A Vanilla “Tech” Contract May Not Be So Vanilla to a Trained Expert
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October 09, 2024
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Companies enter into technical contracts hoping to achieve lofty business transformation goals through the use of technology assets (software, hardware, cloud computing, etc.). Unfortunately, tech implementation projects have a shocking failure rate (up to 70% according to BCG)1 and often companies end up embroiled in a dispute with the tech provider.
When a company hires a technical consultant or implementation partner, it typically involves a complex web of technical contracts. These contracts cover the licensing of software, implementation services, statements of work, payments and royalties, support services, and much more. Disputes can arise when the software or systems do not perform as planned, the company’s business needs change, change is not managed properly, or when one party decides to sever the relationship.
Despite each project being unique, the provisions in these technical contracts tend to use standardized or boilerplate language. Because this language is similar to the countless other contracts that a company might review in the normal course of business, there is a tendency to treat them the way a typical smartphone user checks the terms and conditions agreement box when downloading a new app. Yet, however innocuous they might seem, these boilerplate provisions are often at the center of technology-related litigation.
Contact Interpretation
Ordinarily, contract terms are given their plain and ordinary meaning.2 But, parties can submit evidence interpreting the meaning of certain terms if they are not completely unambiguous.3 When a term has a specialized meaning in industry, such evidence (called “trade usage”) may be admissible in interpreting the contract.4 Likewise, evidence of how the parties behaved in the past with respect to a contract (called “course of dealing” or “course of performance”) may be relevant to interpretation.5
For example, let’s say a contract requires delivery of “top-quality” widgets without specifying the characteristics of a top-quality widget. If there is a dispute regarding the quality of widgets delivered, evidence of what the widget industry considers to be “top-quality” (trade usage) may be relevant to questions of contract interpretation and performance. Likewise, evidence of the quality of widgets that were delivered and accepted by the parties in the past (course of dealing/performance) may be relevant.
To further illustrate the importance of trade usage and course of dealing/performance in contract interpretation, the following anonymized case study examines how the meaning of words like “copying” and “make available” can have a major impact on how an alleged breach of contract is resolved.
What is “Copying”?
A recent dispute involved a company’s (the “Company”) licensing of software as a service (SaaS) from a software vendor (the “Licensor”) that provided functionality for scheduling the Company’s staff and for uploading and displaying data to its customers. After several years of use, the Company decided to develop its own proprietary software system and hired an independent technical consultant (i.e., programmers) for the project. The Company and the technical consultant successfully built a new system. The Licensor was not happy and sued for breach of their license agreement, among other things.
One provision-at-issue of the license agreement prohibited “copying” of the Licensor’s system. The Licensor alleged that the Company had copied its system in breach of the copying provision. In support of this allegation, the Licensor’s expert opined that copying had occurred. The expert relied heavily on evidence that the Company’s technical consultants had accessed the Licensor’s system during development of the new system. The expert also relied on the similarity of certain visual or user interface elements in both systems. However, the expert did not opine on the interpretation of the “copying” provision.
In contrast, the Company’s expert recognized that properly interpreting the “copying” provision was predicate to the breach analysis. The license agreement was an agreement between two sophisticated businesses for licensing a technical software system. In this context, the Company’s expert opined that “copying” would be understood to mean copying actual software elements embodied in source code. The Company’s expert’s analysis was supported by the full text of the provision, citation to technical references, and witness testimony. This evidence showed that both parties understood the copying prohibition to quintessentially prohibit copying of source code, but did not prohibit independent development. The evidence also showed that the Company had never accessed the Licensor’s source code nor reverse compiled code.
Instead, the evidence (e.g., meeting videos, mockups, requirements documentation, etc.) showed a normal software development process that was not aided by any prohibited copying. Any similarities between the systems (e.g., login pages) was attributable to the generic nature of both systems’ functionality, not copying.
To Share or Share Not
Another provision-at-issue prohibited “making available” the Licensor’s system to third parties. The Licensor alleged breach of this provision based on the fact that the Company had provided access to the Licensor’s system to the Company’s technical consultants. Again, this provision appeared at first glance to be straightforward so the Licensor’s expert did not opine on an interpretation of the provision. Instead, the Licensor’s expert’s opinion was inherently based on interpreting “third party” to strictly mean anyone that was not an actual party to the license agreement.
The Company’s expert again recognized that the analysis starts with interpretation of this provision, one that is commonplace in the software world. These types of provisions are intended to prohibit sublicensing or reselling software systems. It is customary in the software industry for third-party technical consultants to have access to software systems for routine operations and maintenance. As such, the Company’s expert opined that this provision would be understood to only prohibit making the system available to true, arm’s-length third parties. That opinion was supported by factual witness testimony from both sides, confirming that access by the Company’s day-to-day contractors and end-user customers was intended and accepted by the Licensor. In contrast, if the license agreement was interpreted to strictly exclude access by anyone who was not an actual party to the license agreement, then it would have excluded those individuals who had been using the Licensor’s system for years without objection.
The parties settled the case a few days after the Company submitted its rebuttal expert report.
Key Takeaways
This anecdote highlights just two examples of how trade usage and course of dealing/performance can illuminate the plain meanings of words found in tech contract provisions. For companies involved in tech contract disputes, understanding how the relevant tech industry views provisions like these could make a huge difference in the outcome of the dispute.
Footnotes:
1: P. Froth et al., “Flipping the Odds of Digital Transformation Success,” Boston Consulting Group (Oct. 29, 2020) (last visited Aug. 21, 2024).
2: See, e.g., Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 662 (Tex. 2005) (“Contract terms are given their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense.”) (citations omitted).
3: See, e.g., ibid.
4: See, e.g., Restatement (Second) of Contracts § 222(3) (1981) (“[A] usage of trade in the vocation or trade in which the parties are engaged . . . gives meaning to or supplements or qualifies their agreement.”); Merriam-Webster, Usage of Trade (available at https://www.merriam-webster.com/legal/usage%20of%20trade (last visited June 11, 2024)) (“usage of trade: a practice or method of dealing that is regularly observed in a place, vocation, or trade and that one justifiably expects to be followed by another party to a commercial transaction[.] . . . NOTE: Evidence of a usage of trade may be admissible as supplementing the express terms of a disputed contract when it does not contradict them.”); Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471, 485–86 (Tex. 2019) (“Industry custom and usage may inform the meaning of words that may carry their plain meaning in some contexts, but may also carry a special meaning in the context of a particular industry. As a general rule, parties are presumed to contract in reference to the usage or custom prevailing in the particular trade or business to which the contract relates, and evidence of custom or usage . . . is generally admissible to assist the factfinder in ascertaining the parties’ true intent.” But, “when a contract is unambiguous, we do not consider outside evidence, including industry custom and usage, to alter or contradict the terms.” (quotations and citations omitted)).
5: See, e.g., Cornell Law School, Legal Information Institute, Course of Dealing (available at https://www.law.cornell.edu/wex/course_of_dealing (last visited June 11, 2024)) (“Course of dealing refers to a sequence of conduct regarding previous transactions which can reasonably be seen as evidence of a common basis of understanding between the parties.”); Cornell Law School, Legal information Institute, Course of Performance (available at https://www.law.cornell.edu/wex/course_of_performance (last visited July 8, 2024)) (“Course of performance refers to a sequence of conduct between two parties with respect to a particular transaction.” And, “[c]ourse of performance differs from the related course of dealing because course of performance concerns conduct after a contract has been formed whereas course of dealing is concerned with conduct that occurred before the contract in question was formed.”); Strickland v. Coleman, 824 S.W.2d 188, 192 (Tex. App. – Houston [1st Dist.] 1992, no writ) (“[E]vidence of custom or course of dealing is admissible to prove or interpret the terms of a contract.”).
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October 09, 2024
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