cost. In collection cases we have sometimes experienced subscribers and Judges challenging the valuation of the equipment. Needless to say, we often find the valuation exceedingly high. After all, the subscriber is not being asked to pay the value of the equipment, and the subscriber may in fact be impressed that the alarm company is willing to install such expensive equipment for a minimal installation charge and a low monthly charge for the lease, service and monitoring of the equipment. So a commercial subscriber who is getting a free installation and being charged $40 a month may not raise an eyebrow, an objection, when the lease provides that the value of the equipment is $4500.00. When there is a default and lawsuit however and the alarm company is seeking 80% of the balance of the monthly charges and 80% of the agreed value of the equipment, the valuation issue first comes to light. Of course we argue that the equipment value is not a permitted issue since it is agreed to in advance in the contract. But further argument is usually necessary. Is the price the alarm company's cost, a wholesale or retail value? Well, simply, it is the price that the alarm company would want for the equipment, installed. Wires and piping may have little value purchased new, and even less value after its used and installed on a job, but to the subscriber it could have higher value since it is installed already in the premises, removal could be costly and leave damage, and replacement could be expensive. I thought it would be easier to support a higher price for "installed" equipment than just the value of the equipment. Hence, the additional word was added to the contract provision. (the copyright date on this latest revision is now 11/01, in case you are wondering how outdated your contracts may be -- they are upgraded a few times a year). While I am at it, one other change was made in this revision. Additional language was added to make it crystal clear that no service to the system is required if the subscriber is in default under the contract. This is for the lease, service and monitoring contracts.
Who Protects the Central Station - Securing receivables. This article is for the central station companies providing wholesale
monitoring services, and the alarm dealers who install alarms and contract for
third party monitoring. Let's look at the relationship from the perspective of
the monitoring company, which I usually refer to as the Central Office, or
CO.
The CO has made a substantial investment in a facility, office space,
equipment, telephone lines, and trained personnel. COs doing wholesale
monitoring all have substantial advertising and sales budgets and expenses.
The competition is fierce. Monitoring rates can go anywhere from $6 to $2 a
month, and when you throw in some start specials, the price is even less.
COs do have their "better" customers, just like any business does. But one of
the problem issues COs face, like other businesses, is the customers who don't
live up to the bargain, in this case, those who don't pay their bills for the
monitoring service. The CO usually feels particularly bitter about the non
payment since it knows that the alarm company has in all likelihood collected
the monitoring charges from its subscribers, and that the amount charged by the
alarm company to the subscriber is likely 5 to 10 times or more than the amount
the CO is charging the alarm company. How can the CO guard itself against
these alarm companies that don't pay their bills, often moving from one CO to
another once the bill is high enough or the special deal is over?
Recently I sent a notice out that the "standard" alarm contracts I offered
to the industry were being upgraded and that one change was the addition of a
clause that gave the alarm company a security interest (by filing a UCC-1)
against the subscriber. Well, that change has now been added to the my
standard contract between the CO and the dealer (the Installer Contract).
The provision works like this. The alarm company grants the CO a security
interest, or lien, on the subscriber accounts being monitored by the CO, and
any other property that can be included, such as equipment. In the event the
alarm company attempts to sell its alarm contracts the lien will show up. If
the alarm company goes bankrupt, the lien will make the CO a secured creditor.
If the alarm company tries to avoid payment and seeks to abscond, the CO can
assert its lien and grab the collateral. The perfect protection? No, but
another level of protection.
I remember that when I was fairly new representing the alarm industry a CO
decided to exercise self help by going after the subscriber accounts of a non
paying alarm company. I was surprised. This CO (long gone now) was also an
installing company, and therefore was in direct competition with the many alarm
companies it provided third party monitoring for. These alarm companies were
apprehensive about giving the CO their subscriber information, and I thought
that the CO's action of soliciting the subscribers of the defaulting alarm
company would, once it got out in the industry, cause more economic harm than
could be gained by going after the accounts. As far as I knew there was no
precedent for that type of remedy.
Well, time went on and one of the innovative provisions I added to a
contract between the CO and the alarm dealer, was that very remedy. So if you
have signed such a contract the CO can solicit your subscribers if you default;
but it's still not secured, and solicitation sometimes is quite ineffective. A
security interest adds an additional remedy that may prove to make a difference
between recovering what's owed, and losing it and watching the alarm company
slip away, only to surface being monitored by one of your competitors.
In order to perfect its security interest the CO will need some additional
information from the alarm company, including the type of business entity,
state of organization, tax id and state id if one is issued. The UCC-1 is then
filed in the state where the alarm company is organized, not necessarily the
state where the CO is located or where the alarm company has offices.
This protection for the CO is entirely appropriate. There is little
sympathy for the alarm company who beats its CO, and the CO is entitled to all
the protection it can reasonable get. The security interest provision is
therefore something that should be acceptable to the alarm dealer
Collections- 10 Year Term Restrictive Covenants in Buy/Sell Agreements Outright sales and financed time payments Typically alarm and other security sales contracts provide for a contract deposit and balance on completion. What happens when you permit the subscriber to pay off the purchase price over time, agreeing to finance the sale? The answer is plenty, more than you need to or want to know. Permitting payments over time and charging a finance charge turns your sales contract into a retail installment contract, and there are all kinds of laws that govern those contracts, particularly if you are selling residential consumer contracts. Almost all of these laws effect the way the contract terms can be structured and the terms themselves. Some of the laws require the term "retail installment contract" on the top and again by the consumers signature, actually competing for the space required by the infamous 3 day notice of cancellation, which needs to compete with the notice that the customer is entitled to a complete copy of the contract at time of signing. Waiver of juries are not allowed, nor can you require the customer to waive the right to interpose counterclaims if you start a suit. If your contract calls for you to get legal fees, then the customer will also be entitled to legal fees if successful in the action. Of course all of the usual consumer protective provisions must also be in the contract, like estimated starting and completion dates, warranty notices, permit notices, license disclosure, type size. Then there are the federal laws, Truth and Lending, requiring that you disclose the purchase price, the finance charge, the totals (in case your customer can't add I suppose), the percentage rate (as if anyone wants to be reminded they are paying 18 to 24%). Needless to say the laws require specific positioning of the provisions and disclosure. Think you can piece together one of these retail installment contracts yourself? Think again. The laws are all over the place. And once you permit a payoff I am not so sure you can circumvent the laws by claiming that you are not charging a finance charge. One may be imputed, and since you don't make the disclosures, who knows how many laws you may be violating and the various penalties, none of which you will like. So what's the answer. Stick to what we do know. If it's a sale, get a contract deposit and the balance on completion. You can find that type of security contract at www.alarmcontracts.com.
Contracts of Adhesion and enforcement Alarm contracts contain numerous provisions which when read by a subscriber and even legal professionals unfamiliar with alarm law may appear to contain onerous provisions; Onerous from the perspective of the subscriber. When litigation arises one of the attacks against the contract is that it is unenforceable. While various grounds supporting that position are typical, one of the common issues is that the contract is one of adhesion. What precisely does this mean? Arguing that a contract is one of adhesion a subscriber would claim that the contract is a standardized form; that the contract was preprinted and that the alarm company would not make changes. Along with that would be a claim that the parties had unequal bargaining power. What is the consequence of a finding that the contract is one of adhesion? Surprisingly that finding alone does not render the contract unenforceable. The finding that a contract is one of adhesion is only the first step in determining its enforceability There must also be a determination that the terms of which the party claiming adhesion was unaware at the time of signing the contract are beyond the reasonable expectations of an ordinary person or are oppressive or unconscionable. This standard of review when applied to alarm contracts routinely results in enforcement. Though novel 25 years ago, typical provisions in an alarm contract have received judicial review in almost all states, and enforcement is expected. Thus contracts with the exculpatory clause, limitation of liability provision, liquidated damages, indemnity clauses, are routinely enforced. You would be foolish to conduct business without a well drafted and time tested contract, and that is the case for sales, monitoring, service of all types of alarm and security equipment.
Collection Policy Ideas
Business has not yet turned for the better and keeping an eye on your
receivables is as important as ever. Additionally by the time this article
reaches print there won't be much time until the Christmas holiday season comes
and goes. If you have been in business any length of time you know that
marginally solvent business often hang on through end of December and then
close. That could mean that bills, like the alarm bill, stop getting paid just
about the time you are reading this Security Dealer article. Be vigilant.
Check your receivables now and those in default warrant your attention.
Creditors who act fast and furious are the ones who get paid first, and
sometimes they are the only ones that get paid at all.
Here are some perhaps obvious ideas that you should implement regarding
your collection practices:
1. The process starts with knowing the full and correct name of your
subscriber; the full corporate or partnership name. [the correct name belongs
on the contract -- which you must have with every subscriber].
2. Be certain to get the title of the person who signs on behalf of a non
person entity, such as a corporation.
3. Confirm the name of your subscriber by checking a posted license, sales tax
notice, or corporate filing receipts if you can get to see them. Many
subscribers will have licenses posted in the premises that you can easily look
at.
4. Make a copy of the checks you receive from your subscribers, especially if
the bank account is a new one. Retain the copy with your subscriber's records.
5. Try and get your subscribers tax id number. In fact the new contracts call
for that information so that you can fill out the UCC form for your security
interest.
6. Retain records of service requests and calls.
7. Obtain records from the central station to confirm that the alarm system
was tested and working when installed and get periodic test signal confirmation
and retain those records in your subscriber's file.
8. Be mindful of your subscriber's payment practice history. In other words,
if the customer typically pays within a particular time frame then you need to
be alerted to a failure to pay within that period. You need to contact the
subscriber to ascertain why payment is not being made in the customary manner.
If you do not receive a satisfactory answer then that is the time to refer the
subscriber to "collection." Each subscriber therefore establishes its own
schedule based on past payment history. One subscriber may be fine running 4-6
months in arrears, and another may cause you reason for concern if payment is
not received within 15 days.
9. Remember to keep matters on a professional level. Do not get into a
personality conflict with your subscriber over late payment of default.
10. Refer the matter to a lawyer familiar with alarm collection practice; avoid
collection agencies and your relatives.
Individual Bankruptcy and Protecting Your Rights As I write this article the much talked about bankruptcy reform
legislation remains in Legislative Committee in the Senate and House. It is
not anticipated that the legislation will reach a favorable vote until after
the summer [2002]. You may be wondering how this proposed change in the
bankruptcy law may effect you and your business. For additional bankruptcy
information you can visit my web site at www.KirschenbaumEsq.com (I have served
as a trustee in bankruptcy for over 25 years).
The most talked about proposed change to the bankruptcy laws will
establish a "financial means" test. If an individual filing has income
exceeding a certain level for his geographical area then he will not be
permitted to file under chapter 7 but will have to file under chapter 13.
Chapter 7 is a liquidation whereby an appointed trustee collects and
sells the debtor's non exempt property, the proceeds of which is then
distributed to the creditors according to a distribution priority. Most
chapter 7 filings are what we call "no asset cases" which means that the
debtors do not have sufficient assets to liquidate to create a bankruptcy
estate. Unless there will be something meaningful to distribute to creditors
after the Trustee pays administration expenses the Trustee generally will not
open an "asset case" and liquidate property. When a chapter 7 case is filed
that appears to be a no asset case the clerk of the court sends a notice to
creditors that advises that it is not necessary to file a "proof of claim,"
(that is the procedure in the Eastern District of New York and may not be the
procedure used in all districts). If assets are later found and the Trustee
creates an estate then the clerk of the court sends out notice to creditors to
file a proof of claim. Only those creditors who file a proof of claim will
share in the distribution.
A chapter 13 filing is quite different. This is a wage earner's plan.
An individual with regular income can propose a repayment plan over 36 to 60
months. The debtor will need to propose paying out over the life of the plan
at least what a Chapter 7 Trustee would liquidate in a chapter 7. To
participate in the distribution you must file a proof of claim.
You may experience an increase in bankruptcy filings in anticipation of
the proposed changes in the law. Individuals who think that they will be
forced into a chapter 7 because they have higher income than their geographical
average may want to file now rather than be forced into a chapter 13 where that
excess income will be used to fund a plan that pays back 25% of the unsecured
debt.
There are several things that you should do if you receive notice that
your subscriber has filed a bankruptcy petition.
File a proof of claim for the entire amount of your contract as if there
was an immediate breach. In a 13 you should receive payments; in a 7 you will
get paid if the Trustee finds assets. In either case your proof of claim can
be examined and a motion brought to modify the claim if it is excessive. You
can choose at that time to defend the motion or permit the proposed change in
the proof of claim.
You are not permitted to seek recovery of any amount owed prior to the
filing of the petition. You are not however required to continue providing any
service to the debtor unless the debtor reaffirms your contract, or at the very
least makes all payments due after the filing of the petition. Technically you
can seek to have the debtor formally reaffirm the contract and require the
contract to be brought current. Your contract with the debtor is what is known
as an "executory contract" and the debtor has the right to terminate it in a
chapter 7 or 13, in which case you can file a proof of claim for your damages.
In a chapter 7 or 13 you should notify the Trustee if you have any
information regarding assets of the debtor that have not been disclosed.
Though you will be invited to attend the first meeting of creditors it
is not necessary to attend unless you want to ask the debtor questions about
his assets, particularly those not disclosed. Your attendance will not qualify
you to participate in any distribution; for that you must file a proof of
claim.
Do not take any steps to recovery money owed to you prior to the filing
of the petition. There is an automatic stay of enforcement and you could be
held in contempt of court, a serious matter.
If you are using the latest standardized contract forms
[www.alarmcontracts.com] then you have the right to file a UCC making yourself
a secured creditor. First of all, you cannot file the UCC after the debtor has
filed the petition. Second, if you file the UCC within 90 days of the date the
petition is filed it could be set aside as a preference. If you do file the
UCC prior to the 90 days, or it is not set aside, then you can be a secured
creditor, to the extent of the value of your security, and unsecured to the
extent that the collateral is insufficient to satisfy the amount you are owed
on the contract. The proof of claim you file will break down your status. As
a secured creditor you have the right to remove the collateral, but you will
need court permission unless you wait for the automatic stay to be lifted. You
should consult with a bankruptcy lawyer before taking any action.
There is no reason to give up on a subscriber just because you get
notice of a bankruptcy filing. With a little effort and assistance from a
bankruptcy lawyer you can protect your rights.
Mechanical or electronic interception of audio is unlawful without a
party to the conversation's consent. This is Federal Law and most states have
similar statutes. Video taping is another matter. There is no Federal Law
that prohibits video recording. Suffolk County in New York is proposing
legislation to outlaw video taping in public rest rooms, dressing rooms or
changing rooms. The impetus for the bill is a case of a landlord who installed
a video camera in a tenant's bedroom and hooked it up to his VCR. The proposed
legislation will also prohibit two way mirrors and peepholes in the designated
areas. Interestingly enough, this year the New York legislature tried to pass
a peeping tom bill covering areas where people had a "reasonable expectation of
privacy." The bill didn't become law.
Years ago I defended an alarm company accused of installing a CCTV
camera in a female employees bathroom, hooking it up to the vice president's
office VCR. The proof in that case established that the alarm company had
actually installed the camera in a warehouse area and the vice president of the
subscriber moved it himself to the bathroom and hooked up the VCR. I got my
client off the hook.
Video taping legislation is likely to pop up in most jurisdictions and
you should watch for it.
Indemnity Provision Every properly draft
security contract will contain an
Indemnification Provision. This provision will
be required by all insurance companies that are
wise enough to require contracts between their
insureds (the alarm and security companies) and
the subscribers. It is this provisions which
also seems to generate the most scrutiny and
objection from subscribers. When I am asked by
the security company to negotiate with the
potential subscriber and close the deal I
typically agree to omit the Indemnity Provision
from the contract. This article will review the
provision, discuss why it's in the contracts,
why I agree to take it out and what consequence
might follow its omission from the contract.
Selecting a Central Station: Considerations
This is the first article in a series of articles regarding dealer's
selection of central stations. Future articles will address the specific
considerations mentioned below.
Alarm dealers who do not have their own central station
facilities face the option of selecting from the plethora of companies
that provide monitoring for other companies. This is known as "wholesale"
monitoring or "third party" monitoring. Here are some issues that a
Dealer should consider.
1. Does the dealer require UL certified monitoring, and can the central
station (CO) provide that service?
2. Is the CO competitive in its prices for its monitoring service?
3. Does the CO carry industry accepted errors and omissions insurance?
4. Does the CO provide any type of support to the dealer other than
monitoring the accounts, such as technical support, assistance with
service or equipment, or discounted errors and omissions insurance
premiums?
5. Does the CO require that the dealer sign a contract, and does that
contract lock the dealer into a long term relationship with the CO, does
it require the dealer to indemnify the CO, and does it give the CO an
option, first right of refusal, to purchase the dealer's subscriber
accounts if the dealer wants to sell?
6. Is the CO also an installer that may actually be in competition with
the dealer?
7. Is the CO a local company providing monitoring to dealers in its
geographic area, or a nationwide monitoring company?
8. Will the CO permit the dealer to have its own telephone line coming
into the CO?
9. Does the dealer require the dealer to have all subscribers sign the
CO's monitoring contract, a "three party contract"?
10. Does the CO have a reputation for honesty, efficiency, providing good
monitoring service, keeping good records and being responsive to the
dealer when necessary?
Police Response -
Contractual Obligations Recently there was a spirited exchange of
ideas regarding alarm systems and Sales
Contracts It's surprising how many
alarm company owners don't appreciate the need
for a Duty to third parties Here is a potentially dangerous case for the alarm industry in New Jersey and elsewhere. Alarm company installs burglar alarm in sporting goods store where guns are The monitoring company receives a signal, broken front window, makes 3 calls in attempt to verify the alarm, can't reach anyone, calls police in little more than 2 minutes of receiving the alarm. Police arrive within minutes; the burglars are gone. Guns are stolen. Several weeks later one of the guns is used to kill two people. The burglar was eventually caught and convicted. The families of the two murdered people then sued the sporting goods store and the alarm company. The alarm company sued the monitoring company. There are two court decisions and neither mentions any alarm contracts. The sporting goods store moved for summary judgment to dismiss the complaint brought by the families (plaintiffs). The main arguments were that the sporting goods store owed no duty to the murdered people, and furthermore, any negligence by the sporting goods store was not the proximate cause of the deaths; rather the criminal acts were the cause. The court rejected the argument and refused to dismiss the complaint. The alarm company also moved for summary judgment. It proffered the same arguments. That motion was also denied. The alarm company now finds itself in an appeal from that order. Since I am not handling the case and have not reviewed the proceedings I cannot comment on how the case was handled. Sometimes hard facts make for bad law, and that's one of the things you need to watch for when litigating any case. The court in this case noted that commercial gun sellers in NJ are regulated and have to have an approved plan for securing the inventory. Here there was some question if the alarm was properly operating (there may have been defect in audible alarm). In the decision denying the sporting goods store's motion, here is where the trouble began: "Although there is no reported decision in the State requiring a gun dealer to exercise reasonable care in the storage and display of its firearms, there is no logical basis for rejecting such a duty." The court went on to hold: "A licensed seller of firearms should not be immune from liability if it engages in conduct that contributes to gun violence... It is not unreasonable to require commercial gun sellers to take necessary preventative measures to safeguard and secure weapons capable of instant death... Thus, the existence of a duty in this case will promote reasonable conduct and discourage negligent security practices." Regarding proximate cause the court held that it is usually a question of fact for a jury. Also, "Proximate cause is a limitation the common law has placed on an actor's responsibility for the consequences of the actor's conduct ... there may be any number causes intervening between a negligent act and the final injurious occurrence.... The fact that there were also intervening causes which were foreseeable or were normal incidents of the risk does not relieve the tort-feasor of liability... A proximate cause need not be the sole cause of the harm. It suffices if it is a substantial contributing factor to the harm suffered." As to foreseeability, "all that is required is that a harm is likely to befall a victim". The court then applied the same reasoning to the alarm company, and denied its motion for summary judgment. The court went on to hold that a jury could find that "any negligence on the part of the alarm company was a substantial factor to the ultimate harm." The court was very impressed with an "expert's" report that said that it was negligence to try and verify the alarm when the signal was for a broken front window, and there was several minute delay in calling the police. How to guard against increasing litigation risks? Properly drafted contracts that clearly specify what you intend to do and what your limitations are, is a good start. Carefully assessing your subscriber and potential risks to it, its customers and the public at large is becoming more important as plaintiff lawyers and judges are becoming more creative in finding ways to expand the net of liability. Making sure that you engage attorneys who know the alarm and security industry and have experience handling claims of this sort. It's not just another case to you, it could very well be your business and life's savings. Using the UCC-1 form The standard alarm contracts that I offer the trade contain a UCC provision. This permits the alarm company to secure the subscriber's obligation under the contract by placing a lien on the alarm equipment. The provision can be expanded to include all assets of the subscriber in the case of commercial accounts. All states have the Uniform Commercial Code (except perhaps Louisiana). This is the statute that creates liens on personal property. Filing the UCC-1 in the designated governmental office creates the lien. Once the lien is filed it turns you into a secured creditor, rather than an unsecured creditor. Your subscriber will not be able to sell its liened assets free of the lien. If the subscriber files bankruptcy, you will be a secured creditor rather than unsecured. Though the contract permits you to file the UCC-1 as soon as the contract is signed you should probably wait until you think the subscriber may be in financial trouble and going to default on the contract. However, if the subscriber files bankruptcy within 90 days of the UCC-1 filing the lien can be set aside as a preference, making you unsecured again. The UCC-1 can be effective in protecting your receivable from the subscriber. Collections - it's who you know I am going to assume that if you read this column regularly you are
using proper contracts with your subscribers. Whether your business is
selling, servicing, monitoring, or leasing; whether is basic burglar alarms,
panic, medical, temperature, water flow, fire, CCTV or any other condition
susceptible to detection, you need a proper contract. Not only will it protect
you from liability, but it will be essential when you have to sue for your
money. That's what this article will focus on.
Unless finding subscribers and providing your service is your hobby, you
are in it for the money. You do your end of the bargain and expect to receive
what you bargained for, and you expect to receive it without any shenanigans.
That doesn't always happen. Some subscribers will have unexpected
circumstances that unfortunately delay or prevent them from paying you as they
agreed, and others who think it's their right or just way of life to beat
whoever happens to have the misfortune of doing business with them.
What should you be doing to help insure that you will end up with your
end of the bargain once you have fulfilled you end? Of course a proper
contract spelling out what you should be doing and what your subscriber is
going to pay for it is essential. Also important is the "legal" paragraph that
specifies what you are entitled to if the subscriber defaults, such as a
liquidated damage, acceleration of payments, equipment value, legal fees,
interest and costs, and the forum of your choice in which to litigate when
necessary.
However, none of the above is as important as knowing who you are doing
business with, and perhaps the fact that they know that you know who they are.
I can't tell you how many times one of our clients complains that we are
settling a case for far less than it should be worth, or give up trying to
collect anything, because the contract is made with a non entity, or an
individual who resides under an unknown rock someplace. If you do business
with and don't know who you are doing business with, don't expect to be able to
enforce your contract if that becomes necessary; and you have only yourself to
blame.
You need to know your subscriber. You need to know the proper corporate
name; you need to know the individual's name who signs the contract, and if on
behalf of a corporation, you need to know the person's authority to act on
behalf of that entity.
You should be getting tax identification numbers; social security
numbers; you should be getting bank account information and credit references.
I am giving some serious thought to adding a provision in the standard
contracts [for standard contracts see www.alarmcontracts.com] requiring a
charge card and the right to charge over due items, or credit card charges as
they become due. Though possibly unpopular, your subscribers might be amenable
to such payment option if they received a discount if the pay that way.
Even without the credit card option, knowing that you have their credit
information and their proper identification, and that you could possibly damage
their credit information, may dissuade a subscriber from defaulting.
CCTV Lease The recently designed CCTV contract deals with specific services available
with that type of service. The contract deals with on site camera viewing,
remote internet viewing and central station viewing upon activation. Data
storage is also an optional service.
Designed as a commercial lease, this contract is suitable for commercial
subscribers only. The lease covers the installation, service and monitoring.
There isn't anything particularly special about liability issues for
CCTV, though there may be different and hightened expectation with CCTV so that
your subscriber may look to hold you responsible for undetected burglarly or
even inventory shortage. The contract of course needs to make clear that there
is no liability and the tghe CCTV system, like all alarm systems, is intended
as a deterent and is not designed or represented to guarantee to prevent the
contingencies that it is designed to detect.
Those of you who want to continue using the Standard Sales contract for
CCTV followed by the Service Contract, can still use those contracts, but the
printed forms do not specify the services as they do in the CCTV lease.
I have been asked about a sales contract for the CCTV, but it's not
designed as yet. I thought the lease format would be more suitable for commercial
subscribers who would be the market for monitored CCTV. A sales contract will
have to include either a separate contract for service and monitoring, or
have options for those services in the sales contract. If there is sufficient
interest I will design the CCTV sales contract. The CCTV can be ordered on my
web site at www.alarmcontracts.com.
Employment Contract and the Disloyal Employee Most employers share a concern that employees may be disloyal.
Disloyalty of course spans a wide spectrum, from merely intentionally failing
to perform tasks, accepting benefits personally that rightfully belongs to the
employer, to dishonesty and theft. Disloyalty can also follow an employee who
leaves the employer's employment taking with him as much business as he can
along with what the employer considers proprietary and confidential
information. What then can an employer do to guard against this possibility?
First let's review what consequences a disloyal employee can expect. A
case just decided by the Second Circuit Federal Court of Appeals (which covers
NY) will likely be a pivotal decision. Federal courts apply what they believe
to be the law of the state as annunciated by the states highest court. This
court therefore found itself addressing what it believes is the law in New
York. The facts of the case [Phansalkar v Andersen Weinroth & Co., LP] need
not be reviewed. The court held that New York's faithless servant doctrine
requires an employee to forfeit all compensation received after his first
disloyal act.
New York's law regarding the disloyal or faithless employee is grounded
on the law of agency. An agent is obligated to be loyal to his employer and
prohibited from acting in any manner inconsistent with his agency or trust and
is at all times bound to exercise the utmost good faith and loyalty in the
performance of his duties. This covers salaried as well as commission
employees. The employer is entitled to return of salary, compensation or
commission paid, and it does not matter that the services were beneficial to
the employer or that the employer suffered no provable damages as a result of
the breach of fidelity by the agent employee.
New York's policy developed over a century ago. The first decision held
that a disloyal employee forfeits promised compensation only when the
misconduct and unfaithfulness substantially violates the contract of service
and permeates the employee's service in its most material and substantial
part. Disloyalty would not be substantial where it was a single act or where
the employer knew of or tolerated the behavior. Later a second standard
developed, where the agent employee was said to owe the highest good faith duty
to the employer, and if he acts adversely in any part of the transaction, or
omits to disclose any interest which would naturally influence his conduct in
dealing with the subject of the employment, it amounts to such fraud upon the
employer as to forfeit any right to compensation for services.
Thus, the Second Circuit concludes that New York maintains a strict rule
against limiting a faithless servants forfeiture, and misconduct by an employee
that rises to the level of a breach of duty of loyalty or good faith is
sufficient to warrant forfeiture. The law is clear that an employee is
prohibited from acting in any manner inconsistent with his agency or trust.
Absent an agreement from the employer, an employee who makes a profit or
receives a benefit in connection with transactions conducted by him on behalf
of his employer is under a duty to give such profit or benefit to his employer,
whether or not is was received by the employee in violation of his duty of
loyalty.
The is an exception to total forfeiture. Forfeiture may be limited to
the time of the disloyalty where compensation is apportioned, meaning that the
employee is paid on a task by task basis, commission basis, engaged in no
misconduct at all with respect to certain tasks, and the disloyalty with
respect to other tasks did not taint or interfere with the completion of the
tasks as to which the employee was loyal. In such case the disloyal employee
would forfeit only the compensation earned in connection with the specific task
as to which he was disloyal.
Things you should be doing as an employer. You should be using
employment contracts. I offer a standard form where you can fill in the duties
and compensation. The contract clearly spells out that the employee is not
permitted to compete or have outside business interests. The contract
identifies confidential and proprietary information and contains a restrictive
covenant, non compete agreement for both during and after employment.
Certainly all salespeople and key personnel should sign an employment
contract. The contract will serve to better define the employee's duties and
your expectations, and specify prohibited conduct, the violation of which would
be considered disloyal. You can order the contract from my web site at
www.alarmcontracts.com.
Regarding the enforcement of the restrictive non compete provision,
always an interesting topic, that is beyond the scope of this article.
However, the inclusion of such provision will give your employee, or
ex-employee, more than a moment of pause, before violating it, and courts will
generally enforce the provision to the extent of protecting the employer's
legitimate business interests.
Employment Law - age and sex discrimination New York Federal courts have the same standards for determining age of sex
discrimination in employment. Here's the standard:
New York Executive Law section 296 makes it an unlawful discriminatory
practice for an employer because of the age or sex of any individual to refuse
to hire or employ or to bar or to discharge from employment such individual or
to discriminate against such individual in compensation or in terms, conditions
or privileges of employment
A party alleging discrimination must demonstrate that he/she is a
member of the class protected by the statute, that he/she was discharged from
employment or barred from a position for which he/she was qualified or paid
less in such position and that his/her discharge, exclusion from employment or
receipt if of lower wages occurred under circumstances giving rise to an
inference of age or sex discrimination.
Once a plaintiff demonstrates by admissible evidence a prima facie case
of discrimination, the burden shifts to the employer to provide some
legitimate, nondiscriminatory reason for the plaintiff's rejection.
Late charges and penalties for delinquent payment My standard contracts don't include a
provision for late charges and Service contracts, service slips and completion certificates.
Alarm/security companies should understand the difference and significance
of service contracts, service slips and completion certificates. Each document
is designed to protected alarm companies from liability arising from claims for
losses suffered by subscribers. Most claims against alarm companies (and I
include security companies who install, monitor or service security equipment,
including fire, access control, CCTV and other security devices or services)
claim that the loss was caused or contributed to by the alarm company's breach
of contract, negligent design or installation of the system, monitoring or
service of the system. In order to rely on your contracts protective
provisions you must have a contract that specifically covers the alleged
conduct. Design and installation, and warranty work is covered by the sales
contract; monitoring by the monitoring contract (and you need your own
monitoring contract -- not the one supplied by the central station); service to
the system is covered by the service contract.
What, you don't have a service contract? Well, then, you don't have any
contractual provision that protects the service you provided. If the complaint
against you includes an allegation that your service was contrary to the
contract (a breach of the contract) or that you were negligent in your service,
then you will have to defend the action without benefit of a contract that
would have certainly protected you; perhaps saved your company or a good deal
of its assets.
A service contract covers all service that you will provide. My standard
form is designed so that you or the subscriber can select either a per call
relationship or one where the subscriber pays a recurring amount for service.
The contract is signed once and self renews.
The service slip I offer (and it's not on the order form and has to be
ordered separately by email or phone, is similar to the service contract but
covers only a single service visit or job. It is not ongoing. It's
application is therefore very limited and I do not prefer the service slip to
the service contract.
A completion certificate is not a substitute for either the service
contract or a service slip. Although the one I offer does have the exculpatory
clause on it, it is more of an acknowledgment by the subscriber that you were
there and that the alarm was fixed and working when you left. It's good
practice to use the completion certificate after every installation and every
service call, but it is not as comprehensive as a service contract.
Only the service contract will add value to your business, and only if you
select recurring revenue instead of the per call relationship.
No subscriber should refuse to sign a service contract, especially if you
offer the per call option. With that option the subscriber does not even have
to call you for service and can use another, but if you are called and do
provide the service, your service is governed by the service contract. You
would be foolish to provide service without a service contract.
exculpatory clause
The exculpatory clause remains one of the more popular protective
provisions in a properly worded alarm contract. This provision provides that
the alarm company is not liable for damage in the event of breach of contract
or negligence.
Judges, lawyers and subscribers have some difficulty with this provision
until it is explained and the rationale considered and understood. More
importantly, when explained that the provision is consistently enforced in all
states the provision is better accepted.
Exculpatory clauses made their appearance a long time ago and received some
notoriety when people started getting injured in Vic Tanny's gym, only to find
out that their membership privileges included an exculpatory clause. States
were quick to respond by enacting legislation outlawing such clauses in gym
contracts, and the legislation soon expanded the list of those prohibited from
using exculpatory clauses in their contracts. Fortunately that list does not
include alarm companies.
Many court decisions express the reality of the alarm company relationship
with the subscriber, recognizing that for a nominal sum the alarm company
provides a level of protection, but not insurance coverage. For that reason
courts accept the notion that alarm companies should not be liable for damages
arising from a loss that the alarm was intended to detect. To achieve that
result however the contract needs a properly drafted exculpatory provision.
The exculpatory clause is not full proof and other equally important
provisions need to be in your contract. Additionally the exculpatory clause
is not enforced in all situations, notably when gross negligence or fraud is
alleged. Enforcement and treatment varies state to state. If you're not sure
if your contract has the provision, or if you're not sure it's up to date,
check it out. Your business could depend on it.
Who should instruct the central station? Alarm Installers who rely on wholesale monitoring central stations to
provide monitoring service generally select the central station. Most if not
all communication is between the Installer and the central station, not between
the subscriber and the central station. It's not uncommon for the subscriber
not to even realize that the central station is separate from the Installer.
The central remains unknown even though the subscriber talks to an operator
when there is an alarm signal verification or notification.
The Installer, central station, subscriber relationship has only several
variations. 1) The subscriber has signed the Installer's monitoring contract
and the central station's three party contract (the best situation for
Installer and central station); 2) the subscriber has signed only the
Installer's monitoring contract (OK for the Installer and perhaps no protection
for the central station); 3) the subscriber has signed only the central
station's monitoring contract (OK for the central station and probably no help
to the Installer); 4) the subscriber has signed no contract (good for the
subscriber; the Installer and central station are obviously owned by idiots).
The contract or contracts signed by the subscriber should govern the
relationship between the subscriber and the Installer and the central station.
The contract will specify the alarm company's obligations, particularly what is
supposed to happen when an alarm condition is received, typically call the
police, fire, subscriber and sometimes the Installer. Most often the
instruction for response is provided for in the contract, so that the central
station has contact names and telephone numbers as well as any special
instructions, such as verification or no verification, or call only Installer
and not police or fire.
How are these instructions changed and who can change them? In almost all
cases the central station will take instruction from the Installer. After all,
it's the Installer who hired the central station, has other monitoring accounts
with the central station and pays the central station. But what right does the
central station have to take instructions from the Installer? Depending on the
contract terms that the subscriber has signed, the answer may be "none."
An Installer may call the central and change a code, or calling
instructions, or verification instructions, or call in testing, advising the
central not to respond to a signal. If the subscriber's contract does not
authorize the Installer to change monitoring instructions and procedures
without authorization from the subscriber then the Installer has no authority.
Since the central station does not want subscribers claiming that changes were
made unless the subscriber makes the change in writing the central station
contract most likely provides that no changes will be made unless in writing.
How does that contract provision reconcile with a telephone call from the
Installer or even a writing from the Installer? It doesn't. If the contract
requires a writing for the subscriber then that's what is necessary. If the
central station takes instruction from the Installer and those instruction make
a change that contributes to a subscriber's loss, then the central station and
the Installer face exposure.
The contract signed by the subscriber should appoint the Installer as the
subscriber's agent for purposes of dealing with the central station if that is
going to be the reality of the relationship. My three party central station
contract has had that provision for years. So does the Installer's monitoring
contract. www.alarmcontracts.com Make sure you have that provision in your
contract, assuming you have a contract.
Errors and Omissions Coverage-What's Covered? Hopefully you made the wise decision to obtain errors and omissions
insurance to cover you for claims arising out of your security services. This
coverage will provide defense cost and indemnity in the event a claim is made
against you for negligence or negligent breach of contract to provide the security
services you have contracted to provide. The coverage is not absolute however
and you should understand what you should be covered for, and what you will
not be covered for.
Lets start with what you will be covered for. You do the installation,
provide the service or monitoring. Your subscriber suffers a loss which the
security was intended to detect. Or, your employees cause some type of damage
while performing their work. Under these circumstances you should have
coverage.
What circumstances might not have coverage? You contract to provide
security and you thereafter decide not to perform at all; in other words, you
decide to breach the contract and not perform at all. This is not where you
forget to protect an opening, but where you decide not to do the job at all. You
will not have coverage for your breach of this contract.
You decide to solicit the subscribers of a competitor. You get a claim
letter or you get sued for intentional interference of contract, inducing
breach of contract or tortious interference of contract by the other security
company. You will not be covered for this claim or suit by your errors and
omissions carrier.
Be careful with your policy language. Coverage is triggered by an
"occurrence" that causes "property damage or bodily injury." Your errors and
omissions carrier needs to interpret that as including property loss which the
security was intended to detect (or protect). The established E&O carriers, such
as Cover X and the NBFAA risk group understands this. If your broker has you
with other insurers make sure its claims department understands that a burglary
loss will not have property damage or bodily injury, but you expect coverage.
Thanks to Bart Didden for suggesting this article.
Liability for Lawn Signs
Do you face any liability for putting a lawn sign in front of your
subscriber's house, and no actual alarm system?
When I was in high school, over 38 years ago, a father of my friend's
girlfriend had a little side business; he sold "electric alarm security"
stickers. He ran an ad in the NY Times and I think in Popular Mechanics
[or something like that]. My friend told me he made about $150 a week
selling these "fake" alarm stickers. They were green and I bet all you old
timers saw one. I don't know if someone still sells them. This reminds me
of lawn signs and no alarm.
The answer to the question seems simple. If the subscriber knows that
all it is buying is a sign and no alarm, then the subscriber would not be
able to sue you if there is a burglary. Sure, I can think of some
exceptions and twists.
One exception would be if you assured your subscriber that an actual
alarm served little purpose and the lawn sign would be just as effective.
Even though you might be able to find law enforcement officials who
actually believe that, we in the business know it's not true. Alarms may
have their limitations, but are worth the value of the installation and
service. Someone who buys only the lawn sign and nothing more, gets the
protection he paid for. Two signs, twice the protection.
What about visitors to the premises? Those who entered and stayed upon
the premises under the false impression that they were in a protected
area. After all, the police will be called, according to the sign. Though
you would claim that you sold the sign to the subscriber and there are no
third party beneficiaries to that agreement, the more likely facts are that
if you are selling just lawn signs you don't have a contract. I'm sure
someone could find a judge somewhere who would take the position that you
should have known that others would be at the premises and rely on the
false security of the impressive lawn sign. A judge who thinks like that
may not actually be that hard to find.
Well, I am done amusing myself, so here's what I really think. As a
security professional it would not be wise to sell just a lawn sign, just
like it would not be a good idea to leave obvious areas of the premises
unprotected, without clearly specifying in your contract exactly what areas
remain unprotected; especially if the areas would customarily be protected.
So if your subscriber doesn't want upstairs windows protected, the
garage door, or back door, you should be making note of that in your
contract. I don't believe it is necessary to specify what other and
additional equipment your subscriber has declined to purchase, since that
list could be endless, but points of protection that are not to be
protected should be identified.
So if you want to sell signs or stickers, you should use a contract and
specify the limits of your protection. If you're just in the sign or
sticker business, you no doubt don't use contracts, and probably don't need
to. But, as a security professional you are going to he held to a higher
standard than a guy who sells stickers through ads in Popular Mechanics [if
its still published]. As one reader of my emails pointed out, the lawn
sign is a great advertisement for your company, and if someone wants you to
place it on their property it might very well pay off in new leads and
sales.
Automatic renewal provision
Security contracts for monitoring, service and lease provide for
recurring revenue. Recurring revenue is the goal for alarm companies
because subscriber contracts can be sold based on a multiple of the
recurring revenue. Most often purchasers do not care what the remaining
term of the contract is since a properly drafted recurring revenue alarm
contract will contain a renewal provision.
The renewal provision provides that when the term of the contract is to
expire the contract will automatically continue for an additional term
unless canceled by one of the parties to the contract.
Though the contract may provide for automatic renewal and specify how a
subscriber can communicate an intention not to renew, you need to be
careful to determine if the jurisdiction that governs your contract permits
automatic renewal, and if so, whether you are required to give some notice
of the renewal.
My standard contracts with recurring revenue have the automatic
renewal. In New York the renewal provision is not effective unless a
separate written notice is sent to the subscriber advising of the automatic
renewal. Absent this notice, required by statute, the renewal is not
effective.
I will have my office perform a state by state search of laws that
effect the automatic renewal provision and post the statute or requirements
on my web site [like the leading cases and the three day notice of recision
is now posted]. Keep in mind that we will be searching for statewide laws
and you may have local ordinances that apply that we will not necessarily
find. You should check with your local attorney to determine if any laws
effect your automatic renewal provision. Be careful about the advice. You
are not asking what your attorney thinks is a good idea. You want to know
what the laws are and what you are required to comply with.
I will keep you posted as we add the requirements state by state. Any
of you aware of a statute in your state please let me know.
Automatic Renewal Clause Issue Is it time for the alarm industry to change the way it conducts its business? Long term planning is essential for all businesses. The alarm industry has long employed term contracts with automatic renewal clauses to perpetuate recurring revenue. While this business plan has worked well it is increasingly coming under legislative attack. Let's deal with the issue now. The alarm industry is different in several ways from other "home improvement" contractors, or other building trade contractors in the commercial setting. One laudable distinguishing factor is that you deal with security, an issue that has unfortunately become paramount in everyone's mind. But the less attractive aspect of the business is that it is terribly competitive. Unlike the typical home improvement contractor you can't figure a job with 100% profit. More likely you are concerned with how much you will lose on the installation. Your benefit comes from the long term relationship and the recurring revenue that you will receive. When you factor this in, you can actually make a good living and more importantly, develop a nest egg when you are ready to sell your business and retire. Recurring revenue generating contracts require the subscriber to make periodic payments, typically monthly or quarter annually. The contracts that call for recurring revenue are usually the commercial lease, monitoring contract and service contract. If you are just installing and not monitoring you are walking away from the recurring revenue; Same with service. If you have a "per call pay as you go" relationship you do not have the benefit of recurring revenue. We have seen the term of the contract increase. Long ago the typical term was 3 years. It is now common to see 5 years in consumer contracts and 10 or more in commercial leases, monitoring or service contracts. With automatic escalation or a provision allowing you to increase the charges, long term contracts become less risk for you. The automatic renewal provision has always been a staple in the recurring revenue alarm contracts. But the provision is coming under attack in legislation around the country. The time to deal with this legislative assault is now, not when you find your contracts invalidated, or worse consequences. If you go to my web site www.KirschenbaumEsq.com under Alarm Law Issues, you will see that we have posted legislation from several states. Our research has not found legislation in most states, but our search may not be complete, and it appears that this issue is receiving sufficient interest to put alarm companies in all states on alert. There appear to be two variations with laws affecting the automatic renewal clause. At least one state outlaws renewal completely. Others have strict requirements on what notice you need to give the subscriber. While at least one statute provides that violation of the notice will constitute deceptive trade practice, you run the risk that law enforcement or the courts will consider persistent violations a deceptive trade practice, opening you to all kinds of damages, financial and perhaps more. Your solution is easy to suggest, but perhaps difficult to digest. If your state permits the renewal clause but imposes notice requirements, you must comply with those requirements; not some of the time but all of the time. Compliance starts today, not next year. If you know you won't, don't want to, or can't comply, then you must change the contract to a month to month renewal. Even in those states where no renewal is permitted the damages for month to month will be less severe. The standard security contracts I offer to the trade will be updated immediately to provide for month to month renewal. I suggest that you take this time to upgrade your contracts with this change and others that have been made over the past year. Of course the best solution is to constantly re-sign your subscribers on new contracts before the original term expires. That practice will avoid renewal issues and it will ensure that your subscribers have the latest contract forms, provided you are keeping current on your contract upgrades [for contracts see http://www.alarmcontracts.com/]. The practice of upgrading your subscribers to new contracts makes more sense then you might think. Periodic visits to your subscribers will have tremendous benefit to you. Not only will you be renewing and strengthening your relationship with your subscriber, but you will have the opportunity to inspect the security system, suggest upgrades and increase your recurring revenue. Remember, your existing subscriber base is often your best opportunity for new business, through upgrades, new or different protection and referrals. If you have the burglar alarm system, why don't you also have the fire alarm? What about CCTV, and I don't mean the stand alone system that you install and walk away, but the one where you provide data storage and central station monitoring so that you can generate recurring revenue. If you don't suggest new and other systems to your subscribers they may not be aware of the availability of the systems, or they might not think you provide and service those systems. If you are aware of legislation involving the automatic renewal clause please let me know. Account Stated What is an accounted stated and what
consequences arise regarding the use
Disclaimer Notice Security companies have been asking for
disclaimer language in the Security Dealer Will recent cases affect the alarm industry No third party beneficiary clause A
properly drafted alarm contract contains a
provision that provides that there "are no third
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