Colonial Life Ins. v. Electronic Data Systems

• Citation: 817 F. Supp. 235
• Decision Date: 31 March 1993
• Docket Number: Civ. A. No. 90-420-M.
• Parties: THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA, Chubb Life Insurance Company of America, and the Volunteer State Life Insurance Company d/b/a Chubb Life America, Plaintiffs, v. ELECTRONIC DATA SYSTEMS CORPORATION, Defendant.
• Court: United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of New Hampshire

817 F. Supp. 235

THE COLONIAL LIFE INSURANCE COMPANY OF AMERICA, Chubb Life Insurance Company of America, and the Volunteer State Life Insurance Company d/b/a Chubb Life America, Plaintiffs, v. ELECTRONIC DATA SYSTEMS CORPORATION, Defendant.

Civ. A. No. 90-420-M.

United States District Court, D. New Hampshire.

March 31, 1993.

COPYRIGHT MATERIAL OMITTED

William L. Chapman, Concord, NH, James J. Marcellino, Boston, MA, Donna M. Sherry, Wellesley, MA, for plaintiffs.

Charles W. Grau, Concord, NH, Ayala T. Alexopoulos, Plano, TX, Phillip N. Smith, Dallas, TX, for defendant.

ORDER ON DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT

McAULIFFE, District Judge.

Before the Court for consideration is defendant's, Electronic Data Systems Corporation's ("EDS"), Motion for Partial Summary Judgment (document no. 51), to which Chubb Life America¹ ("Chubb"), objects (document no. 54). EDS seeks summary judgment in this breach of contract action on issues related to limitations on damages, limitation of express warranties, breach of contract claims, and alternative dispute resolution.

Relevant Facts

On July 10, 1987, EDS and Chubb entered into an agreement for the License of Computer Software ("the Agreement"). EDS agreed to license computer software to Chubb and provide data processing services as specified in the agreement. In exchange, Chubb agreed to pay EDS $21,300,450.00, and to perform certain obligations in connection with implementation of the EDS processing system called the "Insurance Machine."

The Agreement between EDS and Chubb contains certain provisions which are particularly relevant to the disposition of this motion. First, the agreement contains a limitation of damages clause.² Section 11.4 of the Agreement provides as follows:

Definition of Liability. In the event that EDS shall be liable to Chubb due to EDS' performance or nonperformance of its obligations under this Agreement, whether arising by negligence, intended conduct, or otherwise (i) the amount of damages recoverable against EDS for all events, acts or omissions shall not exceed in the aggregate the compensation payable in accordance with this Agreement for the two months preceding the event giving rise to said liability, and (ii) the measure of damages shall not include any amounts for indirect, consequential or punitive damages of any party, including third parties, or for damages which could have been avoided had the data furnished by EDS or the EDS System been verified before utilization.

The Agreement also contains a limitation of warranties clause. Section 8.2 of the Agreement provides:

Warranty to Conform to Detailed Design Specifications: EDS warrants that the EDS Systems as installed shall, for a period of one hundred and twenty (120) days substantially conform to the detailed design specifications, (including any specified interaction of components), provided further, Chubb's sole and exclusive remedy for any breach of such warranty shall be the correction, by EDS, of any such defect in the EDS Systems. Said warranty period shall begin with the acceptance of any module for all aspects relating solely to the internal operation of that module.

Finally, Section 8.4 of the Agreement contains the following disclaimer of warranty:

EXCEPT AS PROVIDED ABOVE, EDS MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

Section 2.1(b) of the Agreement incorporates by reference pages 7-62 of the pre-contract Proposal of April 1987, which contains certain express warranties.

After entering into the Agreement, both EDS and Chubb had difficulty complying with the schedule and performing their respective contractual obligations, resulting in subsequent letter agreements dated September 9, 1988, and January 31, 1989, modifying the July, 1987, Agreement. To date, Chubb has apparently paid EDS over eleven million dollars, but has allegedly not received the software that was to be delivered within the first fifteen months of the project.

Summary Judgment Standard

A Motion for summary judgment must be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). In ruling upon a party's motion for summary judgment, the Court must "view the entire record in the light most hospitable to the party opposing summary judgment, including all reasonable inferences in that party's favor." Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir. 1990).

The moving party has the burden of demonstrating the absence of a genuine issue of material fact for trial. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). If the moving party carries its burden, the party opposing the motion must set forth specific facts showing that there remains a genuine issue for trial, demonstrating "some factual disagreement sufficient to deflect brevis disposition." Mesnick v. General Electric Co., 950 F.2d 816, 822 (1st Cir.1991), cert. denied, ___ U.S. ____, 112 S.Ct. 2965, 119 L.Ed.2d 586 (1992). This burden is discharged only if the cited disagreement relates to a genuine issue of material fact. Wynne v. Tufts University School of Medicine, 976 F.2d 791, 794 (1st Cir.1992).

Discussion

1. Application of the UCC to the Transaction

The dispute between EDS and Chubb related to limitations on damages and express warranties necessarily requires the Court to first determine, as a matter of law, whether the Uniform Commercial Code, ("the Code"), N.H.REV.STAT.ANN. 382-A:2 (1991), including its damages and warranty provisions, applies to this case. Since the Court is exercising diversity jurisdiction, it must apply New Hampshire law.³ Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

Whether the Code, in particular Article Two of the Code, is applicable to transactions involving computer software, is an issue which has inspired some commentary.⁴ In general, "a contract for computer data processing services is neither a contract purely for personal services nor a contract for the sale of goods. It is an enterprise that involves a combination of personal skills and labor, materials, equipment and time." Kearsarge Computer, Inc. v. Acme Staple Co., 116 N.H. 705, 710, 366 A.2d 467, 471 (1976).

The test for "inclusion or exclusion from Article 2 is not whether the goods and nongoods parts of the contract are mixed, but rather, `whether their predominant factor, their thrust, their purpose, reasonably stated ... is a transaction of sale.'" Cianbro Corp. v. Curran-Lavoie, Inc., 814 F.2d 7, 14 (1st Cir.1987) (quoting Bonebrake v. Cox, 499 F.2d 951, 960 (8th Cir.1974) (contract for sale of goods including substantial amounts of labor covered by Article 2)).

Section 2-202 of the Code provides that it is applicable to any "transaction in goods." N.H.REV.STAT.ANN. 382-A:2-202 (1991). The New Hampshire Supreme Court has noted that "the use of the term `transaction' rather than `sale' in UCC § 2-202 makes it clear that Article 2 is not to be confined to those transactions in which there is a `sale,' that is a transfer of title." Xerox Corp. v. Hawkes, 124 N.H. 610, 615, 475 A.2d 7, 9 (1984) (quoting 1 R. Anderson, Uniform Commercial Code, § 2-103:4 at 500-01 (1981)) (warranty and damage provisions of Article 2 held applicable to service agreement between lessor and lessee of copy machine).

Here, EDS and Chubb entered into an agreement for the license of computer software. Section 1.1 of the Agreement describes the transaction as follows:

EDS shall provide Chubb the computer software and DP data processing services described herein for delivery and/or use in New Hampshire subject to the terms and conditions set forth in this Agreement. The performance will begin with the installation of the Insurance Machine....

The section continues with a description of the contemplated phases of the agreement, and the projected completion dates for each phase. Under the contract, EDS was to spend four years developing and customizing its Insurance Machine for Chubb. At the end of this term Chubb was to receive a license to use the system. EDS maintains that the UCC should not apply to the contract because it was dominated not by goods, but by the years of service EDS was to provide Chubb. The Court disagrees.

Although the Agreement did contemplate many years of servicing, the purpose or thrust of these services was support of EDS' product, the Insurance Machine, in accommodating Chubb's business practices. The essence of the contract was to license Chubb to use a computer software product. Computer software has been held to fall within the definition of a "good" under the Code. Advent Systems Ltd. v. Unisys Corp., 925 F.2d 670, 675-76 (3rd Cir.1991); see also RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543, 546-47 (9th Cir.1985) (goods aspects of transaction predominated in the sale of a software system); Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 742-43 (2d Cir.1979) (same). Additionally, the warranty and damage provisions of the Code have been held to apply to a lease arrangement in New Hampshire. See Xerox; supra.

The Court holds that the Uniform Commercial Code, as adopted in New Hampshire, applies to the contract between EDS and Chubb, the principal object of which was to provide for a license to use computer software. Accord Graphic Sales, Inc. v. Sperry Univac Div. Sperry Corp., 824 F.2d 576, 579 (7th Cir.1987) (citing district court opinion which held that Article 2 of the Code applies to leases of computer equipment).

2. Limitation of Damages

Defendant EDS contends that the limitation of damages clause, contained in Section 11.4 of the License Agreement, is binding on Chubb's breach of contract,...