Was it Recklessness or Intentional Misconduct?

An interesting case recently arose in the United States District Court in Connecticut. The plaintiff, who operated a manufacturing facility, hired an alarm company to provide security and surveillance services at the plant and two other facilities.

The parties allegedly executed a service agreement governing the services the alarm company was hired to provide, including a surveillance camera system that notifies human operators when it detects suspicious activity. The plaintiff alleged in its complaint the alarm company can disarm the system in which case the surveillance cameras would register activity but would not activate an alarm or notify human operators of suspicious activity.

The agreement allegedly required the alarm company to “comply with any requirements and policies provided by (plaintiff) in connection with the agreement.”  In accordance with its provisions, the plaintiff allegedly instructed the alarm company that they must obtain approval from two specific plaintiff employees before disabling the security systems.

A theft allegedly occurred on the day in question documented in the complaint. Prior to the theft earlier that day, the surveillance system allegedly produced two false alarms — purportedly a frequent occurrence at the premises. According to the complaint, the alarm company “apparently wanted to avoid having to deal with” these false alarms and so decided to disarm the system.

The plaintiff alleged the alarm company failed to obtain the required approvals from the designated employees before disarming the system. The thieves were caught on the surveillance cameras, but the disarmed system did not trigger an alert. The plaintiff filed the complaint asserting claims for breach of contract, common law recklessness, fraudulent and negligent representation, and violation of the Connecticut Unfair Trade Practices Act (CUTPA).

The alarm company filed a motion to dismiss, arguing that the parties’ contract bars recovery for the plaintiff’s losses.

The agreement entered into between the parties contained a limitation of liability provision.  The provision, among other things, provided that “ …if service provider or any person or entity affiliated with service provider is determined to be liable for any loss due to a system failure event in any respect, their liability shall be strictly limited to $50,000 per claim, and $500,000 aggregate for all claims, as the agreed upon damages and not as a penalty.”

The court indicated that under Connecticut law a breach of contract claim has four elements:

• The formation of an agreement
• Performance by one party
• Breach of the agreement by the other party
• Damages

The court pointed out that the agreement provided that the alarm company “shall not be liable for any losses arising directly or indirectly from any system failure events.” In determining whether this provision precludes the alarm company’s liability, the court indicated that it must identify the meaning of the term, “system failure events.”

In discussing the matter, the court indicated that the meaning of the term absolves the alarm company of liability for “any losses arising directly or indirectly from any system failure events.”

Notwithstanding, the court pointed out a subsequent paragraph in the agreement which states that “the foregoing limitation of liability shall not apply” if the losses are caused directly by the alarm company’s “sole or gross negligence, or intentional misconduct.”

The court indicated that it must determine whether the plaintiff has alleged at least reckless misconduct. The court then pointed out that despite its knowledge of this serious danger, the alarm company made the deliberate decision to disarm plaintiffs alarm system. It did so without informing the plaintiff and in violation of the plaintiff’s instruction that the alarm company must obtain approval from designated employees before disarming the system.

Accordingly, because the limitation of liability provision is enforceable — except as the claims for recklessness or intentional misconduct and because the plaintiff has plausibly alleged that the alarm company’s conduct was at least reckless — the court denied the alarm company’s motion to dismiss the plaintiff’s breach of contract claim.

As a final point, the alarm company’s motion to dismiss was granted with respect to fraudulent and negligent misrepresentation claims and denied as to the claims for breach of contract, recklessness and violation of the CUTP and as to the request for punitive damages.