After making the decision to file a lawsuit for a failed implementation or ERP project, one of the first things that should be analyzed is the contract executed with the ERP vendor. Having analyzed hundreds of these implementation contracts, one thing is abundantly clear: they all contain language that is strongly in favor of the software vendor or licensor in the event that the customer is damaged from a failed implementation. None is more evident than two provisions contained in every well-drafted ERP contract: (1) the disclaimer of warranties; and (2) the limitations of liability. These two provisions will work to effectively limit the amount of damages that an ERP customer will be able to claim.
A common disclaimer of warranty provision will look like the following:
Disclaimer: The Licensor disclaims all other warranties express or implied, including without limitation, any implied warranties of merchantability or fitness for a particular purpose.
A typical limitation of liability provision will look like the following:
Limitations of Liability: Except for (1) damages resulting from (a) unauthorized use or disclosure of confidential information, or (b) personal injury arising from either party’s gross negligence or willful misconduct; or (2) the Licensor’s right to collect unpaid fees, under no circumstances and regardless of the nature of any claim shall the Licensor or Licensee be liable to each other for an amount in excess of the paid license fees for the software directly causing the damages or be liable in any amount for special, incidental, consequential, or indirect damages, loss of good will or profits, work stoppage, attorneys’ fees, interest or exemplary or punitive damages.
As demonstrated by the examples above, these provisions are problematic for the ERP software customer because they limit recovery to only the fees it paid to the ERP software vendor. Any claim that seeks to recover damages in excess of what the contractual limitations allow will be challenged by the ERP software vendor’s lawyers . The limitation of liability provisions in these contracts are so narrowly drafted that the amount of damages they allow to be recovered is almost always never enough to recoup damages that the ERP customer has suffered as a result of the failed ERP implementation.
Fortunately, claims for fraud, which can include claims for fraudulent inducement or fraudulent misrepresentation, can be effectively utilized to overcome the limitations discussed above. Fraud effectively allows plaintiffs to plead a cause of action that will fall outside the limitations contained within the contract. An ERP vendor will not typically be able to “disclaim” any fraudulent actions or limit its liability for actions that happened outside of the contract. Therefore, claiming and proving fraud is an important strategy that must be considered when bringing a lawsuit.
Be warned that fraud is harder to prove than most other causes of actions typical in a technology project. While different jurisdictions will vary regarding what elements must be shown to prove fraud, the plaintiff almost always must prove that the defendant knew it was committing fraud or making material misrepresentations. If you have any questions regarding pleading or proving fraud as a cause of action in technology lawsuits, please give our office a call at (312) 263-0570.