Contract Law - The Seventh Circuit Has Enforced A Software Contract - DIGITECH COMPUTER INC v. TRANS CARE INC - US 7th Circuit

Nos. 10–1525, 10–1652. - DIGITECH COMPUTER INC v. TRANS CARE INC - US 7th Circuit

Trans-Care, an Indiana company in the medical transportation business, licensed dispatch and billing software from Digitech. Unfortunately, the software "did not work as Trans-Care expected, and so Trans-Care attempted to exercise an option to terminate the agreement." Digitech brought a claim for breach of contract. Trans-Care then brought a counterclaim for fraud.

The district court dismissed the fraud claim and found in favor of Digitech on the computer contract claim.

In its initial proposal to Trans-Care, Digitech explained its pricing and included a guarantee. The Court described the guarantee as follows: "This guarantee stated that during the first 90 days, billing would be limited to programming charges; within that period, if Trans–Care was not completely satisfied, it could walk away from the contract without paying any software licensing fees."

The parties then negotiated a written software license. However, the 90 day guarantee was not included in the written software license. The Seventh Circuit summarizes the software licenses as follows:

"The Agreement stated that it was to run for three years starting May 8, 2006. Trans–Care's obligation to make monthly software licensing payments was to begin 90 days after the software was installed. For its part, Digitech could “suspend or terminate” the software products and services in the event that Trans–Care was delinquent in payment for 60 days. The Agreement provided that Digitech could recover attorneys' fees for “collections of any unpaid balances.” Finally, it required notice and the opportunity to cure before termination."

Digitech struggled to install the software. When the software was finally installed in January 2007 it did not work to the satisfaction of Trans-Care and was allegedly "plagued with malfunctions."

On March 1, 2007, Trans-Care attempted to exercise the 90-day right to cancel. Because the provision was not included in the agreement, Digitech refused to honor it.

On April 3, 2007, Digitech locked the software because of Trans-Care's failure to make payment.

The main issue on appeal was whether the 90-day cancellation provision was part of the contract even though it was not included in the final draft of the contract.

The Seventh Circuit agreed that the 90-day cancellation provision is not included in the agreement. Moreover, parol evidence could not be used because there was no evidence the provision was part of the contract. The Court holds: "The negotiations went on for some time, and Digitech's last mention of the 90–day satisfaction guarantee occurred two-and-a-half months prior to the conclusion of the final agreement. Even without a formal integration clause, we would need some clue in the final agreement that the parties meant to carry this important provision forward. There is none."

Trans-Care also argued that the 90-day provision was referenced in its first purchase order under the Agreement and that, therefore, the 90-day provision was included in the Agreement. The Court rejected this argument. It writes: "If one reads the purchase order as Trans–Care does, it is an attempt at a modification of the Agreement. “The modification of a contract, since it is also a contract, requires all the requisite elements of a contract.” Hamlin v. Steward, 622 N.E.2d 535, 539 (Ind.Ct.App.1993). In order for the modification to be effective, Section VI of the Agreement required written evidence that Digitech accepted the new term. No such evidence exists: Digitech did not sign the purchase order or take any other action indicating its acceptance. The purchase order was therefore at most a proposal for a modification that was never accepted, and thus its terms did not become part of the overall agreement between the parties. Trans–Care thus cannot justify its repudiation of the contract on this basis."

The Court affirmed the judgment for Digitech, but reversed most of the damage award on the ground that Digitech locked the software one month after Trans-Care attempted to cancel. Once Digitech terminated the contract by locking the software, it could no longer collect payment. Thus, Digitech was entitled to payment for the period from January 2007 to April 3, 2007 and no more.

The case was decided under Indiana law, which appears to be identical to Illinois law.

Comment: this case is a sad lesson in contract drafting. The parties failed to carefully include the 90-day cancellation provision in the final software license and, thus, they were not able to rely on it. Trans-Care was fortunate that Digitech locked the software and thereby terminated the contract.

Edward X. Clinton, Jr.

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Contract Law - Discovery Rules Applies to Breach of Contract Claim

Newell v. Newell, Ill: Appellate Court, 3rd Dist. 2011 - Google Scholar

This case holds that the discovery rule applies to a breach of contract claim.

Jared Newell filed a lawsuit against his mother Ruth Newell and First Midwest Bancorp alleging conversion and breach of contract alleging that Ruth had improperly withdrawn funds from a savings account in his name.

In 1993, while a minor, Jared received a settlement from a lawsuit involving a motor vehicle accident. A court order entered in the lawsuit provided that: "No funds shall be withdrawn from the minor's account without prior court order."

In 1994, Ruth opened a guardianship account in Jared's name. The signature account contained the following statement: "Minor account. No minor withdraw until 18 years old on 5-18-00 per court order — See Louise McLaren." Ruth's attorney, Thomas Cowgill, gave bank personnel a copy of the court order when Ruth opened the account.

Unfortunately Ruth removed the balance of the account without a court order.

In 2005 or 2006, after graduating from college Jared learned that his mother had drained the account. He filed suit against his mother and the bank in 2007. The bank moved for summary judgment on the ground that the lawsuit was barred by the three-year statute of limitations set forth in the Uniform Commercial Code. (810 ILCS 5/4-111). The trial court agreed and granted the motion for summary judgment.

The Appellate Court reversed and reinstated the case. The court reasoned that the discovery rule applied to the case: "

An action for breach of contract accrues when the breach of the contractual duty or obligation occurs. ABF Capital Corp. v. McLauchlan, 167 F. Supp. 2d 1011 (N.D. Ill. 2001). The discovery rule is an equitable exception that tolls the statute of limitations period until the plaintiff discovers, or has reason to discover, the cause of action. Knox College v. Celotex Corp., 88 Ill. 2d 407 (1981). The rule was created to alleviate the harsh consequences that result from a strict application of a limitations period. Continental Casualty, 329 Ill. App. 3d at 701. It typically applies in cases where the relationship between the injury and the alleged wrongful conduct is obscure. Rodrigue v. Olin Employees Credit Union, 406 F.3d 434 (7th Cir. 2005). Thus, under the discovery rule, the statute of limitations does not begin to run until the plaintiff knew, or in the exercise of reasonable diligence should have known, that he was injured, the cause of his injury, and that there was some indication of wrongdoing. Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325 (2002)."

Jared argued that before 2005 or 2006 he could not have discovered the unauthorized withdrawal because his mother was in a position of trust.

The Court then distinguished several cases where Illinois courts have held that the discovery rule did not apply to UCC or breach of contract claims. The Newell Court noted that other Illinois cases have applied the discovery rule where there were circumstances of fraudulent concealment.

The court reasoned that Jared's mother concealed the unauthorized withdrawals from him and the Bank was in the best position to block the unauthorized withdrawals. "[F]raudulent concealment by a third party tolls the statute of limitations where the person fraudulently concealing the cause of action is in privity or has an agency relationship with the defendant. Serafin v. Seith, 284 Ill. App. 3d 577 (1996). This case involves allegations of fraud committed by Jarred's mother, someone in a position of trust and the guardian of the FMB account. Because Ruth was the guardian of the savings account and Jarred resided with her, account statements were mailed to Ruth. Thus, while the victim of a conversion of negotiable instruments case is typically in the best position to easily and quickly detect the loss and take action (see Haddad's of Illinois, 286 Ill. App. 3d at 1073), it would have been difficult for Jarred to uncover any wrongdoing that may have been apparent in the account records (see Continental Casualty, 329 Ill. App. 3d at 702). In this case, the bank was in a better position than Jarred to enforce the depository agreement and monitor any unauthorized withdrawal of funds."

Comment: this is an area of some debate and uncertainty in the law and one that this blog will attempt to cover in the future.

Edward X. Clinton, Jr.

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Fraudulent Misrepresentation On the Internet is recognized by Illinois

BONHOMME v. St. James, Ill: Appellate Court, 2nd Dist. 2011 - Google Scholar


This is not a commercial case, but the topic is novel and important and could have implications for the commercial world.


The Illinois Appellate Court for the Second District held that the plaintiff, who was duped by a fake persona on the internet, could maintain a cause of action for fraudulent misrepresentation.


Plaintiff alleged that the defendant developed a fake persona to lure the plaintiff to make expensive gifts. Eventually, plaintiff gave the defendant and her friends about $10,000 in gifts and other items. Plaintiff and Defendant began on-line conversations in a chat room for the HBO show Deadwood. The court summarizes the "relationship" as follows: "In June, defendant registered again, posing as a man named Jesse James and under the user name of "Auboy." "Jesse" began chatting with and e-mailing plaintiff in July 2005. Defendant, in her own name, also began e-mailing plaintiff in July. ... Plaintiff and "Jesse" began an on-line romantic relationship that lasted until July 2006."


The Court explained why it believed it was appropriate to expand the law of fraudulent misrepresentation:


It is clear, then, that while the "typical case" of fraudulent misrepresentation arises in a commercial context, our supreme court has acknowledged that this tort may, in the appropriate circumstances, be expanded to cover areas outside of the commercial context. We conclude that this is an appropriate circumstance in which to expand the application of fraudulent misrepresentation. We first note that this case is "one in which the plaintiff has parted with money, or property of value, in reliance upon the defendant's representation" (W. Page Keeton et al., Prosser & Keeton on Torts §105, at 726-27 (5th ed. 1984)), so it is not, all at once, an expansion of the tort into "purely personal settings." See Doe, 228 Ill. 2d at 348. Plaintiff clearly pleaded that she spent over $10,000 on gifts, some of which were for defendant, but some of which were for "Jesse" and other characters invented by defendant, and $700 for preparations for a move to live with "Jesse." Clearly, these are economic losses alleged to have resulted from defendant's misrepresentations. Plaintiff has also alleged other damages, including bills for therapy and medical expenses "to recover from Defendant's false representation regarding the fictitious characters and their activities." However, as this case involves a motion to dismiss during the pretrial stage, we need not address whether such damages could be recovered here.


Looking again to the elements of this cause of action ((1) a false statement of material fact; (2) knowledge or belief of the falsity by the party making it; (3) intention to induce the plaintiff to act; (4) action by the plaintiff in justifiable reliance on the truth of the statement; and (5) damage to the plaintiff resulting from that reliance), we conclude that plaintiff has alleged sufficient specific facts to establish a cause of action for fraudulent misrepresentation. Plaintiff alleged that defendant posed as at least 20 fictional characters between June 2005 and April 2007, the most important of which was "Jesse," with whom plaintiff started "chatting" in the Deadwood chatroom in July 2005. Defendant also communicated with plaintiff in her own name and represented to plaintiff that "Jesse" and the other characters were real persons she knew. Thus began an almost-two-year masquerade of false statements from defendant to plaintiff, statements that defendant obviously knew were untrue. The complaint is filled with specific dates of, and quotes from, e-mails from defendant, "Jesse," and other characters.


Comment: I agree with the Court's decision. The plaintiff was duped by the defendant (who created phony online profiles) to part with her hard earned money. The creation of each of the phony online personalities involved making false statements to Plaintiff. The false statements were designed to convince plaintiff that internet persona "A" was really somebody else.


UPDATE:


Since my original post, the Illinois Supreme Court accepted this case, heard argument, and reversed. The Court held that the trial court properly dismissed the fraudulent misrepresentation claim because the dispute arose out of a personal relationship.  


The citation to the case is 2012 IL 112393.


The court, in an opinion by Justice Thomas, held: 


"In light of Doe [v. Dilling 228 Ill. 2d 324, 343-43 (2008)], the crucial question in this case is whether the facts at issue are purely personal in nature, or whether there exists some commercial, transactional, or regulatory component that moves them beyond the purely personal.  This is not a difficult question to answer.  When all is said and done, what lies beneath this case is two private persons engaged in a long-distance personal relationship...Indeed, all of the hallmarks of ordinary human relationship are present: correspondence, conversation, intimacy, trust, mutual beneficence, emotional support, affection, disappointment and even grief.  And just as importantly, there is absolutely nothing of the commercial, transactional, or regulatory at work...Consequently, as regrettable as the alleged facts are, we hold that they are not the types of facts upon which a claim for fraudulent misrepresentation may be pled."


Edward X. Clinton, Jr.

www.clintonlaw.net

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Northern District of Illinois Enforces Personal Guaranty

GE BUSINESS FINANCIAL SERVICES INC. v. Schiffman, Dist. Court, ND Illinois 2011 - Google Scholar

This is a case where GE loaned money to a business and sought to collect on a guarantee by two individual defendants.


The court entered summary judgment in favor of GE, after noting that the individual defendants did not file a response to the Motion for Summary Judgment. This case demonstrates that contract cases can often be resolved with summary judgment.


"Under Illinois law, for a breach of contract cause of action, a plaintiff must establish: "(1) an offer and acceptance; (2) consideration; (3) definite and certain terms; (4) performance by the plaintiff of all required conditions; (5) breach; and (6) damages caused by the breach." Cogswell v. CitiFinancial Mortg. Co., Inc., 624 F.3d 395, 398 (7th Cir. 2010).


...


GE has pointed to sufficient evidence to show that, as a matter of law, the Guaranty was a valid contract, based on offer and acceptance, consideration, and definite and certain contract terms. In addition, it is undisputed that GE made the Loan on August 8, 2007 and performed all of its obligations under the Guaranty. (SF Par. 4, 14). Thus, GE has also pointed to sufficient evidence to show that, as a matter of law, GE performed the conditions required under the contract."


Edward X. Clinton, Jr.


www.clintonlaw.net

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Contract Law - Failure to Revoke Agency Leads to Compensation For Agent

Harmon v. Gordon, Dist. Court, ND Illinois 2011 - Google Scholar

This is a contract law issue - the principal allegedly revoked the agent's authority before the term of the agency had been completed.


Under Illinois law, this constitutes a repudiation of the contract, and allows the dismissed agent to sue for damages.


The Court explained its holding as follows:


Under Illinois law, when a principal and an agent enter into a contract for a specific term, the principal may still revoke the agent's authority "at any time and under any circumstances." Lehman v. Eugene Matanky & Assoc. Inc., 438 N.E.2d 614, 619 (Ill. App. Ct. 1982). However, a principal who agreed to employ the agent for a certain length of time cannot revoke the agency "rendering himself legally liable for such damages." Kenilworth Realty Co. v. Sandquist, 371 N.E.2d 936, 939 (Ill. App. Ct. 1977). Such a revocation results in a repudiation of the principal's contractual obligations. Id. Here, LHA has alleged that Gordon agreed to use LHA's financial and consulting services on an exclusive basis for the entire duration of his NBA playing career, and that Gordon fired LHA while he was still an active player. Assuming, as we must, that these allegations are true, Gordon's premature revocation would constitute a breach of contract under Illinois law. Accordingly, dismissal of Count I is not warranted under Rule 12(b)(6).


Edward X. Clinton, Jr.

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