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.