
why 80% liquidated damage provision / 4 days left for contract sale
January 8, 2019

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why 80% liquidated damage provision
            I understand why the liquidated damage clause is in the contracts and I agree with the formula. My question is why does the liquidated damages apply to the equipment when the equipment value is agreed to in the contract. Can you please explain the thought process behind that.
            Alarm contracts generally have a term of years for monitoring, service and inspection; sometimes lease.  Payment is required monthly or some other periodic time frame.  The payment for the continuing services over the term of the contract is referred to as RMR, recurring monthly revenue [no matter how its billed, so that annual billing is still referred to at RMR].  Alarm companies expect to make their profit over the life of the contract and that profit is challenged or not realized if the subscriber breaches the contract.  Upon breach the alarm company can discontinue services and demand payment for the balance of the contract.  Since the alarm company is no longer providing its services it would be unjust to require the subscriber to pay the full balance of the contract.  In contract disputes a non-breaching party would be entitled to recover its lost profit, defined as the amount charged less the amount required to fulfill the contract.  Because it is difficult if not impossible to establish an alarm company's lost profit it's appropriate to use a Liquidated Damage provision.  The Standard Form Agreements use 80% of the balance, which is another way of saying that the balance of contract is reduced 20%. There is no magic to the 80%, you could use less and maybe more.  
            Not all alarm companies sell the equipment.  In the Commercial All in One Lease [or the residential version] the equipment is the property of the alarm company and never becomes property of the subscriber unless the alarm company sells the equipment.  The All in One provides that upon breach of the contract the alarm company has the option to remove the equipment or sell the equipment to the subscriber for an agreed upon price which is set forth in the Lease. 
            You question is, why does that provision provide that the alarm company only recover 80% of the agreed price rather than the total agreed price?  The same analysis as above applies.  New equipment is likely worth more than old equipment; equipment depreciates.  If an alarm company has the right to recover its equipment but would prefer to sell the equipment, the alarm company would be compelled to prove the value of the equipment at the time it wants to recover the equipment, not the equipment cost when it was installed.  Again, since establishing such value would be difficult or impossible with certainty, the parties can agree on Liquidated Damages.  As long as the Liquidated Damages are reasonable and not shockingly unconscionable, courts will enforce the Liquidated Damage clause.  There should be some consideration for depreciation so using the liquidated damage clause makes the demand for the agreed value, less 20%, more acceptable.  
            You will also find the Liquidated Damage provision in the Residential All in One where the installation and equipment value is waived provided the subscriber complete the contract term.  There however the straight 80% isn't used. Instead the equipment is valued prorata over the life of the contract, but the starting point is the agreed value of the equipment. 
            Keep in mind that you don't have to seek the value of the equipment, you could demand removal, as some companies do.  In the Standard Form Agreement you have the option. 

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
516 747 6700