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?
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.
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.
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
The latest contract modifications to the standard contracts [ Alarm
Contracts] (with recurring revenue -- which would be lease, monitoring and
service) included a change in the initial term. The term of the contract,
which years ago was typically 3 years, changed to 5 years well over 10 years
ago, and is
now 10 years. Of course there is also an increase provision and I have
retained the right of the alarm company to terminate or withdraw the increase if
the subscriber does not want to pay an increase.
Just a few weeks ago we got a decision on a collection
case that went to trial. We sought 80 percent of the balance of a 10 year
term (about 8 years left), pursuant to the liquidated damage clause, and 80% of
the stated value of the equipment, which was something like $3000.
There were other interesting issues in the case that the Judge had
to deal with, but the issue for this article is the enforcement of the term, the
liquidated damages and the equipment value.
The Judge gave the full amount calculated on the
liquidated damage clause on the 10 year term, plus legal fees of approximately
33% on that amount.
However the Judge gave nothing for the value of the equipment (we were seeking
80% of that amount also) because the Judge reasoned that if the customer had
paid for 10 years, as she was being charged in the judgment, then the equipment
would depreciate and have no value after that passage of time.
Though there was nothing in the record to support the
Judge's speculation of the declining equipment value, the enforcement of the 10
year term and the recovery of legal fees, made the award high enough.
The contract also has the automatic renewal clause, but
many companies are remise in sending out the required renewal notice. Will
subscribers sign a 10 year term contract? Well, several of our clients
have been using contract with that term for some time without issue. Your
ability to sell it will depend on
your marketing and sales pitch.
Restrictive Covenants in Buy/Sell Agreements
When you sell your business, or your subscriber accounts, you expect to be
asked by the buyer to sign a restrictive covenant that prevents you from
competing with the buyer. The scope of the restrictive covenant is defined
by
the terms of the agreement. I want to examine some of the characteristics
of
the restrictive covenant.
First, let me clear up a fundamental
misconception; restrictive covenants
are enforceable provided the terms are reasonable, necessary for the protection
of the buyer and not unduly burdensome for the seller. Thus, a buyer who
sells
a business local to one state will not generally be restricted from competing
in other states. If a buyer needs several years to establish itself and
cement
its relationship with its customers and in the industry, then a life time
restriction prohibiting the seller from re entering the industry is over kill
and won't be enforced. One except to this general rule, the seller can be
and
should be barred from dealing with the customers sold to the buyer, forever, or
at least as long as they remain customers and for a reasonable time
thereafter.
There are two aspects to the restrictive covenant that
need to be
considered: soliciting and servicing.
Be very careful how you word the restrictive covenant
since it will be
strictly construed, most narrowly, against you (if you are the one trying to
enforce it). Some agreements just restrict "soliciting"
subscribers. The
problem arises when the party under such restriction claims that he did not
"solicit," but that the subscriber contacted him; thus no violation of
the
restriction.
If the restriction precluded "servicing" then it would not
matter who did
the initial contact.
I have seen so many poorly worded buy out agreements
where the restrictive
covenant is inadequate to protect the buyer, or so obviously unenforceable due
to the onerous and unnecessary scope of the restriction. Often the
verbiage
goes on and on about how the seller is to be restricted as "an owner,
stockholder, partner, consultant, friend, employee -- on and on ad nausea."
Your rule of thumb should be to keep it simple. Seller, in any and all
capacity, should be precluded from soliciting and servicing all sold accounts,
forever, and from competing against the buyer in the limited area where the
seller use to be and where the buyer now intends to make its presence (if it
was not there before), and the time duration should be reasonable, which
criteria does change depending on the circumstances.
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.
My standard contracts [ Alarm Contracts ] contain the
following provision:
INDEMNITY: Lessee agrees to and shall indemnify and hold harmless Lessor, its
employees, agents and subcontractors, from and against all claims, lawsuits,
including those brought by third parties or Lessee, including reasonable
attorneys' fees, and losses asserted against and alleged to be caused by
Lessor's performance, negligent performance or failure to perform its
obligations under this agreement.
Though my paragraph containing the indemnity clause
contains more than just the above quoted language, the quoted language
constitutes the Indemnity Provision.
The provision is an important one because it offers the
opportunity to recoup a loss should a third party to the contract prevail
against the security company. Keep in mind that the contract is between the
security company and the subscriber. Arguably someone who has not signed the
contract would not be bound by the contract provisions, which typically will
include the exculpatory clause and other protective provisions. A perfect
example of a non party who might make a claim is a guest in a home which is
burglarized, or a tenant in a building where only the landlord is the
subscriber. Now I know that you are reading this and thinking that these third
parties can't prevail against the security company because they are not
'intended third party beneficiaries of the contract" between the security
company and its subscriber. That may be true, and most often is the case.
However, that may not prevent a claim or lawsuit from being brought, and there
could be any number of factual scenarios where a non contracting party can
establish liability against the security company. The indemnity provision
provides from reimbursement for the expense of defending claims and lawsuits, as
well as reimbursing for damages which the security company has to pay.
It is just this benefit to the security company that causes so many subscribers
to object to the provisions inclusion in the contract. Their argument is that
the provision exposes them to unforeseen damages since they cannot anticipate
who might seek to claim third party status and make a claim against the security
company. While accepting the other protective provisions in the contract which
clearly prevents them from making a successful claim against the security
company and also requires that they insure against the loses that the security
system is intended to detect, they object to the potentially limitless exposure
that the Indemnity Provision presents.
When this is the only barrier to making the sale I
typically agree to omit the Indemnity Provision from the contract. My standard
contracts contain sufficient other language to protect the security company, and
also makes it clear that the security company and the subscriber do not
recognize any "intended third party beneficiaries" of the contract.
Third party claims are rare; most claims or lawsuits are from the subscriber or
its insurance carrier suing in subrogation [which is different from a third
party claim], so the Indemnity provision is not often needed.
I will also more readily omit the provision when I know
that my client has proper errors and omission insurance. Since the security
company carries insurance that provides defense and damage coverage the
indemnity provision is not usually necessary for the protection of the security
company.
This brings us to the potential consequences of
omitting the provision. First and foremost, be certain that you do not vitiate
your errors and omissions coverage by deleting the Indemnity Provision. You need
to check with your broker or carrier. While most carriers require that you
produce a contract and represent that you use the contract in order to approve
you for underwriting, coverage of a claim may not be conditioned on your actual
use of the contract in the approved form; in other words, if you use the
contract in approved form most of the time you will have coverage when you need
it if the subscriber suing you has a contract with omitted or changed positions.
The removal of the Indemnity Provision should not be a clause that prevents your
coverage. One word of caution. Even if your carrier will not refuse to defend a
claim for modification of the approved contract terms there may be changes that
you make that would cause them to justifiably take that position, so consult
knowledgeable counsel or the carrier before making the changes.
Another consequence of omitting the Indemnity Provision
is that you may leave yourself exposed if the claim against you exceeds your
insurance coverage, or for the amount of your deductible, or if your carrier for
any reason does not provide coverage. But keep in mind that the Indemnity
Provision is only as good as the party providing the indemnity. If you have a
claim or lawsuit against you it is still your obligation to defend and pay the
damages, if any. Indemnity is reimbursement after you have incurred the expense.
If your subscriber is no longer in business or financially able to reimburse you
then the indemnity isn't worth the paper it's written on.
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?
Central Station UL certification
This is the second article in the central station selection consideration
series.
As a security dealer you have many choices in selecting a central station
to monitor your subscriber accounts. The type of security systems you
install and monitor may dictate the central station that you must turn to
for monitoring, though most systems can be monitored by any of the
hundreds of central stations that offer their services.
One of the first issues that you might want to consider is whether the
central station is UL certified. Underwriters Laboratories Inc. is an
independent company that sets standards for electrical and other systems,
including alarms, that are recognized by the insurance industry. You will
find that some of your subscribers require UL approved systems in order
to meet requirements established by their insurance company. The UL
approval may include the monitoring, i.e., certified central station
monitoring. This can be done only by a central station that is UL
certified.
The UL certification involves lots of standards, well beyond my expertise
and this article. However, for UL to approve a central station, or allow
it to issue UL certificates to subscribers, that central station must
meet certain minimal requirements, not only in the facility that the
central station is housed in, but the equipment it uses, the personnel it
employs, the number of personnel and their training, the central
station's ability to provide guard response within designated times and
methods as prescribed by UL, and other issues that UL monitors from time
to time.
Obviously not every central station is UL approved. Central stations run
the gamut of receiving equipment set up in someone's bedroom and
monitored by one person, to well manned operations that either do not
comply with UL or do not want to pay UL for its certification, to
operations that have the approval of UL to call themselves certified
central stations. Even UL certified has its qualifications, and limits.
In New York City for example, in order to monitor fire alarm systems a
central station not only has to be UL approved, but must also be approved
by the New York City Fire Department, and only a few companies are. I am
sure this same situation exists throughout the country. Additionally,
many municipalities have licensing requirements. While some of these may
be strictly revenue raising and require nothing more than the payment of
a fee, many impose operational requirements that not all central stations
can meet. You need to be sure that the central station you select is
permitted to operate in the areas where you install security.
It is not always the case that UL certified central stations provide the
best service. You may have your own ideas of what type of service you
want to provide to your subscribers, and perhaps only a local central
station operated by a one man show is willing to provide you with that
service. Or you may offer inexpensive monitoring to your subscribers and
find that a UL certified central station is too costly for you. If all of
your systems are non UL perhaps UL certified monitoring is
unnecessary.
When making
your selection of a central station there are
many factors that you will need to consider. UL certification is one of
them.
Central Station Pricing
This is the third article in the central station selection consideration
series.
The old adage, "you get what you pay for" undoubtedly holds true for
central station monitoring as well as in other situations. If you shop
around you will find that central stations provide their services for a
wide range of prices. Non UL burglar alarm monitoring without daily
reporting can range from less than $2 to over $6 a month. That's a wide
spread, especially if you have several hundred accounts.
Not all central stations can offer the all the services that you need,
such as fire, medical alert [personal emergency response], radio backup
or certified central station monitoring. Obviously you can expect to pay
more for these services, as well as any special reporting or response
instructions you may want that is in excess of what the central station
ordinarily provides.
More often than not the selection of the central station turns more on
personality between you and the central station representative, whether
it be the owner or a salesman, than it does on pricing. This is not
necessarily wrong, and in fact may be justified, since your comfort level
dealing with companies that service you, such as your selected central
station, is important. I think that pricing, while a consideration, is
perhaps the least important consideration, and certainly the other
considerations that I have suggested and will cover in this serious of
articles are far more important in my opinion.
Having said that however, which no doubt will endear me to my central
station clients, be keenly aware that your central station knows the
pricing of its competitors, and is sensitive that you are interested in
keeping your expenses down. Don't be shy about suggesting that perhaps a
discount is in order, or a special rate, for whatever reason you can
imagine.
Central Station Support for Dealers
This is the fifth article in the series on central station selection
considerations, and focuses on item 4, whether the central station
provides any type of support besides its monitoring service. A central
station located on the other side of the country may not be able to
provide some of the assistance or support that a local central station
can provide. On the other hand, a nationwide monitoring company may offer
the kind of support that you need and can't get from a local company. One
issue you should consider is what type of support are you likely to seek
from your central station.
A dealer can expect its central station to provide some or all of this
type of support, and this list is by no means all inclusive: keep the
dealer apprised of the local laws pertaining to alarm installations and
monitoring, and other laws effecting the dealer; newsletters with current
informative information; information on current and proper contracts [my
favorite of course]; information on errors and omissions insurance, as
well as discounts if you use the central station's insurance carrier;
technical support for installations; covering UL certificates; monitoring
fire or other special systems that the dealer is not licensed to monitor;
covering service calls; providing certain clerical services such as
invoicing subscribers for the dealer; newsletters directed to the
subscribers that promote services of the dealer; financial support;
available to purchase subscriber contracts when the dealer is ready to
sell.
I am sure I have left out services that a central station could provide,
and may have included items that no central station does provide.
However, as a dealer you need to consider what items are important to you
when selecting your central station. For you it may not be important that
the central station keep you up to date on new laws or offer to cover
your service calls in a pinch. For others service calls coverage may be a
life saver for the dealer. Perhaps the clerical service provided by a
central station saves the dealer the expense of an employee, maybe even
an office. Even if you are a dealer that believes himself totally self
sufficient and not in need of any of the support I mention above there is
no reason not to consider the possibility of such need in the future when
making you selection. Remember this is only one of the several items I
mentioned in the overall process of making your selection.
Central Station Contracts
This is the sixth article in the series on central station selection
considerations.
This article discusses the fifth consideration in selecting a central
station and deals with contractual issues.
Not all central stations use the same contracts, and in fact some may not
use any contracts. You should read and understand what your central
station s asking you to agree with.
First of all, let me comment on one of the more common misconceptions,
and that is the monitoring contract itself. A smart central station doing
third party wholesale monitoring would be wise to use three party
contracts, signed by the dealer, subscriber and the central station. This
monitoring contract is for the benefit of the central station, not the
dealer. Dealers who use the central station's monitoring contract as the
only monitoring contract are making a huge mistake, one that will cost
them significantly if there is a loss and when they go to sell their
subscriber accounts. Dealers need their own monitoring contract in
addition to whatever monitoring contract the central station requires.
The reason for this is that the central station's contract is designed to
protect the central station, rarely the dealer, usually have no monetary
provision, may not have a term provision, cannot be used by the dealer as
a salable and transferable contract, and I could go on and on. Dealers,
get your own monitoring contract [www.alarmcontracts.com].
You may also be asked to sign what I call an Installer Contract. This is
a contract between you and the central station. It might provide for what
rates you will be paying, the minimum number of accounts you need to
maintain, the minimum length of time you must leave some or all of your
accounts at the central station, and it may also contain some provisions
that you need to understand, such as an indemnity provision and a first
right of refusal if you want to sell your accounts. While I am not
necessarily adverse to such provisions I do think that a dealer should
understand what it is agreeing to, and the consequences. This should be
an important consideration when selecting a central station.
The indemnity provision is exactly what it sounds like, similar to the
one hopefully in your subscriber contracts; it obliges you to defend
actions against the central station and pay damages that the central
station incurs. It can be broadly worded, or narrowly tailored; it can be
full or partial; and it can cover counsel fees or not. If you do agree to
indemnify the central station make sure that your errors and omissions
insurance company will issue you an endorsement for contractual indemnity
covering that contract relationship. Using the same carrier as the
central station may help.
The right of first refusal is something you may give little thought to
until you try and sell your subscribers and find out that you can't, at
least until you give the central station the right to either match the
offer that you have, or, believe it or not, exercise its option to
purchase at some prearranged price or formula, which could be and
probably is much lower than the offer you have.
So as you can see, the contracts you will be asked to sign are another
important consider when selecting the central station.
Central Station and Insurance
This is the fourth article in the series on central station selection
considerations. Insurance; errors and omissions specifically. Why should
you care what insurance your central station carriers, or if in fact it
carries any insurance at all? Well, the answer is rather simple, when
both you and the central station get sued you are going to want to know
that your central station has sufficient coverage to respond to the
lawsuit and any damages that may be awarded.
Errors and omissions insurance provides coverage for losses arising from
the operation of the business, in this case monitoring service, and is
triggered by both an occurrence and damages within the scope of coverage.
While the insurance policy may contain familiar language that an
occurrence resulting in "property damage or loss" be sustained, in
alarm
and security insurance policies the occurrence is failure to detect or
property respond to the intended incident for which the alarm system is
intended to detect, and resulting loss to the property within the
premises. Thus a burglar alarm system is designed to detect a break in
and the loss of property is the items stolen [and not necessarily the
damage to the building where the break in occurred].
When a loss within the context of security alarm systems occurs, unless
the loss is easily reconstructed and the failure of the protection
identified, the subscriber is likely to sue for negligent design of the
system, installation, service and monitoring. Obviously the subscriber
will be suing the central station and the dealer, both of whom are
involved in one of more of the four elements of the system {design,
installation, service, monitoring]. While you will certainly be
responding to the first three elements the central station will have to
account for the monitoring.
There is much to be said for using a central station that has a policy
from the same insurance carrier as you. If you both have the same carrier
and the loss is within the policy limits of the policies then it is
unlikely that the attorneys hired by the carrier will be looking to you,
and your attorney looking to the central station. [the carrier may want
to hire two attorneys, one for you and one for the central station,
though I have counseled carriers that this practice is unnecessary in
many situations, especially when I am the assigned counsel]. That sort of
in fighting is only good for the plaintiff in the action who can sit back
and wait for you and the central station to finish blaming each other and
making the plaintiff's case for it.
One thing you can take comfort in is that your insurance carrier cannot
sue you, and it won't even try. So if you and the central station have
the same carrier that carrier will try and have a united front defending
the lawsuit, which is the way it should be.
Some carrier's may be willing to give you a discount if you and the
central station both have policies with it. That is something worth
looking into.
Of course in the event of a catastrophic loss you want to be sure that
the central station has sufficient insurance. In this industry there is
never enough, but you know the type of accounts you have the potential
for exposure.
Don't be shy about asking for insurance coverage information from the
central station, and be sure to ask if it can arrange a discount for you
if you use the same carrier.
Police Response - Contractual Obligations
Recently there was a spirited exchange of ideas regarding alarm systems and
police response. [if you are not getting my emails then email me at
Kenesq050@aol.com) and ask to be added to the list]. The comments ranged from
those sympathetic to police criticisms of false alarms caused by shoddy alarm
companies to those who thought the there was not problem except lazy police
misrepresenting what actually constituted a false alarm. Whatever the alarm
industry's contention however, one thing we all can probably agree upon is
that more and more police departments are doing all they can to avoid police
response to alarm systems.
How announced policies of no police response to certain types of alarms or all
alarms will effect the alarm industry remains to be seen. Again the alarm
industry is not uniform in their opinions. Some see non police response as the
beginning of the end for the alarm industry, and other see it as a great
opportunity to install more equipment and provide additional services such as
guard response.
For those alarm companies providing alarm monitoring service, threats to or
changes in police response policy, there is an immediate need to examine their
relationship and responsibility with their subscribers.
Obviously alarm systems, and alarm monitoring specifically, contemplate some
response when the alarm detects what it is designed to detect, i.e.,
unauthorized entry, smoke, fire, etc. Alarm systems may be more difficult to
sell, or command less money (if that's possible - is anyone paying a
subscriber to install a system yet?) if potential subscribers believe that
municipal response is not available, and existing subscribers who come to
believe that municipal response, fire or police, may decide that the system is
no longer worthwhile or that they are paying far too much for the new limited
service and benefit.
If you don't have a contract with the subscriber then what happens when police
response is permanently terminated is anyone's guess. If however you have a
contract that deals with and addresses that contingency then its the
contractual agreement that governs the situation.
My standard monitoring contract clearly provide that police or municipal
response is beyond the control of the alarm company. Also, in the event police
response is terminated the subscriber remains liable for all payments for the
entire term of the contract. There is no reason this provision should not be
enforced by the court. If you don't have this provision then I suggest that
you get it and put it into your contract.
Sales Contracts
It's surprising how many alarm company owners don't
appreciate the need for a
proper sales contract. Questions that you have regarding what you are supposed
to do and what rights you have under certain circumstances are almost always
governed by your contract. Your obligations and rights in connection with the
sale, design and installation of the alarm system should be covered by the
sales contract.
There are typically two principal issues regarding the sale. First, you want
to be sure you will be paid, and second, you want to be sure your subscriber
can't sue you and win.
Let's start with what is absolutely not acceptable. A proposal. I don't care
if the proposal is a form proposal that you purchased, or a letter proposal
that you put together. Most "proposals" are written in such a way that it
calls for the subscriber to sign an approval on the proposal, and as soon as
that is done, the proposal becomes the sales contract.
If you insist on using a proposal then it should state on its face that "this
proposal is subject to subscriber signing alarm company's standard sales
contract." Also, there is no need for the proposal to call for the
subscriber's signature on the proposal. The proposal is your offer to enter
into a formal contract and the only way for a subscriber to accept that offer
is by signing your formal sales contract.
You don't have a formal sales contract? Well, get one; right now. If you are
doing sales you need a sales contract. Only the sales contract will cover the
design and installation of the system. It will provide for collection issues
if you're not paid. It will contain protective provisions in the event your
subscriber suffers a loss related to what the alarm was intended to detect
against.
If your subscriber does suffer a loss, unless the failure of the alarm company
is easily determined (such as failure to call police when signal received) the
complaint against you is likely to claim defective design and installation as
part of the negligence. Only the sales contract will cover that. The
monitoring contract and service contract will not cover the design and
installation.
You need protection for all the services you provide. Sales, monitoring and
service are 3 separate relationships you have with the subscriber, and you
need 3 separate contracts. You can get them at www.alarmcontracts.com. Visit
my website at www.kirschenbaumesq.com for previously published Legal Side
articles.
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.