Richard Raysman and Peter Brown

The outsourcing of implementation of large enterprise software projects shows no signs of stopping. Different, and more expansive outsourcing efforts are prevalent as well. For example, a multinational enterprise software provider with offices around the world, including in emerging markets known for companies providing efficiencies while retaining scalability and costs, recently inked a deal building on its existing relationship with its customer where it would provide both infrastructure and mainframe services pursuant to a deal worth more than $300 million.

Unsurprisingly, not all outsourcing relationships turn out so well. Often at issue is whether the qualifications and experience of the outsourced consultants alleged by the provider comport with the realities on the ground once the project commences. In one recent such example, a service provider hired to implement a company-wide software reboot saw its project go awry when the customer alleged that the provider misrepresented, among other things, the capabilities of its outsourced software technicians. See W.G. Bradley. v. intelligence, No. 4:17-cv-208 (CDL), 2018 WL 2944428 (M.D. Ga. June 12, 2018). In W.G. Bradley, although the relevant agreement included an “entire agreement” clause, plaintiff’s fraud claims nonetheless survived defendant’s motion for judgment on the pleadings, even though plaintiff arguably affirmed the contract with respect to acts alleged to be fraudulent, because of a secondary set of alleged fraudulent acts by the defendant that specifically pertained to the purported qualifications of defendant’s consultants. That said, defendant’s motion was not dismissed entirely, as the court granted its dismissal of the breach of the warranty claims based on an exclusive warranty disclaimer in the agreement. This column is devoted to a detailed evaluation of the factual circumstances and legal analysis and conclusions.

Facts and Procedural Background

In 2014, plaintiff W.C. Bradley Co. (Bradley) hired defendant itelligence, Inc. (itelligence) to assist with Bradley’s comprehensive and consolidated enterprise software overhaul. When sending a bid proposal to prospective service providers, Bradley emphasized that it required implementation assistance from a service provider with “proven abilities” in the enterprise solutions field.

itelligence claimed that its personnel would surpass Bradley’s functional and technical mandates in particular because it would provide a “flexible, scalable and stable platform for innovation and growth.” During the antecedent negotiations, itelligence also told Bradley it employed “experienced consultants who could implement a software solution that met [Bradley’s] needs” which would ultimately ensure that Bradley would be “self-sufficient” at the conclusion of the project. The project was to be completed in two phases, with the initial estimated cost as just under $6.5 million. Phase 1 encompassed Bradley’s European business unit (hereinafter, Zebco) and its real estate entity.

On Feb. 24, 2015, the parties entered into a master services agreement (the agreement) providing the terms dictating how itelligence would deliver its services. The agreement contained exclusive warranties and integration provisions. Phase 1 commenced the following month, with the two-phase rollout itelligence sold to Bradley morphing into an eight-phase endeavor. According to the court, the first phase rollout for Zebco’s non-United Kingdom European operations “did not go well” with respect to, inter alia, itelligence’s invoicing protocols, adherence to European tax laws, and the electronic data interchange component of the software, which Bradley characterized as a “complete failure.” Nonetheless, itelligence billed Bradley for the costs incurred in fixing its mistakes.

After this Zebco fiasco, on May 9, 2016, Bradley sent itelligence a “notice of material breach,” demanding that itelligence “cure its breaches under the [agreement] and misrepresentations within 30 days.” itelligence countered with a remediation plan designed to fix the issues and keep Bradley’s business. Bradley agreed to the remediation plan and the Agreement was amended accordingly.

However, in November 2016, things again went awry, this time with respect to itelligence’s rollout for Zebco’s North American operations. Many of the same problems recurred. In September 2017, Bradley sent itelligence an additional notice of material breach, and in the following delivered a notice of recession. Ultimately, Bradley paid itelligence more than $20 million for a project initially estimated at less than a third of such sum.

Bradley brought claims alleging, inter alia, fraud, fraudulent inducement, breach of the exclusive warranties and material misrepresentations concerning itelligence’s capabilities to execute the project. itelligence moved for judgment on the pleadings on the fraud, negligent misrepresentation and certain express warranty claims. Its central argument was that Bradley waived its right to rescind the agreement, and in fact affirmed the agreement, rendering its sole recourse to sue under the contract and not in tort.

Legal Analysis and Conclusions

The court denied in part and granted in part itelligence’s motion for judgment on the pleadings, applying the standard where such a motion will be granted if there are “no material facts in dispute and the moving party is entitled to judgment as a matter of law.” Cannon v. City of W. Palm Beach, 250 F.3d 1299, 1301 (11th Cir. 2001).

The court first considered whether Bradley waived its right to rescission of the agreement, thereby precluding its fraudulent inducement claim. Under Georgia statutes, a party wishing to rescind for fraud is required to do so “promptly” after discovering the fraud and with that “promptitude which the nature of the case and environment of the circumstances would require.” (citations omitted). Deciding if a prompt rescission occurred is highly fact-specific and therefore typically reserved for the jury to decide. Accordingly, the court can adjudicate this question as a matter of law if the facts and circumstances essential to the waiver issue are clearly established.

Here, itelligence claimed that the May 2016 “notice of material breach” it received from Bradley showed that Bradley knew of itelligence’s purported fraud but nonetheless affirmed the Agreement. The court acknowledged that this notice evidenced Bradley’s dissatisfaction with the Zebco EU rollout and that Bradley perceived certain of itelligence’s consultants to lack sufficient previous experience, which manifested in their inability to understand Bradley’s customized business requirements. However, nothing in the pleadings viewed most favorably to Bradley showed that it was aware of the alleged fraud by itelligence that it now referenced, including that itelligence knowingly sold a software system it knew would not work, lied about the proficiency and experience of its consultants, and offered a bad faith estimate of the length and the cost of the project. Rather, the court credited Bradley’s assertion that it did not discover these aspects of the itelligence fraud until September 2017, 16 months after its first notice, and a month prior to its rescission letter.

itelligence in essence made the same argument concerning Bradley’s fraudulent inducement claim, with a wrinkle that the “entire agreement” clause of the agreement estopped Bradley from claiming that its affirmation of the agreement was nullified by alleged misrepresentations. However, the court observed, in citing to a case where homeowners were not estopped from asserting fraudulent inducement claims notwithstanding a merger clause in a purchase and sale agreement, that since Bradley sought rescission of the agreement, it was not bound by the merger clause. Accordingly, the same facts that justified survival of the fraud claim did the same for the fraudulent inducement claim.

However, the court dismissed Bradley’s breach of express warranty claims. Turning again to the agreement, it held that the warranty disclaimer in the agreement barred Bradley’s breach of warranty claims because the only warranties offered by itelligence in the agreement concerned the validity of its license rights and that it would provide services “in a good and workmanlike manner using the highest industry commercial practices and standards.” The sole remedy for breach of warranty was that itelligence would replace the product, or, if that was impossible, issue a refund. itelligence offered no other warranties, whether express or implied. Accordingly, the court granted itelligence’s motion for judgment on the pleadings and dismissed Bradley’s breach of express warranty claim.

The case continues, with Bradley filing a discovery motion in late June referencing issues with review and production of documents both from itelligence and a third party.

Richard Raysman is a partner at Holland & Knight and Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).