October 1990
One of the most difficult legal problems for vendors of computer systems, ranging from manufacturers to VARs and OEMs, is balancing the degree of specificity they must agree to in setting functional specifications, with the common disclaimers of warranties. A case recently decided by the Massachusetts Appeals Court illustrates just how careful vendors must be to avoid liability for breaching warranties they sought to avoid making.
Arthur D. Little Systems, Inc. (“ADLS”), entered into a contract to provide a “turnkey” computer system that would provide basic accounting and inventory control to USM Corporation. The first phase of a multi-phase contract required ADLS to provide detailed, written specifications for the system. The specifications “estimated,” based on “available data,” that the system would have a response time of 2 seconds per field 92% of the time, and 3 seconds per field 98% of the time. The document also described a response time of 8-9 seconds as being the “worst case.”
The performance of the system delivered by ADLS, which originally had been intended to support 14 active terminals, fell far short of even the worst case. It yielded a response time of 10 seconds with one terminal active and 30 seconds with four terminals active. After ADLS proved unsuccessful in its attempts to speed up the system, USM sued for breach of warranty.
ADLS argued that it was not liable because, even though the contract warranted that the system would be in “substantial accordance” with the specifications, the contract also provided that ADLS was required only to use its “best efforts” to satisfy USM. The trial judge agreed with ADLS, holding that ADLS had in fact used its best efforts to produce a satisfactory system, and that beyond this the contractual risk of poor performance fell on USM.
The Appeals Court disagreed, holding that ADLS was liable for breach of warranty. First, the Appeals Court noted that in its early proposals to USM, ADLS had defined the term “turnkey” to mean that “complete responsibility” for system development rested with ADLS. By agreeing later to provide a turnkey system, ADLS was bound by its own earlier definition of the term “turnkey.” Second, the court found that ADLS had warranted to USM that the system would be free from “defects in design,” and the court held that the poor response time of the system was a design defect. Third, the court held that ADLS was not saved by the contract provisions which stated that USM did not warrant the merchantability of the system, or its fitness for a particular purpose. The court applied a rule of law which requires that to the extent express warranties are inconsistent with disclaimers, the express warranties must be given effect over the disclaimers. Lastly, the court held that the fact that USM employees were closely involved in the development of the system, and were even aware that the response time promised by ADLS might be difficult to deliver, did not excuse ADLS’ warranty obligations.
TLB Comment : The USM case should remind system vendors that the implied and express warranty provisions of the Uniform Commercial Code, which regulates virtually all business sales in the U.S., comprise a mine field for those that would rely on rote warranty disclaimers. In addition, USM provides some indication that the Massachusetts courts, or at the very least the Massachusetts Appeals Court, may be inclined to interpret the Code so as to protect customers, rather than vendors