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Standard License Agreement Fails to Avert Large Damages Award

January 1993

A recent case shows that where there’s a will there’s a way. A Massachusetts Superior Court judge wanted to award damages to a software licensee he believed had been wronged, and he was prepared to go to great lengths to find a flaw in a contract which, on its face, appeared to safeguard the licensor.

EMC Corp. purchased software from VMark Software. VMark’s salespeople made oral promises that if the software did not perform satisfactorily VMark would pay for the new DEC hardware that EMC was going to buy for the sole purpose of running the software. The VMark software did not perform, and EMC demanded $400,000 to compensate it for the DEC computer. In defense, VMark raised the standard license agreement that EMC had entered into, which disclaimed all warranties, but promised that VMark would “repair and replace” any defective software. The judge held that because VMark had failed to repair the software, the limited remedy of repair had “failed of its essential purpose,” and therefore VMark had breached its warranty.

The holding that failure to repair constituted breach of warranty was consistent with past cases decided on similar circumstances. However, the judge’s next holding was a real surprise. The license agreement provided that in no event would VMark be liable for any “loss or damage,” including “special, indirect, incidental, or consequential damages.” The judge held that this did not prevent EMC from recovering the $400,000 it had spent on the DEC hardware, since the contract did not exclude reliance damages.

It is rare (almost unheard of) for a license agreement to exclude reliance damages, and VMark cannot be faulted for failing to do so. The point is that when a judge wants to do “justice,” as he or she perceives it, it is hard to write a contract that cannot be circumvented.