USM Corp. v. Arthur D. Little Systems, Inc.

• Citation: 28 Mass.App.Ct. 108,546 N.E.2d 888
• Decision Date: 07 February 1990
• Docket Number: No. 88-P-650,88-P-650
• Parties: , 10 UCC Rep.Serv.2d 327 USM CORPORATION v. ARTHUR D. LITTLE SYSTEMS, INC. et al. 1
• Court: Appeals Court of Massachusetts

Page 888

546 N.E.2d 888

28 Mass.App.Ct. 108, 10 UCC Rep.Serv.2d 327

USM CORPORATION v. ARTHUR D. LITTLE SYSTEMS, INC. et al. ¹

No. 88-P-650.

Appeals Court of Massachusetts Essex.

Argued Oct. 6, 1989.

Decided Nov. 27, 1989.

Further Appellate Review Denied Feb. 7, 1990.

Thomas J. Urbelis, Boston, for plaintiff.

Gene K. Landy, Boston, for Arthur D. Little Systems, Inc.

David J. Brody, Boston, for Arthur D. Little, Inc.

Before BROWN, SMITH and FINE, JJ.

FINE, Justice.

This dispute concerns an attempt by the plaintiff, USM Corp. (USM), to acquire a computer system for use in its business of manufacturing and selling shoe-making equipment. The defendant Arthur D. Little Systems, Inc. (ADLS), was organized in 1971 as a wholly owned subsidiary of the defendant Arthur D. Little, Inc. (ADL), for the purpose of developing, marketing, and installing "turnkey" computer systems. USM and ADLS entered into a contract for such a system, but the result of considerable effort over the course of several years was a system which failed to meet the needs of USM. USM sued both ADLS and its parent, ADL. Against ADLS, USM alleged breach of contract and deceit. Against ADL, USM claimed liability vicariously for ADLS's breach of contract, tortious behavior, and violation of G.L. c. 93A, and, on the basis of ADL's own conduct, for violation of G.L. c. 93A. ADLS filed a counterclaim for payments from USM due on the contract.

Summary judgment was ordered in favor of ADL on the allegations of vicarious liability for ADLS's tortious conduct and breach of contract, and no argument has been made on appeal that that order was erroneous. After a lengthy jury-waived trial in the Superior Court, the judge ruled in favor of the defendants on all of the plaintiff's claims and on the counterclaim, and he assessed costs against USM. Of the issues raised on appeal, we find it necessary to discuss at length only the contract and c. 93A claims. ² We agree with the judge that ADL is not liable to USM under G.L. c. 93A. We disagree with his determination that ADLS is not liable to USM for breach of contract. We therefore reverse the decision in favor of ADLS on USM's claim and on the counterclaim, vacate the assessment of costs, and remand the case for a determination of damages.

1. Breach of contract. We take the facts from the judge's findings. Sometime prior to February 12, 1975, USM began to look into replacing its existing computer system with a more powerful one. The primary purpose of the new system, which USM called MATCON, would be to provide accounts receivable, billing data, inventory control, and other record-keeping functions. USM requested proposals for a "turnkey" systems development approach from a number of vendors, and ADLS, among others, submitted a proposal. ADLS described the services it would supply as follows: "Turnkey Systems Development: in which the complete responsibility for system development--from project definition to complete system delivery--rests with ADL Systems." In its definitive proposal, dated August 7, 1975, ADLS described its proposal as being "for the implementation of a 'turnkey' minicomputer based material control system at USM's Beverly plant." It went on to state that "[t]he proposed system is 'turnkey' in the sense that ADLS will develop and implement a completely operable system, according to the specifications in our proposal, on a fixed price basis. ADLS will acquire the proposed computer hardware, develop the proposed applications software, integrate the two and demonstrate the proposed system in operation for acceptance by USM." The proposal was to use a minicomputer and software manufactured by Data General. Proposals from other prospective vendors would have utilized the products of other manufacturers. In weighing the various proposals, USM engaged in a detailed study of the alternatives, hired an outside consultant for advice, and discussed products directly with the manufacturers, including Data General. As a result of its studies, USM was aware that there were risks involved with ADLS's proposal, but USM favored that proposal over the others.

In the fall of 1976, ADLS personnel began to meet with USM personnel in order to define USM's use requirements so that ADLS could create specific application functions and design a suitable software program. By this time, changes had been made in the proposal with respect to both the hardware and the software to be used for the system. ³ In December of 1976, USM approved the MATCON project and authorized ADLS to proceed to implement the new system. On or about December 15, 1976, the first design phase of the project was completed with ADLS's delivery to USM of the two-volume Functional Design document and the Systems Architecture and Performance Analysis document.

The stated purpose of the Performance Analysis portion of the Systems Architecture and Performance Analysis document was "[t]o publish the results of an analysis of expected performance of the system." Among the results published was a calculation of the response time expected for the MATCON system. ⁴ That calculation yielded the following results: "92% of the time, response time will not exceed 2 seconds/field[;] 98% of the time, response time will not exceed 3 seconds/field." The results were described as "estimates" based on "available data," and they were "to be reviewed at the completion of the detailed design phase in order to verify the results." However, the Performance Analysis also refers to its estimates as being conservative and describes a response time of eight or nine seconds as being the "worst case."

As the process moved forward, both USM and ADLS were aware that response time might be a problem. ⁵ A consultant hired by ADLS to review the Performance Analysis, prepared a detailed report on the problem, ⁶ but he, along with others at ADLS, believed it could be solved by adding a second disk controller to the system. Some computer systems will support access to two disk controllers simultaneously through a process known as "overlapping" or "multiple seeks." As a result of "multiple seeks," the number of disk accesses available to the system would be doubled, thereby cutting the disk-utilization factor in half and improving response time accordingly. Throughout the spring of 1977, Data General assured ADLS that the MATCON system, using the specified products (the C-330 minicomputer and INFOS and IDEA), would support "multiple seeks." The judge found that ADLS reasonably relied on Data General's assurances, although they would later turn out to be false. USM was never provided a copy of the ADLS consultant's detailed report on the response time problem. The judge found, however, that USM personnel were aware of the issues raised in the report as well as the proposed solution.

On March 4, 1977, USM and ADLS memorialized their agreement in a writing entitled "Turnkey Systems Agreement." The basic agreement between the parties was that:

"ADLS shall furnish, and Customer shall accept, a computer system (the 'System'), sometimes called a 'turnkey system' in the vernacular, that comprises the Equipment and Software Programs and satisfies the Specifications, all as set forth in the following schedule, as it might be amended, on the terms and subject to the conditions set forth below and on the following pages of this Agreement[.]"

Under the heading "Specifications," the contract provided:

"The functions to be performed by the system are defined in the functional specifications document titled 'MATCON Materials Control System Functional Design' Volumes I and II, dated December 1976 and the MATCON Systems Architecture and Performance Analysis dated December 1976. The detail program specifications will be defined by a document developed in tasks 4 and 5 of the task breakdown structure (Table 1, Attachment B); Acceptance Test Specifications will be developed in Task 6 of the work breakdown structure."

Performance under the contract was divided into seventeen tasks to be accomplished in four phases, with defined responsibilities for both ADLS and USM. As mentioned earlier, phase one, the functional design, which included tasks one through three (Functional Design, Systems Architecture, and Performance Analysis) was completed prior to signing the contract. Phase two was the preparation of the detail design. Phase three was to create a working system and demonstrate it for acceptability. Phase four was to bring MATCON into daily productive use.

The contract also contained a warranty clause, which provided:

"ADLS warrants that at the time of delivery the system will be free of defects in design and will be in substantial accordance with the functional specifications produced in Tasks 1-3, Attachment B. During the first 180 days after delivery of the system, ADLS will correct any defects or deficiencies in the system without additional charge to Customer. Provided, however, that if investigation of alleged defects or deficiencies discloses that they are not in fact within the requirements set forth in the detail design (Task 4, Attachment B), such investigative effort and any programming changes performed by ADLS to correct such alleged deficiencies or defects will be charged to Customer at ADLS' regular rates. Any additional work done by ADLS after the warranty period and/or on matters other than correction of deficiencies or defects in the system will be charged for at ADLS' regular rates. THIS WARRANTY SUPERSEDES ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE...."

A "Liability" clause required ADLS to use its "best efforts" to satisfy USM and limited ADLS's liability for damages to USM arising out of the operation and use of the system after delivery. Finally, an integration clause stated that the writing was the exclusive and complete understanding of the parties. ⁷

The detail design document...