Digitech Computer v. Trans-Care: Monday-Morning Contract Analysis

U.S. 7th Circuit Contract Cases

Every once in a while I read a court’s opinion and want to know the back story. That’s how I feel about last month’s Seventh Circuit decision in Digitech Computer v. Trans-Care.

Here’s a short version of the business story from the Southern District of Indiana’s three separate opinions and the Seventh Circuit’s opinion. Trans-Care personnel met representatives of Digitech at a trade show. Wanting to win Trans-Care’s business away from a competitor, Digitech later persuaded Trans-Care to negotiate for the purchase of Digitech’s software by offering a 90-day “satisfaction guarantee,” which was unusual for the software company. Digitech formalized the guarantee in a written proposal that it presented to Trans-Care, and the company reiterated the guarantee in subsequent negotiations. The parties eventually signed a formal agreement, which didn’t contain the guarantee. When the software didn’t perform as Trans-Care expected, Trans-Care tried to get out of the contract and Digitech sued for breach of contract.

Why didn’t Trans-Care attempt to insert the guarantee into the formal contract?

One part of the back story I’d like to know is why Trans-Care didn’t negotiate for the guarantee after it received the initial draft of the contract. Digitech used the satisfaction guarantee as an incentive to persuade Trans-Care to negotiate in the first place, and the guarantee was important to Trans-Care right up to the time the formal contract was signed. Yet, although the district court took into account email correspondence and other evidence outside the four corners of the contract, it didn’t find sufficient evidence that the guarantee had been agreed upon. Apparently, it hadn’t even been discussed for some time before Digitech presented its contract to Trans-Care.

Rather than directly negotiate this important provision, Trans-Care clumsily attempted to incorporate the guarantee into the formal agreement by delivering a purchase order containing the terms of the guarantee with a signed copy of the contract in the same envelope.

Why didn’t Trans-Care address the issue head-on? Maybe the company was operating without the benefit of legal counsel and thought it was effectively preserving the guarantee. Or maybe Trans-Care’s counsel relied on the absence of a “complete agreement” clause to conclude that a court would likely deem the guarantee to be a part of the contract if things went south. I have a lot of sympathy for sub-optimal contracting that is the product of the rough and tumble of business negotiations. Still, I wonder.

Was the guarantee missing from Digitech’s initial draft of the contract the result of miscommunication with legal?

Another piece of the story I’d like to know is whether Digitech intentionally omitted the satisfaction guarantee from the initial draft of the contract. Or maybe Digitech’s sales team merely failed to alert its legal team that a non-standard guarantee provision had been agreed to. I’ve seen a lot of situations (from afar, of course) where insufficient communication between business and legal personnel resulted in the production of contract drafts that failed to reflect the business deal. Maybe this is one of those situations and Digitech was the beneficiary of Trans-Care’s reticence to raise the issue.

Did Digitech think through its options or merely shoot from the hip?

Another question I have is how deliberative Digitech was after Trans-Care tried to get out of the contract. Both the lower court and the appeals court held that the satisfaction guarantee wasn’t a part of the contract and that Trans-Care breached the agreement by attempting to terminate the agreement without providing the notice and opportunity to cure that were required by the agreement. Digitech responded to Trans-Care’s breach by locking the software and suing Trans-Care, but was this a strategic move or a mere reaction?

The appeals court held that by taking this course of action, Digitech repudiated the contract, and it limited damages to the amount of a few days of licensing fees on a three-year contract. Digitech had the right under the agreement to merely suspend service and demand payment. This approach likely would have resulted in a significantly higher damage award. Did Digitech take stock of the situation and determine the best response to Trans-Care’s breach, or did it just shoot from the hip to enforce its rights?

Arm-chair quarterbacking is much easier than the real thing, of course. But behind the dispute lies a real story of human interaction among business people, and my interest in contracts is principally on the front end of things. In this case more than most I wonder what the negotiations were like and what the parties were thinking.

3 comments… add one
  • Guest May 29, 2011 Link Reply

    are not the parties always obligated to negotiate in good faith regardless of whether the contract specifically requires it?

  • F. A. Ward May 3, 2013 Link Reply

    As some involved in the Trans-Care side of this issue, I can answer some of the questions posed.

    “Why didn’t Trans-Care attempt to insert the guarantee in the formal contract?” There was language in the Agreement that referred to “other attached documents.” Trans-Care relied on that language to included proposals and specifications given by Digitech. It also relied on the exclusion of a merger clause to deal with this issue. And, to a greater extent than was wise — in hindsight — Trans-Care also relied on the word of Digitech’s President. Obviously all of these were a mistake and if it were to be done over again, would be done differently.

    “Was the guarantee missing from Digitech’s initial draft of the contract the result of miscommunication with legal?” Digitech’s President drafted the initial agreement proposal. Per testimony, he did not cosult with an attorney.

    I can’t answer the third question. I will only say that a lot of mistakes were made on both sides of this Agreement and hopefully, we have both learned from them.

    • Brian Rogers May 12, 2013 Link Reply

      F.A.: Thanks for commenting. As you say, we can all learn when things don’t go as well as we would hope, and I appreciate your sharing some of the backstory for folks who read this post.

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