Ambiguity is one of the worst fears of a contract drafter. Despite good intentions, invariably contract terms will be capable of being understood in more than one way, or are simply doubtful, equivocal, uncertain or absent. A seminal treatise on “The Language of the Law” began: “The law is a profession of words.” Unsurprisingly then, one of the law's most important functions is to resolve interpretative problems created by the use of ambiguous language in contracts; however, by the time a court is deciding the issue, costly litigation may have taken years. In a recent case in Pennsylvania, parties to a software development and license agreement confronted this unfortunate truth, and both left unsatisfied. See Apacheta Corp. v. Lincare, Inc., No. 16-2030, 2017 WL 5901085 (E.D. Pa. Nov. 30, 2017). In this case, a dispute over software deliverables led to litigation in which the court denied both parties' motion for summary judgment because the ambiguity in the underlying agreement created an issue of fact as to what the developer was required to deliver, and if the developer made a sufficient delivery, its entitlement to damages.

Facts and Procedural Background

Plaintiff Apacheta Corp. is a software development company. It entered into a multi-stage development agreement (the agreement) with defendant Lincare, Inc. Apacheta would develop software to manage Lincare's medical equipment delivery system. Specifically, Lincare hired Apacheta in part to develop software that would integrate Lincare's “Active Directory.” The first phase of the agreement involved collaborative work to develop the software, and upon approval of Lincare, would transition into the second phase wherein Apacheta would license the software to Lincare. The agreement's initial term was three years and it contained an integration provision, as well as a right-to-cure opportunity for both parties. The right-to-cure provision afforded both parties the right to remedy any alleged breach within a 30-day written notice period. The agreement also included a “Statement of Work” (SOW) outlining the framework for the software Apacheta agreed to develop. The SOW in turn had a list of features to be incorporated into the software.

The parties began developing the software in January 2015. The project fell behind schedule because Lincare had to deal with a leadership overhaul. Lincare also started raising concerns about the software's specifications and conformity with its needs. Lincare was particularly concerned with the absence in the proposed software of certain components, including “directory integration” and “routine optimization” (the contested elements). Apacheta disputed that the agreement required the inclusion of the contested elements.

In October 2015, Apacheta delivered: (1) a list of functional specifications that claimed to delineate the final scope of the software; and (2) a set of “acceptance criteria” supposedly required by the agreement to be used if and when Lincare tested the software. The specifications did not encompass the contested elements. Lincare remained unsatisfied with the software and in December 2015 rejected the proposed “acceptance criteria.” It also reaffirmed its issues with the absence of the contested elements. After no further discussions, Lincare terminated the agreement.

Apacheta sued for breach of contract. It claimed that Lincare's termination violated the right-to-cure provision because Lincare neither provided notice of breach nor a cure period. Apacheta also moved for partial summary judgment as to damages in the amount of $2.25 million based on the forecasted software licensing fee over the three-year initial term of the agreement. Lincare cross-moved for summary judgment on grounds it had not breached the agreement and therefore owed Apacheta no damages.

Legal Analysis and Conclusions

The court applied principles of Pennsylvania law to interpret the agreement. Considering the context in which it arose (as required by the Pennsylvania Supreme Court), the court concluded that the agreement was ambiguous because: (1) it was unclear as to whether Apacheta was required to provide the contested elements; and (2) it was unclear what damages Apacheta would be entitled to if Lincare was in fact in breach. Given the ambiguity in the agreement, its meaning became a question of fact that could rule out summary judgment.

First, the court evaluated whether Lincare had violated the right-to-cure provision. Such a provision can be ignored if “there is a material breach of the contract so serious that it goes directly to the heart and essence of the contract, rendering the breach incurable.” See LJL Transp. v. Pilot Air Freight, 962 A.2d 639, 641 (Pa. 2009) (concluding that pre-termination notice would have been a “useless gesture” since the breach could not “reasonably be cured”; as such, any notice requirement is moot).

Lincare argued that Apacheta's concession that the software could not integrate with Lincare's “Active Directory” rendered it unable to cure the breach. Apacheta countered that the agreement did not mandate the contested elements. Apacheta noted that the scope of work section of the agreement omitted any reference to the contested elements. Lincare claimed that the text of the agreement concerning the software's “technical aspects” was irrelevant. Analogizing the agreement to a “design and build contract,” in which the written agreement serves to provide an overarching structure of the project, with the details to be filled in as the software development phase unfolded, Lincare argued that the contested elements were vital technical elements of the proposed software; in other words, the “heart and essence” of the agreement.

The court held that the text, extrinsic evidence and course of conduct established that the agreement was ambiguous with respect to the inclusion of the contested elements into the envision software. The court concluded that: (1) the agreement and SOW did not indicate (by definition or otherwise) whether the contested elements were listed in the SOW; (2) deposition testimony conflicted on the presence of the contested elements in the list of features in the SOW; and (3) the parties' course of conduct suggested ambiguity insofar as it related to if Apacheta had submitted acceptable software, and if not, the protocol Lincare had to follow to address the alleged deficiency. Consequently, the court denied both motions and directed a factual determination as to whether the contested elements were part of the contract.

Second, the court held that the agreement was also ambiguous as to what damages Apacheta would receive if Lincare was found in breach. As such, the court denied Apacheta's motion for partial summary judgment. The agreement was silent as to what fee Lincare would pay to license the software. Moreover, it did not establish a deadline for completion and acceptance of the software, raising questions as to at what point in the agreement's three-year term the license fee would be triggered. As such, the agreement was ambiguous “because nothing in the contract explains how the payment amounts were to be determined.” Thus, summary judgment was inappropriate since questions of fact concerning damages remained. A four-day bench trial concluded on Jan. 11, 2018 and the court's subsequent order has yet to be issued.

Richard Raysman is a partner at Holland & Knight and Peter Brown is the principal at Peter Brown & Associates. They are co-authors of “Computer Law: Drafting and Negotiating Forms and Agreements” (Law Journal Press).