In our practice, we represent both ERP vendors and ERP customers in connection with licensing and litigation matters. If an ERP software vendor is going to be sued in connection with an ERP software deal, the ERP vendor will be sued both in tort and contract. While every case is different, typical causes of action in an ERP lawsuit include:
- Breach of contract;
- Breach of warranty;
- Fraudulent inducement; and
- Negligent misrepresentation.
Breach: Two important elements of any ERP software and services contract are the warranty and the exclusion of consequential damages. Warranties in the ERP context typically cover: (i) defects in the software for a fixed period of time; and (ii) the standard by which services will be performed.
The “failure of essential purpose” of a warranty is a legal concept where the warranty provides insufficient remedies to the customer. If the warranty fails of its essential purpose, the ERP customer may be allowed to recover consequential damages even where the contract contains an exclusion on these types of damages because courts may find the remedy language unconscionable.
We often see ERP vendors use aggressive, one-sided contracts that provide warranties with remedies that are limited in scope. In an overzealous effort to minimize liability, these types of contracts may actually increase an ERP vendor’s risk in a breach of contract lawsuit.
When drafting warranties, ERP vendors should consider including remedy provisions that are reasonable and likely to be upheld by a court. ERP vendors should also consider including standard acknowledgments in their form contracts stating that the damages exclusions are applicable even if a remedy in the contract fails of its essential purpose.
Fraud And Negligent Misrepresentation: Lawsuits filed against ERP vendors for failed software implementations almost always contain claims for fraudulent inducement and negligent misrepresentation. These claims are challenging for plaintiffs to prove for a variety of legal reasons, however, if they survive a motion to dismiss, they present substantive risk for ERP vendors. If faced with a claim for fraud or negligent misrepresentation, contractual limitations on the ERP vendor’s exposure to damages may be inapplicable.
While the best way to avoid a lawsuit based on fraud or negligent misrepresentation is to practice an open and honest sales cycle, ERP vendors should consider including language in their form contracts specifically designed to minimize the likelihood of being sued for fraud and negligent misrepresentation.
Most ERP vendor form contracts include a standard disclaimer of warranties and a merger clause. Depending on how well drafted it is, and depending on the jurisdiction, these types of provisions may frustrate a plaintiff’s ability to bring a suit claiming fraud and negligent misrepresentation. However, the effectiveness of these types of standard contract provisions in defeating claims of fraud and negligent misrepresentation is debatable. What may be more effective is a separately drafted non-reliance clause that forces the ERP customer to acknowledge that it has not relied on specific representations that are likely to form the basis of a fraud or negligent misrepresentation lawsuit.
For more information on ERP software contract negotiation, and fraud and negligent misrepresentation lawsuits, please see the videos below.