Virginia Lawyers Weekly VA Lawyers Weekly
IBM unsuccessfully argued that its subcontractors’ breach of contract suit alleging it failed to pay them for options years violated an anti-assignment provision in its terms and conditions, constituted an unenforceable penalty or was contrary to a limitation of liability clause.
Background
Fifth Third Bank N.A. and ePlus Group Inc. have filed separate causes of action against International Business Machines Corp. for breach of contract and breach of warranty. Plaintiffs generally allege that they contracted to provide technologies to IBM in connection with a government contract. They allege that, under the terms of their contracts with IBM, if the government chose not to renew its prime contract for any stated reason other than it failed to appropriate the requisite funding, IBM was obligated to make payments for “option years.”
Plaintiffs allege that, although the prime contract was terminated, because the stated reason was neither for failure to appropriate funds nor convenience, IBM was obligated to pay for the option years, but failed to do so. On July 21, 2020, the court consolidated the cases. IBM has moved to dismiss both causes of action for failure to state a claim.
Standing
IBM argues that due to an anti-assignment provision in its terms and conditions, the plaintiffs are not proper assignees of the contracts and thus lack standing to bring their claims. The plaintiffs, on the other hand, point to a clause in the ePlus technology quotations that allow assignments.
The assignment provisions in IBM’s terms and conditions and ePlus technology’s terms and conditions directly conflict. However, as the plaintiffs note, the purchase orders stipulate that the terms of the ePlus Technology quotations shall control in the event that the two documents conflict. The anti-assignment provision in the IBM terms and conditions is thus inapplicable, and the plaintiffs have standing to bring their claims.
Penalty
IBM first argues that the court must dismiss the plaintiffs’ breach of contracts claims because they seek to enforce impermissible penalties. The Virginia Supreme Court has advised that courts must look to “the intent of the parties as evidenced by the entire contract viewed in light of the circumstances under which the contract was made.”
The court concludes that it would be premature to decide at this stage whether the plaintiffs’ breach of contract claims are barred on the basis of unenforceable penalties. Discovery has yet to commence, and there is simply insufficient evidence to adequately demonstrate the contracting parties’ intent.
Limitation of liability
Next, IBM contends that “each Purchase Order contains a clear provision that allows IBM to terminate without cause at any time, and IBM is obligated to pay only ePlus [Technology]’s actual expenses for work completed prior to termination.” However, the contracts provide that, if the government choose to exercise its right to terminate for convenience, IBM is liable for the “remaining unpaid payments for the remainder of the term, including option renewals.” In light of this contractual language, the court cannot agree with IBM’s proffered interpretations.
Best efforts
IBM argues that the plaintiffs’ allegations that IBM “failed to use its best efforts to cause the Government to appropriate funds for the additional option years” are conclusory and cannot withstand the motion to dismiss. The court agrees.
Breach of warranty
Each purchase order stipulates that “IBM represents that the software and services . . . will be essential to the Government for the full term.” The plaintiffs allege that when the government did not renew its license, IBM breached that warranty. IBM maintains that because neither the prime contract nor purchase orders were terminated before the base term ended, IBM fulfilled the warranties. The court agrees. “Term” unambiguously refers only to the contracts’ base years and not the option years.
Having concluded that the “full term” unambiguously encompasses only the base year for each contract, the court necessarily also concludes that the plaintiffs have failed to state a claim for breach of warranty. The complaints do not allege that the government did not renew its license during the base year.
Defendant’s motions to dismiss granted in part, denied in part.
Fifth Third Bank N.A. v. International Business Machines Corporation, Case Nos. 3:20-cv-00033, 3:20-cv-00035, Feb. 11, 2021. WDVA at Charlottesville (Conrad). VLW 021-3-063. 19 pp.
