Posts

2019 Case Law Mash-Up: Can you assign exaggerated representations and warranties to a locked-in vendor?

Mash-up (noun): (slang) a creative combination of content or elements from different sources.

Several court cases in 2019 dealt with (or are still dealing with) key issues faced by parties to commercial contracts, including contracts for technology products and services. This post briefly discusses four of those cases and their corresponding issues of contract assignment, representations and warranties, and data security.

Can You Assign?

According to the court in Barrow-Shaver Resources v. Carrizo Oil & Gas (Tex. 2019), the answer to the question, “Can you assign?” is “No.” Bottom line: Make sure your contract clauses are clear and unambiguous, and don’t plan to rely on prior negotiations, drafts, or margin comments to explain away terms you don’t like.

The contract in question included an unambiguous non-assignment clause that read, “The rights provided to [Barrow-Shaver] under this Letter Agreement may not be assigned, subleased or otherwise transferred in whole or in part, without the express written consent of Carrizo.”

The court concluded that Carrizo was within its contractual rights to simply refuse to provide consent to Barrow-Shaver’s requested assignment – without more. Neither the contract language nor applicable law required Carrizo, in withholding consent, to exercise good faith, to be reasonable, to satisfy certain conditions, or to provide a reason for withholding consent.

The court rejected arguments that, notwithstanding the contract language: industry custom and usage should be applied to interpret when consent may be withheld; prior to contracting, Carrizo assured Barrow-Shaver that Carrizo would provide its consent; and, the parties’ prior negotiations and an early draft of the contract should be considered.

Exaggerated Representations and Warranties

Two 2019 cases highlight the sales and contracting processes for big-ticket IT services. In IBM v. Lufkin Industries (Tex. 2019) (“Lufkin”), Lufkin Industries contracted with IBM for the provision and implementation of a new software solution to run Lufkin Industries’ operations systems. In Hertz v. Accenture (S.D.N.Y., not yet decided) (“Hertz”), Hertz contracted with Accenture to build a transformed web site and mobile application. A key takeaway from both cases is that well-drafted contractual disclaimers and integration clauses, absent explicit contractual representations or warranties, can defeat warranty breach, inducement, and misrepresentation claims.

In Lufkin, IBM made several pre-contractual representations regarding the timing and ease of implementation of the new software solution. Some representations were made orally, others appeared in sales materials. The project implementation process ultimately failed. In Hertz, Accenture is alleged to have delivered versions of contracted work product that failed to meet contractual timing requirements, specifications, and warranties. Hertz terminated Accenture’s contract before the project was completed.

In 2019, Hertz filed a lawsuit against Accenture for breach of contract and unfair and deceptive practices. In its motion to dismiss, Accenture specifically called out the contract’s integration clause and conspicuous warranty disclaimer provision. In Lufkin, IBM prevailed against Lufkin Industries’ claims for inducement and misrepresentation. The contract included clearly drafted language disclaiming IBM representations, disclaiming Lufkin Industries’ reliance on IBM representations, and establishing the contract as the entire agreement between the parties.

Contracting for large IT projects can be challenging. The projects are often complex and time-consuming and frequently involve developing or evolving parameters and requirements. Almost certainly, notable time is spent drafting contractual representations, warranties, disclaimers, and integration clauses. But, to address potential issues, also duly consider project scoping provisions and acceptance terms (including whether the RFP (if one) will be part of the contract). If possible, stay connected with your sales or procurement team throughout the sales process to ensure alignment and relevant project-specific contract terms.

Locked-In Vendor

Tightly drafted contracts are a valuable asset – but they are not the exclusive source of risk mitigation and avoidance. If you can, do more.

A class-action lawsuit was brought against Delta Air Lines following a data security breach affecting 800,000 Delta customers. See McGarry v. Delta Air Lines (C.D.Cal. 2019). The breach involved a hack of Delta’s service provider, 24[7] (a Philippines company). Delta subsequently sued 24[7] for damages arising from the breach.

The security terms in Delta-24[7] were robust and comprehensive. In addition, 24[7] represented that it had achieved five different industry-recognized privacy/security certifications. Although the contract terms and representations ultimately may be sufficient to award Delta damages, the contract doesn’t assure Delta’s full recovery. What other help is there?

For customers, even if it’s not required, pre-contract service provider diligence can be quite informative; for vendors, ensure that you can do what you contractually sign up for. When contracting with foreign companies, consider parent guarantees or other contractual mitigations. And, for customers and vendors, closely review your own insurance policies to evaluate coverage in the event of a security incident; also for customers, consider reviewing the service provider’s policies if you have coverage concerns.