Colonial Life Insurance v. EDS

Citation: Colonial Life Ins. Co. v. Electronic Data Sys. Corp., 817 F.Supp. 235 (D.N.H. 1993).

Factual Background
Plaintiffs are all life insurance underwriters doing business as a group under the trade name Chubb Life America (Chubb). Plaintiffs entered into an agreement for the License of Computer Software (Agreement) with Defendant Electronic Data Systems Corporation (EDS). EDS agreed to license computer software to Chubb and provide data processing services as specified in the agreement. In exchange, Chubb agreed to pay EDS $21,300,450.00 and to perform certain obligations in connection with implementation of the EDS processing system called the "Insurance Machine."

The agreement between EDS and Chubb contained a limitation on damages clause which stated: the amount of damages recoverable against EDS for all events, acts or omissions shall not exceed in the aggregate the compensation payable in accordance with this Agreement for the two month preceding the event giving rise to said liability, and the measure of damages shall not include any amounts for indirect, consequential or punitive damages of any party, including third parties, or for damages which could have been avoided had the data furnished by EDS or the EDS System been verified before utilization. The agreement also included a limitation of warranties clause and a disclaimer of warranty.

After entering into the Agreement, both EDS and Chubb had difficulty complying with the schedule and performing their respective contractual obligations, resulting in subsequent letter agreements which modified the original Agreement. Chubb had apparently paid EDS over eleven million dollars, but had allegedly not received the software that was to be delivered within the first fifteen months of the project.

Chubb brought this suit for breach of contract. EDS moved for partial summary judgment on issues related to limitations on damages, limitation on express warranties, breach of contract claims, and alternative dispute resolution.

District Court Decision
The court first determined whether the Uniform Commercial Code (UCC) applied. The court held that the UCC applied to the contract between EDS and Chubb, the principal object of which was to provide for a license to use computer software. The court noted that computer software has been held to fall within the definition of a "good" under the Code. With respect to limitation of damages, EDS contended that the limitation of damages clause was binding on Chubb's breach of contract, breach of warranty, and negligent misrepresentation claims. The court found that the limitation of damages clause was not unconscionable because both parties are sophisticated business entities who extensively negotiated each provision of the Agreement. However, the court also found that the clause was not necessarily binding as a matter of law if there was bad faith on the part of EDS. The issue of bad faith was to be decided at trial.

With respect to limitation of warranties, EDS maintained that the warranty provisions in the Agreement were the sole provisions intended to control the warranty of the Insurance Machine. Chubb, on the other hand, argued that the Agreement incorporated by reference the EDS Proposal, which contained numerous express warranties. The court found that since there was ambiguity, there was a genuine issue of material fact, which precluded summary judgment on Chubb's breach of express warranty claim. With respect to the breach of contract claim, EDS argued that by continuing to accept EDS' services long after becoming aware of EDS' alleged breach of contract, Chubb elected to continue the contract and waived any right that it may have had to terminate the Agreement. The court found that the propriety of Chubb's termination of the contract could not be determined as a matter of law and summary judgment was denied on this issue. EDS also maintained that Chubb's alleged failure to comply with the Alternative Dispute Resolution Clause of the Agreement barred litigation. However, the court found that Chubb substantially complied with the clause in the Agreement because its management periodically met with EDS to resolve disputes. The court denied EDS' motion for summary judgment.