Even Best Contracts May Not Be Ironclad
There is a very important legal issue presented in a case involving ADT that is surfacing elsewhere around the country: duty independent from the contract. The general rule is that failure to perform a contractual duty, or performing it poorly, supports a breach of contract claim, not a tort claim. If limited to breach of contract then the contract terms govern, and in the alarm industry cases the protective provisions insulate the alarm company from liability. Here are the particulars of the ADT case.
ADT installed a burglar and fire alarm system in a New York residence in 2004, with communication over telephone line service. In October 2008 the subscriber notified ADT after seeing an “error message” on the keypad. Between Oct. 19 and Feb. 22, 2009 ADT did not receive any test signals from the subscriber’s premises. ADT did not inspect, repair or service the alarm system. On Feb. 22, 2009 there was a fire in the residence and no signal was sent from the alarm system to ADT’s monitoring center.
It was determined that telephone service had been disconnected. Damages were close to $2 million. The subscriber’s homeowner’s insurer paid and commenced a subrogation action against ADT and the telephone service provider. The action alleged breach of duty to inspect and repair the system, gross negligence, breach of warranty, and breach of contract.
ADT moved for summary judgment based on its contract with the subscriber, which contained a waiver of subrogation clause. The plaintiff (subscriber’s insurer) conceded that the waiver of subrogation was enforceable against the breach of contract and warranty claims, but argued it did not apply to the tort claims. The tort claim theories included “a duty of reasonable care” independent of the contract and gross negligence, and further argued public policy prohibited enforcement of the waiver of subrogation if there was gross negligence. The court rejected the arguments and dismissed the complaint against ADT. Good job.
Unfortunately (for the alarm industry), there are exceptions to the general rule discussed at the outset. In other words, there are times when alarm companies owe a duty beyond the confines of the contract — extra contractual duties. Failure to properly perform these extra contractual duties gives rise to a tort claim. Thus, failure to perform an extra contractual duty is negligence, a tort claim.
One seminal case is Sommer vs. Federal Signal. The alarm firm was found to owe an extra contractual duty because it was franchised and regulated by New York City to monitor fire alarm systems, and the fire department regulations were a comprehensive scheme of New York City fire safety regulations. I was concerned the case would open a floodgate of successful litigation against the alarm industry. The same court that decided Sommer has expressed that finding an alarm company liable in tort for negligent nonperformance of extra contractual duties should be found only in rare cases where public interest is implicated.
In the ADT case, the court decided the provider did not have any special relationship with a city where it was required to do anything in particular with the fire alarm system. Thus, ADT’s obligations regarding the installation, service and monitoring of the alarm system was limited to the contract between the alarm company and its subscriber. One final argument by the plaintiff against ADT was that the waiver of subrogation was prohibited when gross negligence is found. The court noted that while an exculpatory clause is not enforceable if there is gross negligence (willful misconduct), as a matter of public policy the waiver of subrogation does not seek to exempt a party from liability but require one of the parties to contract to provide insurance for all of the parties. The waiver of subrogation clause was enforced. The ADT case is a great win for the industry.
Ken Kirschenbaum has been a recognized counsel to the alarm industry for 35 years and is principal of Kirschenbaum & Kirschenbaum, P.C. (www.kirschenbaumesq.com). His team of attorneys, which includes daughter Jennifer, specialize in transactional, defense litigation, regulatory compliance and collection matters. The opinions expressed in this column are not necessarily those of SSI, and not intended as legal advice.
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