United States: Software Deliverables And Damage Provisions Must Be In Agreement

Richard Raysman is a Partner in Holland & Knight's New York office

Elliot Magruder is an Attorney in Holland & Knight's New York office

A treatise on "The Language of the Law" introduced its approach to contract law with the following maxim: "The law is a profession of words." Accordingly, one of a court's most frequent tasks is interpreting ambiguous contracts created by the use of ambiguous language in contracts; however, by the time a court is deciding the issue, costly litigation may have taken years. In a recent case, parties to a software development and license agreement confronted this unfortunate truth, and both left unsatisfied. See Apacheta Corp. v. Lincare, Inc., No. 16-2030, 2017 WL 5901085 (E.D. Pa. Nov. 30, 2017).

Facts and Procedural Background

Plaintiff Apacheta Corp. develops software and it executed a multi-stage development agreement with Defendant Lincare, Inc. Lincare hired Apacheta in part to develop software that would integrate Lincare's medical equipment system "Active Directory." The first phase involved a development collaboration, and upon approval of Lincare, would transition into the second phase wherein Apacheta would license the software to Lincare. There was a three year initial term and the agreement included an integration provision, as well as a mutual right-to-cure in the event of a purported breach. The agreement also included a "Statement of Work" (SOW) outlining the framework for the software. The SOW in turn had a list of features to be incorporated into the software.

Development began in January 2015 Leadership issues at Lincare caused delays in the project and it also started raising concerns about the software's specifications and conformity. Lincare was particularly concerned with the absence in the proposed software of certain components (the "Contested Elements"). Apacheta disputed that the agreement required the inclusion of the Contested Elements.

In October 2015, Apacheta delivered (without the Contested Elements): (1) a list of functional specifications that claimed to delineate the final scope of the software; and (2) a set of "acceptance criteria" supposedly required by the agreement to be used if and when Lincare tested the software. Lincare rejected the proposed "acceptance criteria" and reaffirmed its issues with the absence of the Contested Elements. After no further discussions, Lincare terminated the agreement.

Apacheta sued for breach of contract in claiming that the termination violated the right-to-cure provision because Lincare neither provided notice of breach nor a cure period. Apacheta also moved for partial summary judgment as to damages in the amount of $2.25 million based on the forecasted software licensing fee over the three-year initial term. Lincare cross-moved for summary judgment on grounds that it was not in breach and could not be liable for damages.

Legal Analysis and Conclusions

The court concluded that the agreement was ambiguous because it was unclear: (1) whether Apacheta was required to provide the Contested Elements; and (2) what damages would be awarded if Lincare had breached. The agreement's meaning became a question of fact precluding summary judgment.

First, the court evaluated whether Lincare had violated the right-to-cure provision, which can be ignored if "there is a material breach of the contract so serious that it goes directly to the heart and essence of the contract, rendering the breach incurable." See LJL Transp., Inc. v. Pilot Air Freight Corp., 962 A.2d 639, 641 (Pa. 2009).

Lincare argued that Apacheta's concession that the software could not integrate with Lincare's "Active Directory" rendered the breach incurable. Apacheta countered that the agreement did not mandate the Contested Elements and noted that the SOW section of the agreement omitted any reference to the Contested Elements. Lincare claimed the agreement concerning the software's "technical aspects" was irrelevant. Analogizing it to a "design and build contract," in which the written agreement serves to provide an overarching structure of the project, with the details inserted later, Lincare argued that the Contested Elements were vital technical elements of the proposed software; in other words, the "heart and essence" of the agreement.

The court held that the agreement was ambiguous with respect to the inclusion of the Contested Elements into the software. The court concluded that: (1) the agreement and SOW did not indicate (by definition or otherwise) whether the Contested Elements were listed in the SOW; (2) deposition testimony conflicted on the presence of the Contested Elements in in the SOW; and (3) the parties' course of conduct suggested ambiguity insofar as it related to if Apacheta had submitted acceptable software, and if not, the protocol Lincare had to follow to address the alleged deficiency. Consequently, the court denied both motions and directed a factual determination as to whether the Contested Elements were part of the contract.

Second, the court held that the agreement was also ambiguous as to Apacheta's hypothetical damage award and denied Apacheta's motion for partial summary judgment. The agreement was silent as to what fee Lincare would pay to license the software and did not establish a deadline for completion and acceptance of the software, raising questions as to at when in the agreement the license fee would apply. As such, the agreement was ambiguous "because nothing in the contract explains how the payment amounts were to be determined." A four day bench trial concluded on January 11, 2018 and any subsequent order remains pending.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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