International Business Machines Corporation, Plaintiff, Appellant, v. Catamore Enterprises, Inc., Defendant, Appellee, 548 F.2d 1065 (1st Cir. 1976)

This case is a paradigm of complex litigation, rivalling the complexity of the cybernetics era from which it arises. It involves the unhappy relationships between a supplier of electronic data processing equipment and services, International Business Machines Corporation (IBM) and a customer, Catamore Enterprises, Inc. (Catamore),¹  a manufacturer and distributor of jewelry. The events at issue here spanned the years between 1967 and 1971 and concern the efforts of Catamore to computerize, and thus expand, its operations with leased IBM equipment and the assistance of IBM services the scope and quality of which are the heart of this suit.

Suit began in October, 1972, with the filing of a simple complaint by IBM in which it sought to collect $68,453.23 from Catamore for rental of equipment and payment for services. Catamore filed an answer containing a simple denial of the facts that would give rise to liability and a counterclaim asserting that IBM had breached numerous express and implied warranties of performance and claiming damages of $250,000. A year and a half later, Catamore filed eight additional counterclaims, principally identifying different elements of alleged damage but adding specific allegations of breach of contract and false representations, and claiming damages of $15,554,210. Trial began on March 10, 1975. On or about May 16, 1975 Catamore again amended its counterclaims in various particulars, adding a ninth counterclaim charging IBM with wanton, reckless, and negligent conduct and claiming $18,887,800 in actual damages and $7,293,234 in punitive damages. After 56 days of trial and 9 days of deliberation, the jury returned a verdict for IBM on its claim against Catamore in the amount of $68,453.23 and a verdict for Catamore on its counterclaims in the amount of $11,400,000.²  IBM now appeals from the $11,400,000 judgment entered against it. Catamore has not appealed from the judgment against it.

IBM argues on appeal that, as a matter of law, there is no basis for liability for breach of contract or for negligence. In addition, it challenges the evidence and instructions as to damages and maintains that a number of rulings at trial and the allowance of excessive latitude to Catamore's counsel contributed to confusion and error.

In reviewing this case, we are not insensitive to the fact that we are dealing with a most arduously protracted trial, in which the district court took the utmost pains to avoid captious rulings, be fair to both parties, and to give both sides advance notice of its problems and proposed instructions. Equally weighty in our minds is the deference to be given the jury, which, faced with a host of complex issues on both liability and damages, spent nine days deliberating over the evidence of this 56 day trial. We are nevertheless compelled to vacate the judgment below and remand for a new trial. For reasons which are stated below, we deal only with the questions of contract liability.

What we might term the contract history of this case is the following. In the mid-1960's Catamore was a thirty-year old family company, which had specialized in selling religious jewelry to wholesalers and was in the process of expanding and diversifying its business. It was not only selling a general line of jewelry but, by 1965, was experimenting with a new sales method, "program selling", in which wholesalers were bypassed and, after market tests were run, prepackaged units of jewelry items were placed directly in retail stores of some of the large chains. Reordering would take place several times a year.

Catamore's tests led to increasing sales and expectations and the recognition that for it to develop capacity to process dramatically increased quantities of retail orders, and to coordinate production with demand, it would require a system of production control using electronic data processing equipment. Conversations between Catamore's President, Robert Catanzaro, and an IBM salesman, Davitt, led to a study of Catamore's needs by an IBM systems engineer. Thereafter, IBM's representative staged a presentation for Catamore, in which he explained through the use of schematic charts the different steps necessary to computerize Catamore's production control system.³  At this point, in September, 1968, Catamore decided to adopt such a system. It proceeded to sign a Machine Service Agreement, providing for the lease of a computer. Both parties understood that it was to be installed in December of 1969, after the necessary preparatory work had been done.

The core of this dispute is the opposite understandings of the parties as to who had the responsibility for doing this preparatory work, which consisted of general systems design (as to overall flow of the system), a more refined detail systems design,⁴  and programming.⁵ 

It is Catamore's contention that IBM orally agreed to furnish, along with the computer, a completely computerized production control system on a "turnkey" basis, so that Catamore personnel (who would have had training in operating the system) could take over all operations. Even the ordinarily time-consuming task of programming was allegedly assumed by IBM since it would use and merely modify preexisting programs already in its library of programs. Catamore had only the obligations of hiring a programmer/maintenance man to run and keep updated the system after installation and of converting basic data used in its manual system so that the data could be used by the computer.

It is IBM's view that, on ordering the computer equipment, Catamore would have available to it, at no extra cost, both the education of Catamore's employees in data processing and assistance in systems engineering design. The latter, according to one IBM witness, Davitt, meant that, to take one of the four operations of production control, the order entry system, IBM, working with Catamore, would develop a "systems design flow chart of order entry", i. e., more detailed design of this function, on the basis of which a programmer could begin to work.⁶  The programmer then would write even more explicit instructions and then translate those into a coding language understood by the computer. Catamore would be allowed to use IBM facilities for testing. But all programming would be Catamore's responsibility, IBM not at that time performing this service for customers. IBM did, however, offer Catamore any of the package programs in its library which might be useful.

These contrasting views as to who was to do what were the seeds of what followed. While a chart of steps to be taken, and times within which they should be taken, to prepare for the December, 1969, installation of the computer and start-up of the new system had been a part of IBM's sales presentation, little seemed to be happening by way of joint consultation or implementation by either party during the next nine months. Some work on systems design was done by IBM; in April of 1969 Catamore had hired a controller, Correra, to supervise its data processing project; a start had been made on converting the items of Catamore's inventory to computer compatible numbers and a larger computer had been placed on order. But no Catamore employee had obtained any data processing education. In the meantime, Catamore had pushed ahead with its new sales approach, bringing back a significantly increased number of orders as the result of testing its product lines and packages in many retail outlets. It also prepared for expansion by making arrangements for additional facilities, financing, and new products.

In June, 1969, IBM announced a new policy to all its customers, stating that systems engineering services would be supplied on a charge basis, except that assistance which had earlier been mutually planned would be continued to be supplied without charge until January 1, 1970. In addition, rental charges would be reduced 3 per cent. This came to be called "unbundling". Catanzaro testified that he was assured by IBM's Davitt that unbundling would not affect Catamore since IBM's commitments would be fulfilled before January 1, 1970. When a new IBM marketing representative, O'Reilly, took over the Catamore account in September, 1969, from Davitt, he saw that the time remaining until December was inadequate to perform all the tasks necessary to launch the new system, and recommended to Catamore that delivery of the equipment be deferred to March or April of 1970. This was agreeable to Catamore, which was seeking a new building and which would not face another business season until the fall of 1970. It set an outside installation date of September, 1970.⁷ 

In November of 1969 IBM wrote Catamore, referring to the provision in the unbundling announcement that services earlier "mutually planned" would be continued without charge until January 1, 1970. It listed the areas so agreed upon as: "Production Control, Inventory, Order Entry, Invoicing, Accounts Receivable, and Accounts Payable."⁸  It then noted that "the system design for production control has been 90% completed with the remaining accounting application systems (presumably Accounts Receivable and Accounts Payable) to be designed." It concluded by stating that after January 1, 1970, services in the noted areas would be on a charge basis "as stated in our Agreement for IBM Systems Engineering Services." The parties disagree as to the message conveyed by this letter, Catanzaro testifying that he had been told by IBM personnel that the 90 per cent included programming, IBM witnesses insisting that this referred only to systems design.

Shortly thereafter, on December 9, 1969, Catamore signed IBM's form "Agreement for IBM Systems Engineering Services" (SES). This agreement stated that it was to govern all assistance in the installation and use of data processing products; that it was "the complete and exclusive statement of the agreement between the parties, which supersedes all proposals oral or written and all other communications between the parties"; that the customer's exclusive remedy should be limited in nature and amount to the amount paid for services under the applicable Service Estimate, that IBM would not be liable for lost profits or other claims, or for consequential damages; and that no action "arising out of the services under this Agreement may be brought by either party more than one year after the cause of action has accrued."⁹ 

On the same date Catamore signed a Service Estimate, or authorization, in the amount of $4,884 for work to be done by October 31, 1970 in contrast to the September, 1970, date which was orally agreed upon on the production control system and other items. The forms stated that authorization was given "under the terms of the captioned Agreement for IBM Systems Engineering Services". Catanzaro testified that in authorizing his subordinate to sign this agreement, he did so because "we had committed our company to a course of action that was irrevocable" and, having been told that the remaining 10 per cent of work to be done would cost about $5,000, felt that all he would be giving up was the difference between this added obligation and the 3 per cent reduction in rental Catamore would receive.

On January 29, 1970, Catamore executed a second authorization in the amount of $2,508 for work to be done by March 30, 1970 in performing "the detail design and definition of the order entry/Inventory Control System previously developed . . . Included in this estimate are: 1. Program Descriptions. 2. Transaction Analysis. 3. Major Report Layouts. 4. Record and File Specifications (.) At the termination of this scope of effort, an estimate will be submitted covering programming implementation and documentation of the systems." This authorization contained the same explicit reference to the SES as did the previous authorization.¹⁰ 

At this point the focus shifts. In early 1970 Catamore not only had seen its program selling continue to expand but seized an opportunity to enter the costume jewelry field. When one of its customers (a costume jewelry firm which had bought fine jewelry from Catamore to supplement its line) ceased to do business with it, Catamore hired the customer's experienced sales force and Catanzaro brought about the creation of two new corporations, M. V. Creations, Inc., which was to purchase costume jewelry, and Vicario, Inc., which was to be a selling company (hereinafter referred to as MV/Vicario). A new and urgent need for a data processing merchandise control system arose. According to Catamore an oral agreement was reached in mid-March, 1970, for the creation of a merchandise control system to be completed in eight weeks. A larger computer was ordered and, beginning on March 30, 1970, a series of SES Estimates was entered into by MV/Vicario. All of these contained the above mentioned reference that "authorization for the above work is given under the terms of the captioned Agreement for IBM Systems Engineering Services".

The subsequent unfolding of events may be even more telescoped, since they are not germane to the issues we deem presently controlling. The system supplied to MV/Vicario, according to Catamore witnesses, failed to reflect inventory accurately, with the result that it ended 1970 in a badly overinventoried position. When September, 1970, arrived, Catamore was still without a production control system and, faced with a deluge of orders, resorted to extreme efforts to cope with a crisis but was unable to process many orders. "Locked" into IBM equipment and system, Catamore, according to Catanzaro, was forced to await a 1971 delivery. The MV/Vicario salesmen, faced with reduced advance "draws" against commissions, left. Catamore again faced the busy fall season of 1971, unable to cope with orders and losing customers. An IBM study of Catamore's problem, presented in December, 1971, revealed, according to Catanzaro, only the problems he knew existed three years earlier. Various threats, cancellations, restrictions, promises, demands, and negotiations occupied the latter part of 1971 and much of 1972.¹¹ 

While this narration is extensive, we have omitted reference to voluminous testimony bearing on acts IBM may or may not have done which would be relevant to Catamore's allegations of fraud, misrepresentation, or negligence. In so compressing our presentation of the facts, we have not captured the full flavor of Catamore's case, in its assertions and evidence as to negligence,¹²  fraud and misrepresentation,¹³  or damages.

At this point we summarize in more detail both the theories of liability which were submitted to the jury and the parties' present positions with respect to them. Catamore's contract claims arise from its allegation that it and IBM entered into two separate oral contracts, each of which could be enforced consistent with the Statute of Frauds: the 1968 oral agreement for a production control system and the 1970 agreement for a data processing merchandise control system for MV/Vicario. A pivotal issue, of course, is the applicability of the SES agreement's limitations of liability clauses to these causes of action. The district court refused to rule that these contract claims were subject to the limitation of liability clauses in the SES agreement as a matter of law. It thought there was sufficient evidence of misrepresentation for a jury to find that Catamore had been induced to enter the SES agreement by fraud, rendering the agreement itself voidable, and that there were no other impediments to its rescission. See note 13, supra. Whether or not the SES agreement was valid, the district court also believed there were bases for regarding the two oral agreements as wholly independent of the SES agreement and not subject to its limitations. It therefore also permitted the jury to find both that the SES agreement was in effect and that both breaches of contract claims were meritorious. Catamore, in addition, now maintains that, whether or not the SES agreement is voidable, the limitations of liability clauses in it are themselves void and may not bar its contract claims.

IBM, not surprisingly, insists that the jury should not have been permitted to consider the contract theories of recovery. In its view, neither oral contract was enforceable: the 1968 agreement was within the Statute of Frauds and the 1970 agreement was not a contract since the parties intended that it would be reduced to writing before it would become binding. In any event, IBM insists that, as a matter of law, both contract claims were subject to the SES agreement which it maintains was valid in all respects and were barred by it.

Catamore's negligence claim is that IBM, in its dealings with Catamore, committed numerous unreasonable acts of misfeasance, all of which were independently actionable in negligence regardless of their relation to the contract claims. Even if the SES agreement barred the contract claims, Catamore maintains that the limitations of that written agreement should not be construed to apply to its negligence count. IBM, on the other hand, contends that the negligence claim should never have gone to the jury. Its view is (1) that the district court abused its discretion in permitting the addition of a negligence counterclaim on the twenty-ninth day of trial; (2) that, under the facts of this case, Catamore's sole remedy was in contract; and (3) that even if a negligence action was maintainable, this action too was subject to the limitation of liability clauses in the SES agreement.

Although the parties have briefed the whole range of issues referred to above, we will not, at this juncture, rule on the propriety of the trial court's having submitted each of these theories of liability to the jury. As to one issue, the objections IBM raises are not before this court.¹⁴  Although we recognize that a decision by this court as to all the others would simplify a second trial of this case, we do not undertake the task. Some of the issues are novel, and a few involve what appear to be close legal questions. We are reluctant to extend this opinion to include a number of complex legal determinations where it seems likely that some may ultimately not be necessary to the resolution of this dispute. Some of these questions will be determinative only if the jury makes factual assumptions which, while perhaps not improper, are unlikely. Because special verdicts were not returned in the first trial, see Fed. R. Civ. P. 49, we have no way of knowing either the factual assumptions the jury made or the theories of liability it found persuasive. While we would encourage at least the limited use of interrogatories in any retrial that occurs, see Fed. R. Civ. P. 49(b), we are confident that, whether or not they are used, the factual predicates of any jury verdict at a second trial will be clearer since the issues will have been narrowed as a result of our opinion today. In the appeal of that judgment, this court would be in a position to rule, on the basis of more focused briefs and factual presentations, on whatever legal issues appear to have in fact been determinative.

For the present, therefore, we focus in particular upon the issue whether, under New York law,¹⁵  the SES agreement, the voidable character of which we leave to the second trial,¹⁶  barred the counterclaims for the breach of the two oral contracts. We do so because these contract issues predominated at the first trial and probably were conceived by the jury as central to the resolution of this dispute. Moreover, unlike many of the other claims where we cannot now say with any certainty that egregious errors were committed, we think that notwithstanding the care taken at trial and indeed perhaps because of the spirited, relentless thrust and parry of this extended trial the significance to be accorded facially comprehensive written agreements between sophisticated corporate entities was undervalued.

The morass of business dealings between two companies described on this record, their promises oral and written, the disparity of their understandings, the frustration of expectations, the inevitable recriminations and conflicting memories all this is not unique, new, or infrequently encountered. The law in its effort to facilitate just resolutions of such controversies has, over the centuries, developed certain aids or guides to decision. Two of these are involved in the critical contracts questions at issue here. The first is the substantive principle that when, in the course of business transactions between people or corporations, free and uncoerced understandings purporting to be comprehensive are solemnized by documents which both parties sign and concede to be their agreement, such documents are not easily bypassed or given restrictive interpretations. The second is the functional principle that in our system of resolving disputes, the judge and the jury share in the decision process. In such a case as this the judge must first assess the evidence in order to decide whether, under the substantive principle as illuminated by precedents, the jury should do the weighing.

Here, we think the judge improperly permitted the jury to conclude that the SES agreement, if not voided by fraud, had no effect on Catamore's claims of breach of the 1968 and 1970 contracts. The SES agreement contained a clause providing that an action for breach of contract could not be brought more than one year after the cause of action arose. Neither of Catamore's breach of contract counterclaims were made within one year after the respective causes of action accrued.¹⁷  These actions are therefore time barred if the SES agreement applies to actions brought under the two oral agreements and if the limitation clause is valid. We are persuaded that the clause applies and is valid.

As to the 1968 oral agreement, the jury found in September, 1968, that IBM did in fact orally undertake to deliver a completely designed and programmed, turnkey production control system.¹⁸  Given this finding, this contract concededly had complete vitality until December 9, 1969, when the SES agreement was signed. If all that had occurred on December 9 was the execution of the SES agreement, it may well have been open to the jury to decide that it had no effect on the September, 1968, oral agreement. By its terms, SES purported to supersede "all proposals oral and written and all other communications between the parties relating to the subject matter of this Agreement." Since an executed contract, oral or written, is not a proposal, and of higher dignity than a "communication," SES would seem not necessarily to apply. At the very least there would seem to be enough facial ambiguity to justify accepting other evidence of the parties' intent.

But the execution of the SES was accompanied simultaneously by Catamore's execution of its first Service Estimate. The Estimate was, according to Catamore, for the remaining 10 per cent of the work to be done. And, as we have noted, the Estimate form contained the statement, immediately above the space for a customer's signature, that "Authorization for the above work is given under the terms of the captioned agreement for IBM Systems Engineering Services." Catamore's president, as we have also noted, testified that what he thought to be the remaining 10 per cent of the work on the production control system was to be performed under the SES agreement. Because Catamore's claim for damages for breach of contract arises from IBM's failure to complete and deliver the production control system and since Catamore appears clearly to have entered into an arrangement whereby the last 10 per cent of the work on this system was to be performed subject to the SES agreement, its claim for breach of this promise is necessarily governed by the one-year limitation period contained therein.

Because the parties have cast this issue in such different terms, we emphasize what we have not decided. We are not deciding that the SES agreement replaced or superceded the 1968 oral contract in its entirety. See 3 Corbin on Contracts § 578. Nor have we been required to determine which of two inconsistent provisions one in the oral contract and one in the written contract apply. Compare Laskey v. Rubel Corp., 303 N.Y. 69, 100 N.E.2d 140 (1951). The SES provisions are new clauses, not inconsistent with any earlier ones. Catamore's argument that the SES agreement did not replace the entire earlier agreement misses the point. We accept the proposition that "parol evidence, which does not vary or contradict the writing, is admissible to complete the understanding of the parties." Here, however, we are concerned with the reverse situation: a writing which does not vary or contradict the evidence of the terms of the parol agreement.

Catamore objects to the application of the SES agreement to the 1968 contract on the grounds that when it entered the SES agreement it was ignorant of wrongs IBM had already committed in performing the 1968 contract. It insists that it cannot be held to have waived any rights under a contract when ignorant of wrongs already committed. This argument misses the mark. Although the evidence of wrongs IBM had already committed may well be relevant as to whether the SES agreement was fraudulently induced at least insofar as it applied to causes of action arising under the 1968 oral contract and this evidence may also be supportive of other theories of recovery, it is irrelevant to the question of the effect of the SES agreement, if valid, on the contract action arising from IBM's failure to deliver the turnkey production control system by September, 1970. In December, 1969, Catamore agreed that any such action must be instituted within a year after its accrual. The present action not having been so instituted, it is barred by the SES agreement.

The applicability of the SES agreement to the performance of the 1970 oral agreement involving IBM and MV/Vicario is even more clear. Here again, the jury appears to have found that the discussions in the spring of 1970 culminated in a mid-March oral agreement providing that IBM would deliver a merchandise control system to MV/Vicario in eight weeks. Beginning on March 30, 1970 a series of Service Estimates were executed for work to be done for MV/Vicario.¹⁹  Each such authorization contained the same notation that the authorization "is given under the terms of the . . . (SES)." Catanzaro had testified that IBM's work for MV/Vicario was on the basis of the SES agreement.²⁰ 

Catamore argues that MV/Vicario is a separate corporation and, since it was not a party to the SES agreement, the references to SES in the Service Estimates were not sufficient to require a conclusion that the SES limitation of liability clause applied to MV/Vicario. But the entire record in this case demonstrates the intimate relationship between Catamore and MV/Vicario as interrelated parts of a common enterprise in which Catanzaro was the dominant leader. See also note 17, supra.²¹  Catamore suggests that if the SES has any application to the MV/Vicario Estimates at all, it is limited to "the purpose of authorizing work to be performed". Catamore argues that this must be strictly construed against IBM and be read to refer only to a clause which states that estimates may be agreed to in writing, are not guaranteed and do not constitute a fixed price contract. But all of this information is set forth in the Service Estimate itself; absolutely no justification exists for construing this incorporation by reference so narrowly. The SES is a two-page document containing provisions under ten captions.²²  We see no such ambiguity in the words "Authorization for the above work is given under the terms of (SES)" as would justify any construction that would incorporate some terms and exclude others. 3 Corbin on Contracts § 559, p. 276. See Level Export Corp. v. Wolz, Aiken & Co., supra.

Since we find that the limitations in the SES agreement apply to both of Catamore's contract actions, we must now consider the validity of the provision limiting the period of IBM's liability to one year following the accrual of the cause of action. Catamore, not surprisingly, complains that it is unfair for IBM to attempt so to curtail its risks and liabilities. The short answer to their complaint is such clauses, providing the time limitation is reasonable, are valid under New York law. Soviero Bros. Contr'g Corp. v. City of New York, 286 App.Div. 435, 142 N.Y.S.2d 508 (1st Dep't 1955), aff'd,2 N.Y.2d 924, 161 N.Y.S.2d 888, 141 N.E.2d 918 (1957). We observe that a small consumer may often be required to deal with a large supplier on the latter's terms perhaps the forces of competition are the only check to one-sided dealings. In any case, it seems to us that when a supplier and its customer, neither of whom is helpless in the marketplace, agree on terms limiting the period of liability for future services to one year, those terms must be respected. We, therefore, hold that the district court erred in permitting the jury to find both that the SES agreement was valid and that IBM was liable to Catamore for having breached the two oral agreements.

At the second trial, Catamore may attempt to escape the limitations in the SES agreement by establishing that it was induced to enter into it by fraud. We do not rule out the possibility that the trial court might permit a jury to find fraud in the inducement only insofar as the SES agreement affects actions to recover under the 1968 oral agreement. Catamore may also attempt to recover on a negligence theory. We reemphasize that we are expressing no opinion on the merits of these alternative theories of recovery.

Finally, we realize that there are hotly contested issues concerning damages such as the sufficiency of the basis for projecting lost profits, proximate cause, duplication and confusion, and adequacy of instructions. Without scrutinizing these in detail, we limit ourselves to suggesting that in any future retrial, exhibits such as charts be prepared so to minimize, if not avoid entirely, speculation that any elements of damages had been double counted. A jury is, in a case like this, given quite enough of a task without being unnecessarily confused.

The judgment is vacated and the cause remanded for a new trial.