Office Supply Co., Inc. v. Basic/Four Corp.

• Citation: 538 F. Supp. 776
• Decision Date: 03 May 1982
• Docket Number: Civ. A. No. 80-C-603.
• Parties: OFFICE SUPPLY CO., INC., a Wisconsin corporation, Plaintiff, v. BASIC/FOUR CORPORATION, a foreign corporation, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

538 F. Supp. 776

OFFICE SUPPLY CO., INC., a Wisconsin corporation, Plaintiff, v. BASIC/FOUR CORPORATION, a foreign corporation, Defendant.

Civ. A. No. 80-C-603.

United States District Court, E. D. Wisconsin.

May 3, 1982.

John V. Whaley, Whaley & Whaley, John W. Foley, Foley, Foley & Seehawer, Racine, Wis., for plaintiff.

Emily S. Mueller, Thompson & Coates, Ltd., Racine, Wis., for defendant.

DECISION AND ORDER

REYNOLDS, Chief Judge.

This is an action for damages brought pursuant to 28 U.S.C. § 1332. The plaintiff Office Supply Co., Inc. ("Office Supply") is a corporation located in Racine, Wisconsin, which sells office supplies. The defendant Basic/Four Corporation ("Basic/Four") is a California corporation which manufactures and sells computer hardware and software. In 1975, Office Supply purchased computer hardware and leased computer software from Basic/Four. Office Supply claims that the system was defective and caused it to suffer substantial losses. It seeks compensation for "lost customers, income, good will and executive time and incurred additional hardware and software expense, office form expense, personnel expense and maintenance expense, all to its damage in the sum of $186,000 plus reasonable interest since April, 1975." (Complaint, paragraph NINTH.)

Presently pending before the Court are the defendant's motion for summary judgment, the plaintiff's motion for partial summary judgment, and the plaintiff's motion to compel answers to interrogatories and for compliance with a demand for the production of documents. For the following reasons the plaintiff's motions will be denied and the defendant's motion for summary judgment will be granted.

The Summary Judgment Motions

On January 31, 1975, the plaintiff's president, James F. Bruno, signed a contract for the purchase of computer hardware from the defendant and of computer software which was intended to control order processing, inventory control, sales analysis, and accounts receivable.¹ Mr. Bruno mailed the contract to the defendant, and it was accepted by the defendant's assistant treasurer, R. C. Trost, on February 7, 1975. On April 1, 1975, the hardware was installed. In a letter dated May 22, 1975, the defendant advised the plaintiff that the warranty on the hardware would expire on July 1, 1975. The input of data on the software programs took longer to complete, and for a period of time the plaintiff ran parallel operations on the computer and manually as a check on the accuracy of the software applications. In a letter dated October 6, 1975, Mr. Bruno advised Basic/Four:

"All of the applications anticipated by our company in agreeing to acquire our BASIC/FOUR System are complete and the system appears to be satisfactory. This fulfills your contractual obligation.

"Although the applications programs appear to be operating satisfactorily, some `defects' might become apparent sic later. (Defects might comprise misinterpretation of data, mishandling of a keyboarding error, or a confusing operator instruction—but would not include anything beyond the scope of the system design specification.) It is my understanding that you warrant your programs, when used in accordance with Basic/Four operating instructions, to be free from `defects' for a period of ninety days, and that you will correct such `defects' promptly when they are brought to your attention." (Exhibit E to defendant's memorandum in support of motion for summary judgment, filed December 15, 1981.)

Basic/Four took the position that its warranty on the software expired on January 6, 1976. As to complaints received after that date from Office Supply, it did continue to work with Office Supply in an effort to correct any claimed defects in the computer system. Office Supply also hired Ted Templeton, an independent programmer with a company called Computer Methods, Inc., who was recommended by Basic/Four, to work on its Basic/Four system starting some time after Basic/Four advised that the warranty period was over. The record established that Mr. Templeton made some modifications in the Basic/Four software. He also added at least one new program, the ABC program which involved inventory control, to the system. Starting in January 1978, Office Supply also hired a programmer, Marc Jerome, as a fulltime employee. He found what he claims were three major defects in the software system. The record establishes that two of those defects were in programs which Basic/Four did not supply to the plaintiff. The third defect was in the UJ portion of the Basic/Four accounts receivable program, but there is no evidence that the defect arose in the UJ program until after July 1976, which was after the end of the ninety-day period during which Basic/Four continued to warrant its software applications to be free from defects.

The plaintiff's vice president, David Carlson, testified during his deposition that starting at the end of October 1975 and continuing through early 1978, approximately 20% of the customer accounts were out of balance and the Basic/Four system performed up to 78% of expectation for Office Supply (Tr. at 50-51 and 63). Since February 1978, when Marc Jerome finished correcting the defects in the system, Carlson testified that it has performed up to 100% of expectation (Tr. at 46). The plaintiff's president, James Bruno, testified that the system only performed up to 50% of expectation prior to 1978 (Tr. at 114), that the accounts receivable first went out of balance on the October 1975 monthly statement printed during the first week of November 1975 (Tr. at 43), that it printed through for the first time in February 1976 (Tr. at 135), but that thereafter the accounts receivable problem continued on an intermittent basis until it was corrected by Marc Jerome in early 1978 (Tr. at 87, 132-134, 136, and 142). Both men testified that there were also problems with the hardware but that those problems were always corrected by Sorbus, a service corporation related to Basic/Four with which Office Supply had a hardware maintenance contract, with only a very few minimal extra charges not covered by the monthly maintenance charges. (Carlson Tr. at 38; Bruno Tr. at 121.)

On June 17, 1980, Office Supply commenced its action against Basic/Four.

The portion of the Office Supply-Basic/Four contract dealing with the purchase of the hardware is a straightforward document. It describes on the front of the document the computer model and features and the purchase price. Additional terms and conditions of sale are set forth on the reverse. In relevant part it provides on the reverse that it constitutes the entire agreement and understanding between the parties, that it shall be governed by the law of California, and as to warranties and remedies for breach of warranty:

"3. For ninety (90) days after the Equipment is installed * * * the Seller warrants the Equipment to be free from defects in material, workmanship, and operating failure from ordinary use, and the Seller's liability is limited solely to correcting any such defect or failure without charge. * * *"

In italic print paragraph 3 also states:

"The warranties contained in this Agreement are in lieu of all other warranties, express or implied, including any regarding merchantability or fitness for a particular purpose, arising out of or in connection with any Equipment (or the delivery, use or performance thereof). The Seller will not be liable * * * (b) for loss of profits or other incidental or consequential damages * * *."

The portion of the contract dealing with the lease of the software is not as clearly drafted. On its first page, which is page 3 of the contract, it states:

"This Addendum to the Agreement for the Purchase of BASIC/FOUR Equipment, dated as of the 31 day of January 1975, between Basic/Four Corporation and Office Supply Inc. is hereby incorporated therein and made a part thereof."

Page 3 describes the program applications and their price. Additional terms and conditions are set forth on the reverse side. As to warranties and limitation of remedies, paragraph 3 provides:

"The Seller believes that the programming being furnished hereunder is accurate and reliable and when programming accomplishes the results set forth in the `Design Specifications,' to be agreed to by the Seller and the Purchaser, such programming will be considered completed."

Paragraph 3 continues in italics:

"However, the amounts to be paid to the Seller under this Agreement and this Addendum do not include any assumption of risk, and the Seller disclaims any and all liability for incidental or consequential damages arising out of the delivery, use or operation of the programs provided herein.

"If the purchaser, without the written consent of the Seller, makes any modification to the programming or any deviations from the operating instructions or violates the provisions of paragraph 2, all warranties set forth herein cease immediately.

"All warranties set forth herein are in lieu of all other warranties, express or implied, including any regarding merchantability or fitness for a particular purpose, arising out of or in connection with any program (or the delivery, use or performance thereof)."

The contract also contains a fourteen-page description of the program applications.

The parties agree that the contract is a sales contract, that the choice of law provision which it contains is valid, and consequently that the parties' rights and liabilities are governed by the Uniform Commercial Code ("UCC") as adopted in California. They agree about very little else.

The defendant contends in its motion for summary judgment that this action is barred by the applicable statute of limitations, that the warranty disclaimer and damage limitation provisions in the contract are valid and binding and therefore the plaintiff is entitled to no relief, and that the plaintiff's second cause of action, which is based not on the UCC but on a negligence tort...