Designer Skin LLC v. S & L Vitamins, Inc., et al.
Uncle Henry's Inc. v. Plaut Consulting Co., Inc.
399 F.3d 33 (1st Cir., Feb. 22, 2005)
Web Developer Directed To Pay Damages For Failing To Complete Web Site Developement Project
In this dispute over a failed web site development project, the First Circuit, affirming the court below, holds that defendant Plaut Consulting Co. Inc. ("Plaut") breached its web site development contract with plaintiff Uncle Henry's Inc. ("Uncle Henry's") and affirms an award of $402,000 in damages to plaintiff as a result of this breach of contract as recompense for costs Uncle Henry's incurred in having a third party perform the web development work required under the parties' contract. The First Circuit also affirmed the lower court's award of an additional $77,382.99 to Uncle Henry's as damages resulting from Plaut's negligent misrepresentation of the date by which it could complete the project, which sum represented the cost of servers Uncle Henry's purchased in reliance on such misrepresentation, outside of the parties' contract, for use in hosting the web site at issue. The First Circuit also affirmed an award to plaintiff of attorneys fees as the non-breaching party in the amounts specified in the parties' agreement, together with prejudgment interest on plaintiff's contract damages.
Finally, the First Circuit affirmed the lower court's award of $240,000 in damages to Plaut on a theory of quantum meruit. This award compensated Plaut for work performed after Uncle Henry's declared a default under the parties' contract, on the theory that such work, undertaken while the parties were attempting to negotiate an amended agreement which would allow the project to go forward, was performed with the expectation that it would be paid for by Uncle Henry's even if such negotiations ultimately failed. Uncle Henry's had claimed that the value of this work to it was $0, pointing to the fact that its replacement contractor did not attempt to complete the web site Plaut had started. The First Circuit rejected this contention, holding that the proper measure of quantum meruit damages is not the benefit of the services rendered to the recipient, but rather the value of the services themselves.
Uncle Henry's Retains Plaut To Create A Web Site
Plaintiff Uncle Henry's publishes a "Swap and Sell It" guide, principally in Maine. Seeking to expand its business, Uncle Henry's had a web site built, which it used in connection with its business operations. This web site was not a success, and Uncle Henry's retained Plaut to design and create a better, and hopefully more successful, site.
The parties set out to draft a contract that would govern their relationship. In October, 2000, Plaut sent Uncle Henry's a contract for its execution comprised of both a "Master Agreement," which contained the contract's general terms, and a "Website Development Statement of Work" ("SOW") which described the particulars of the web site to be built for Uncle Henry's. Uncle Henry's executed this agreement ("October Contract") and returned it to Plaut, along with the initial payments due thereunder of approximately $202,000. However, while Plaut did commence working on the project at or around the time it sent the October Contract to Plaintiff, it did not sign this agreement.
Instead, Plaut requested certain modifications to the Master Agreement. As pertinent here, these modifications "limited Plaut's liability to Uncle Henry's to no more than the full contract price plus the value of any change orders (i.e., $645,100); capped recoverable attorney's fees at 20 percent of Plaut's maximum liability; and foreclosed consequential damages."
Uncle Henry's attorney apprised his counterpart at Plaut that these changes were acceptable and sent the contract, this time signed by Plaut, to Uncle Henry's for execution. Uncle Henry's executed this agreement ("December Contract") and a senior officer at Uncle Henry's acknowledged in his deposition that it represented the agreement that governed the parties' relationship. The fully executed December Contract was never returned, however, to Plaut.
Dispute Over Scope Of Work Required Under Parties' Web Site Development Agreement
A dispute soon developed over the scope of the work Plaut was obligated to perform under the parties' contract. More particularly, the dispute centered on what functionality the web site to be built by Plaut was to have. This dispute retarded progress on the completion of the site. When it appeared this dispute would not be resolved and that the web site would not be completed within the time limits set in the parties' agreement, Uncle Henry's delivered a formal notice of default to Plaut. This gave Plaut 45 days to cure the default, or face termination of the contract.
Extensive negotiations between the parties ensued in an effort to salvage their relationship, and have Plaut construct a web site with acceptable functionality. During this period, and after the Notice of Default had been sent, Plaut expended great efforts toward building a web site for Uncle Henry's. This included assembling a second design team to work on the project, and evaluating the work done by Plaut to date.
These efforts too, failed, and on July 18, 2001, Uncle Henry's terminated the contract. Uncle Henry's website was ultimately completed by Stroudwater NGH ("Stroudwater") at a cost of $604,000 for the basic website, and many hundreds of thousands of dollars more for additional features.
Lower Court's Determinations
This lawsuit followed. Uncle Henry's sued Plaut, advancing claims of breach of contract, fraud, negligent misrepresentation and violation of the Massachusetts Unfair Trade Practices Act. Plaut counterclaimed, seeking payment for services it had rendered for which it had not been paid on a theory of quantum meruit.
Most of Uncle Henry's fraud and neglect misrepresentation claims were dismissed prior to trial on the grounds that the alleged misrepresentations constituted statements of opinion, promises of future performance or non-actionable "puffing." Plaintiff was permitted to go to trial on a claim grounded on alleged misrepresentations by Plaut as to the quality and quantity of its performance on the web site. Uncle Henry's claimed that in reliance on such misrepresentations, it had purchased servers to host the web site to be delivered under the contract.
The case was tried before a jury, which found that Plaut had both breached the contract, and misrepresented the quantity of its performance. The jury awarded Uncle Henry's $402,000 in breach of contract damages, $202,000 in damages arising out of defendant's negligent misrepresentation, and attorney's fees as per the parties' agreement. The jury also awarded Plaut $240,000 on its quantum meruit claim for work performed after May 14, 2001, while the parties were negotiating to salvage their relationship. The significance of this May date is not discernable from the Court's opinion.
On the parties' motions, the district court reduced the jury's award of negligent misrepresentation damages from $202,000 to $77,000, in large part because plaintiff's counsel had informed the Court and jury that that sum, which represented the cost of the servers purchased in reliance on the misrepresentation in question, constituted the full extent of plaintiff's damage. The district court otherwise affirmed the jury's determination, as did the First Circuit on this appeal.
Signed But Underlivered Contract Governs The Parties' Relationship
The First Circuit affirmed the lower court's determination that it was the December Contract, and not the October Contract, that was the operative agreement between the parties. As noted above, the Court reached this conclusion notwithstanding the fact that the fully executed agreement had never been delivered by Uncle Henry's to Plaut. The fact that it was executed by Uncle Henry's, and that a senior officer testified that it was the parties' contract, was sufficient. The First Circuit found further support for its decision in the fact that the contract provided it could be modified in a writing "executed … by the party against whom enforcement of such . . . modification . . . is sought . . .".
This determination aided Plaut, as the modified contract limited the damages Uncle Henry's could recover for its breach. First off, the December Contract eliminated Uncle Henry's ability to recover consequential damages. It also capped Uncle Henry's actual damages at the price to be paid under the contracts or approximately $645,000. Lastly, it capped Uncle Henry's attorneys fees, as the prevailing, non-breaching, party, at 20% of the fees to be paid under the contract.
Web Developer's Breach Results In Damage Award
The First Circuit next affirmed the lower court's determination that Plaut breached the December Contract by failing to finish the web site by the contract's "go live" date. In reaching this result, the Court rejected Plaut's claim that it could not be held liable for such a breach because Uncle Henry's had insisted on the performance of tasks not required under the parties' agreement. The Court refused to disturb the jury's finding that it was Plaut, and not Uncle Henry's, that improperly sought to delineate the scope of the work to be performed on, and the functionality of the web site to be delivered under the parties' agreement, and hence such failure did not excuse Plaut's non-performance.
In reaching this result, the Court held that the SOW was ambiguous, and that the lower court properly admitted extrinsic evidence as to the work the parties had intended to be performed thereunder.
Having found that Plaut breached the parties' agreement, the First Circuit affirmed the lower court's award of $402,000 in damages to Uncle Henry's. As noted above, the December Contract barred Uncle Henry's recovery of consequential damages and limited its maximum recovery to the fees it was to pay Plaut for constructing the site under the parties' agreement, approximately $645,000. The contract further provided that Uncle Henry's could recover the greater of the sum it paid Plaut under the contract, or "reasonable costs of cover in obtaining development services from another qualified provider for the Services described herein as necessary to attain 'go live' status for such a Web site." The jury awarded Uncle Henry's $402,000 of the $604,000 it paid Stroudwater to develop the basic web site Plaut was to have delivered under the December Contract.
Plaut argued that Uncle Henry's could not recover the full amount paid to Stroudwater both because the replacement site included features not found in the December Contract, and because Stroudwater had made insufficient use of Plaut's own work on the site. Because the jury awarded Uncle Henry's only part of the sums paid Stroudwater, the First Circuit "infer[ed] that the jury partially credited Plaut's evidence and reduced Uncle Henry's award accordingly." The jury's determination on this issue was affirmed on appeal.
Damages Too For Negligent Misrepresentation
The First Circuit also affirmed the District Court's award of an additional $77,000 to Uncle Henry's as damages arising out of Plaut's negligent misrepresentations as to the quality and quantity of the work it had performed on the site. As noted above, in reliance thereon, Uncle Henry's had purchased servers from Dell on which to host the site to be produced under the parties' agreement. This award represented a reduction from the jury's initial award of $202,000. The First Circuit held that the District Court had properly based such a reduction on representations by Uncle Henry's counsel, both to the Court and jury, that the extent of recovery sought on this claim was solely for the Dell computers, and thus not duplicative of any damages awarded for breach of contract, as the servers were purchased outside of the parties' agreement.
The First Circuit affirmed the dismissal of the balance of Uncle Henry's fraud claims. In so doing, the Court rejected Uncle Henry's claim that the statements in question were actionable because Uncle Henry's was at Plaut's "mercy due to Plaut's exclusive control over relevant information and/or its concealment of critical information during" the parties' negotiations. Quite the contrary, the Court found Uncle Henry's was a "sophisticated business entity represented by experienced counsel who investigated the proposed transaction at great length" before the contract was executed.
Web Developer Recovers For Work Performed After Receipt Of Notice Of Default On Quantum Meriut Theory
The First Circuit also affirmed the lower court's award of $240,000 in damages to Plaut on a theory of quantum meruit for work performed after Uncle Henry's had sent a notice of default to Plaut. In reaching this result, the Court rejected Uncle Henry's argument that such damages were not recoverable because the parties' relationship was governed by a contract which Plaut admittedly breached. Notably, during the 45 day cure period triggered by Uncle Henry's Notice of Default, Plaut could not have completed the web site, or cured its default. Said the Court:
The Court also rejected Uncle Henry's argument that such an award was improper because the value of Plaut services to it were $0. Said the Court: "[D]amages are not measured by the benefit realized and retained by the defendant but rather are based on the value of the services provided by the plaintiff."
Finally, the Court affirmed the dismissal of plaintiff's Massachusetts Unfair Trade Practices Act claim. Because the conduct in question occurred primarily and substantially in Maine, where Uncle Henry's was located, and not Massachusetts, the Massachusetts Unfair Trade Practices Act did not apply.