The Seven Deadly Sins of alarm contracts (and how to avoid them).

file000675840112In my job, I have the pleasure, and unfortunately sometimes pain, of reviewing alarm sales and monitoring contracts for litigation, potential acquisitions, and revisions to contracts. Here are seven mistakes I see most often.

1. Contracts that are not assignable.

Do you want to sell your business someday? Whoever buys it will likely want to take over without having to get every one of your customers to sign a new contract. The buyer will be able to do this if you can assign your existing contract. An “assignment” is when one party to a contract gives the contract’s obligations and benefits to another person. To make sure that you, but not your customer, can assign your contact, it should say something like this:

Assignment. Customer cannot assign this Agreement without Alarm Company’s prior written consent. Alarm Company may assign this Agreement or any of its obligations under this Agreement without notice to Customer.

I have seen contracts that—because of sloppy legal drafting—do not allow an assignment. One agreement that I looked at recently had a clause that allowed for assignments, but also had a blanket provision stating the agreement was not transferrable. That was enough to make the potential buyer walk away.

2. Contracts that have typos.

Typos are the bane of any writer’s existence. They can happen to anyone. But they can mean the death knell to your contract. As an example, I recently looked at a contract that was riddled with typos, including one in the limitation of liability section.

… Customer agrees to indemnify, defend and hold Alarm Company harmless
form (there’s the typo: “form” should be “from”) any and all claims ad lawsuits …

It might look innocuous, and a court would probably still enforce this provision because the intent is obvious. But, in the worst case, typos could ruin the intent of the contract and make it unenforceable. Do you really want to take that chance?

Moreover, having typos in your contract gives the impression that your company is sloppy. If a document that is vital to your business is sloppy, you will also have an uphill battle to convince a potential buyer, a court, or a jury that your sales practices, installations, and service are not sloppy, too.

3. Contracts that are stuck in the dark ages of technology.

Have you been to any security-industry trade shows recently? The amount of new technology is staggering. Indeed, over the past decade the industry has transformed because of all the new electronic aspects of security. If you have been in business a while and you have not updated your contract, it may be stuck in the dark ages of technology when all you had to worry about was the POTS line and some hard-wired components.

These days, depending on your business and what components you sell, you may need to include in your contract provisions related to Internet and cellular data transmission, data storage and corruption, privacy (especially if you offer cameras), password privacy and theft (especially for smart phone or internet access).

4. Contracts that fail to comply with home solicitation cancellation laws.

There are federal and state laws that govern home solicitation sales. These laws dictate that you must give your customer at least three days in which to walk away from any sale that was made in their home (and in some states by telephone). These laws include wording that must be in your contract—giving notice of this right to cancel. The wording must be in a certain place in the contract, and in a certain font size—typically by the customer’s signature in at least 10-point font. In addition, these laws require that the home solicitation customer be given a hand-out, separate from the contract, with this information

If you do not follow these laws, your customer may be able to get out of the contract altogether at a later date. This would make your limitations of liability and damages meaningless.

5. Contracts that hide important provisions.

Unfortunately, in many jurisdictions the days of courts upholding contractual provisions limiting an alarm company’s liability and damages without a second thought are waning. You may recall that last year I wrote about the Georgia Supreme Court case Monitronics v. Veasley, where the Georgia Court of Appeals found that Monitronics’ limitation of liability clause was unenforceable because it was not explicit, prominent, clear and unambiguous. The court explained what was wrong with the contract:

[T]he limitation of liability clause is found on the back of the one-page, two-sided contract …which is titled ‘DAMAGES.’ And rather than being set off in its own paragraph–or even its own subparagraph–the $250 limitation appears toward the end of the second long subsection (e), after a nearly equally long sentence discussing the liability of police or fire departments, and it is far removed from the paragraph 5 title indicating the subject matter of the paragraph. In addition, while the sentence indicating that Monitronics is not liable for incidental or consequential damages is in capitalized typeface, neither the $250 limitation nor the fact that it applies to acts of negligence is capitalized or set off in any unique or prominent way. To the contrary, this important language is written in the same small, single-spaced typeface as the majority of the contract.

In other words, the important provisions protecting the alarm company were hidden in small font, on the second page, under a heading that did not give a hint about the provisions. Don’t make these mistakes.

Another case that everyone is talking about is Jaquez v. Protection One Alarm Monitoring in California. In that case, the plaintiff Sean Jacquez, an attorney, claimed he did not receive the second page to his monitoring agreement and, therefore, was not aware of the cancellation and renewal provisions. The case was initially dismissed, but then was reinstated on appeal because the court found:

“Based on the record before us, Jaquez…had no reasonable opportunity to learn the essential terms of the document he signed as a result of Protection One’s purported failure to provide him with the second page of the agreement. Although the agreement warns a potential customer that he may be charged a cancellation fee, that statement alone would not have informed a reasonable person that he would be charged an early termination fee, much less one for $750 or the remaining amount due under the agreement. Jaquez was not negligent in failing to take additional steps to ascertain what may be charged as an early termination fee. While the law is clear that a consumer is generally not excused from reading a contract, Protection One has provided no legal authority for the proposition that a consumer is obligated to question and investigate any provisions which merely allude to a potential fee.”

The allegations in Jaquez are different from Veasley—it is not that the terms were hidden in small font, etc., but that they were hidden entirely by failure to give the customer both pages of the contract. Other than the obvious lesson to make sure you give your customer all pages of the contract, there are some perhaps less obvious contract-drafting lessons to be learned from Jaquez: include pages number on your contract—“page 1 of 2,” etc.; have the customer initial the pages on which the customer does not sign; and indicate on the first page that the agreement has x number of pages and that by signing the customer agrees that he/she has read and received all pages.

6. Contracts without subrogation waivers.

A subrogation waiver is a provision that states that the alarm company will not be liable for any claims arising from hazards covered by the customer’s insurance.

As I have written before, many lawsuits against alarm companies are subrogation lawsuits brought by insurance companies. For example, if an insurer pays for a homeowner’s claim on a house fire, it may then sue the alarm company claiming the alarm did not timely notify the homeowner of the fire. If your company’s contract has a subrogation waiver, you have agreed with the customer in advance that the insurer cannot bring such a claim. There are exceptions to this provision’s enforcement but it is wise to make sure your contract includes this provision because it is enforceable, under the right circumstances, in many jurisdictions.

7. Contracts that are not updated to reflect the ever-changing legal landscape.

Your contract should be a living document—ever changing as new
information comes to light on best practices, whether from new laws, court
decisions, or shared wisdom in the industry. While it is tempting to get a
contract and forget it, do not do that. Just like technology, the law affecting your contracts changes. You should have an attorney who is familiar with the industry, and who stays abreast on the legal happenings in the industry, review your contracts regularly.