Update (January 29, 2013): Closely related to the challenges businesses face in deals involving complex computer systems, discussed below (scope of work, budgeting, feasibility, and dispute resolution), is the litigator’s nightmare of “e-discovery.”
400 gigabytes balloons to a terabyte. A five week project stretches for months. More than two years ago Plaintiff RTI brought a lawsuit against Defendant Data International, claiming “in excess of $1 million” in damages “increasingly monthly” (represented by John Cotter of the Bloomington, Minnesota law firm of Larkin Hoffman).
Paradoxically, the Plaintiff RTI might hope its damages are “well in excess” of $1 million (or that it has some kind of right to claim its attorneys’ fees). Otherwise, this might be one more case of too many in the unenviable status of “upside down,” where the eventual recovery does not pay for the cost it took to get it.
Original post (January 24, 2013): The subject line of this post is a fairly old joke and the punch line is, “Used car sellers KNOW when they’re lying…” The joke is, of course, cynical and unfair to used car sellers, or alternately, insufficiently cynical and unfair to sellers of computer systems. As with many cynical and unfair jokes, maybe there is a hint of truth to some of us that causes a chuckle of bitter recognition.
The fact is that computer systems and software are extremely complex. The world now runs on them, which means all businesses run on them, which means that disputes between buyers and sellers are now a prominent presence in U.S. civil litigation and there will be more to come. What is a computer systems seller to do about it?
In a well-reasoned decision this past week by U.S. District Court Judge Susan R. Nelson (D. Minn.), it is clear that Fair Isaac, a Minnesota-based company (but not for long), in its “business rules management system” relies on a comprehensive and robust contract making clear what it proposes to do (scope of work or SOW) and what is outside that scope. The contract also includes a “merger clause,” which is a common clause in contracts by which contracting parties seek to include all agreed upon terms in a single document and to exclude any terms that are not set out in the document.
Merger clauses can be extremely important in any complex contract because these are often the subject of lengthy discussion and negotiation. Many terms are discussed and agreed to but do not make into into the final contract. Memories may differ as to what was discussed and supposedly promised.
Courts’ rigid enforcement of merger clauses, on the other hand, could enable terrible injustice or perhaps outright fraud in cases where a party knowingly over-promises, urges execution of a contract with a merger clause hoping to trick the other side For obvious reasons, courts, confronted with these facts will allow claims to go forward regardless of the merger clause.
So, in the end, the challenge for courts is when to enforce a merger clause and when not to. Judge Nelson did not uphold Fair Isaac’s in the face of a challenge by Royal Caribbean but still ended up in Fair Isaac’s favor. Perhaps most importantly, Judge Nelson points out that
where the contract disclaims reliance on a specific representation, as opposed to a boilerplate disclaimer, parol evidence will not be permitted to support a claim or defense that a party was defrauded into entering the contract in reliance on the parol representations.
While the parties here are sophisticated business entities, represented by counsel, the specificity of the disclaimer provision is the “touchstone” to the Court’s determination of whether a fraudulent inducement claim may be dismissed based on the existence of an integration and merger clause. … As such specificity has not been demonstrated here, the Court construes the integration and merger clause and warranty clause of the Software Agreement as too non-specific to determine as a matter of law that Royal Caribbean’s fraudulent inducement counterclaim must be dismissed.
But Fair Isaac was able to prevail in its efforts to get RC’s counterclaims with prejudice dismissed regardless.
Given the level of business sophistication of the parties and the fact that the alleged misrepresentations are contradicted by the terms of the contract, any reliance that Royal Caribbean placed on Plaintiff’s representations is unreasonable as a matter of law.
Apparently the detail of Fair Isaac’s contract was sufficient so that, even without recourse to the merger clause, what it offered (and what it did not) was so clearly set out that its customer simply could not argue otherwise.