July 13, 2018

Affirming A Software Agreement Does Not Preclude Fraud Claims

Digital Technology & E-Commerce Blog

Often at issue in outsourcing agreements is whether the qualifications and experience of the outsourced consultants comport with the realities on the ground once the project begins. In a recent case, a service provider hired to implement a software reboot saw its project go awry when the customer alleged that the provider misrepresented, among other things, the capabilities of its outsourced employees. See W.G. Bradley Co. v. itelligence, Inc., No. 4:17-cv-208 (CDL), 2018 WL 2944428 (M.D. Ga. June 12, 2018).

The plaintiff's fraud claims survived a motion for judgment on the pleadings, even though the plaintiff arguably affirmed the contract concerning the alleged fraud, because of subsequent fraudulent acts by the defendant pertaining to the qualifications of its consultants.

Plaintiff W.C. Bradley Co. (Bradley) engaged Defendant itelligence, Inc. ("itelligence") to assist with Bradley's enterprise software upgrade. itelligence claimed that its personnel would surpass Bradley's functional and technical needs and represented that it employed "experienced consultants who could implement a software solution that met [Bradley's] needs."

The parties executed a Master Services Agreement, which contained exclusive warranties and integration provisions. According to the court, the first phase rollout "did not go well" with respect to, inter alia, itelligence's invoicing procedures and its electronic data interchange, which Bradley characterized as a "complete failure." Nonetheless, itelligence billed Bradley for the costs incurred in fixing its mistakes.

In May 2016, Bradley filed a "Notice of Material Breach," demanding that itelligence "cure its breaches under the [Agreement] and misrepresentations within 30 days." itelligence proposed a remediation plan, to which Bradley agreed. During the next phase, many of the same problems recurred. In September 2017, Bradley sent itelligence an additional Notice of Material Breach and a notice of recession.

Bradley brought claims alleging, inter alia, fraud and fraudulent inducement. itelligence moved for judgment on the pleadings on the operative claims arguing that Bradley waived its right to rescind the Agreement, and in fact affirmed the Agreement, allowing Bradley to sue only in contract and not in tort.

The court denied itelligence's motion as to the fraud and fraudulent inducement claims. Under Georgia law, 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).

According to itelligence, the Notice of Material Breach showed that Bradley knew of the purported fraud but affirmed the Agreement. The court concluded nothing in the pleadings viewed most favorably to Bradley showed that it was aware of the alleged fraud by itelligence subsequent to the Material Breach Notice, including that itelligence knowingly sold faulty software, lied about the qualifications of its consultants, and offered a bad faith estimate of the length and the cost of the project. For purposes of deciding the motion, the court accepted Bradley's position that it did not discover these aspects of the itelligence fraud until September 2017, a month prior to its rescission letter.

itelligence argued the same position concerning Bradley's fraudulent inducement claim, except that the "Entire Agreement" clause of the Agreement estopped Bradley from claiming that its affirmation of the Agreement was nullified by alleged misrepresentations. The court held 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 likewise for the fraudulent inducement claim.

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