In GMG Health Systems v. Amicas, Inc., 1st Cir April 10, 2012, the court had occasion to address a dispute between a software licensor / developer, and a licensee, in which more typical contractual language was in issue (for example, use of the term “go-live” and the phrase “substantially conform to Documentation” and typical warranty limitations).

GMG is a medical services provider – they typically have several systems to manage their billing, processing and other business functions.  Here, GMG contracted with a third party (Amicas) for its software – which had to interoperate with software from an already existing vendor used by GMG.  Like so many disputes, this one arose because of finger pointing between two vendors as to whose software was causing the error.  As an added twist here, and something we have litigated on at least one occasion here – GMG had decided to leave Amicas and go with another vendor, and was desperately trying to find a way out of the long term agreement.

Normally in such disputes, the licensee (client) makes some effort to produce a viable claim of breach of the agreement by the licensor / software developer.  In this case, however, GMG, which had not negotiated the agreement and signed a pre-printed form provided by the software company, produced a sole witness to fight the motion for summary judgment filed by the software developer.  This witness had no IT or software training, was not a project manager, was not familiar with the function of either of the software systems at issue, and could not provide any details beyond that the “interface did not work.”  GMG feebly tried to argue that the merger clause – a clause that states that all prior agreements including verbal understandings between the parties are “merged” into the agreement, did not apply because it had not negotiated the agreement.  The court dismissed that argument without any discussion.

Without the ability to provide evidence of what the parties intended – the so called “seamless integration” with the other system – GMG was unable to overcome the warranty limitation in the agreement, which stated that Amicas did not promise that the software would work for GMG in its environment.  Not surprisingly, GMG lost on all counts . . . and that loss was affirmed on appeal.

What is the moral of the story?

First, negotiate large scale enterprise resource planning agreements! Yes, the negotiation can be expensive, but far, far less than the litigation costs and potential damages.  For example, in the GMG case, it was forced to pay an additional $700,000 for software it had abandoned, it was subject to an attorney fee award, it lost all kinds of time dedicating resources to fight the case, it had to pay its own lawyers, and it ended up taking 5 times as long to reach it s goal (of an integrated system).

Second, even if you do not want to hire a lawyer to negotiate, at least make sure that the party providing the service has stated clearly in the agreement, the deliverable, what it will do, and what you expect from the service.  We have reviewed too many scenarios to count where a client has signed a pre-printed form that had NO promises or very light ones, like this agreement.  If it is a critical result that software X must interoperate with software Y, state that in the agreement.

Third, consider the remedy.  Many contractual negotiations can get hung up on the representations, warranties, disclaimers and so on – when they can be resolved by thinking in the opposite direction – assuming a performance representation is not met, what is the remedy?  Remedies range from the “nuclear” option (total contract termination), to some form of “notice and cure” to a repair, re-perform remedy.

Fourth, consider the term of the agreement.  In the GMG case, the parties amended their agreement and made it a longer term agreement.  Many vendors will offer more significant fee discounts, or less escalation, if the term is longer.  These can be attractive deals – but consider that as with GMG, you may desire to move away from that solution.  So, my rule of thumb on this point is . . . the longer the fixed term of the contract, the more closely you must negotiate it – and the more you must pay attention to escape hatches and “relief valves” if something changes.  Technology changes very fast – locking into a vendor for 5 years (as was done in GMG) is almost unheard of.  A three year deal presents enough technology-change-risk to be the outer limit of most of these deals.

I could go on, but if you made it this far . . . well, thanks!

For more information, contact Mike Oliver.