Opinion ID: 1694101
Heading Depth: 1
Heading Rank: 5

Heading: The Counterclaim (Bentley v. Intergraph) Breach of the APA

Text: We now turn to Bentley's allegations in its counterclaim that Intergraph breached the APA by failing to timely furnish the updated TM schedules, by furnishing incomplete and inaccurate data, and by improperly renewing CRP maintenance agreements. [8]
Bentley first contends that Intergraph failed to comply in a timely manner with its obligation to furnish the CRP maintenance-agreement data to Bentley in the updated TM schedules called for by the APA at the 50- and 150-day intervals. The initial TM schedule attached to the APA was a listing by Intergraph of its CRP maintenance agreements in effect as of a certain date (October 31, 2000, for the United States and July 31, 2000, for all other countries). Bentley contends that during the APA negotiations it tried to obtain an up-to-date list of the CRP maintenance agreements as of the MCO date, but that Intergraph represented that it could not comply with such a request. As a compromise, Bentley says, the parties structured the APA to allow Intergraph to update the TM schedule. According to this Court's review of the APA and the evidence before us, what was contemplated was that Intergraph would add to the initial TM schedule in February 2001 those additional maintenance agreements necessary to provide a comprehensive list to Bentley and in the event Intergraph learned in the ensuing months that agreements had been inadvertently omitted, it could finalize the TM schedule in May 2001. Section 7.1 of the APA states, in pertinent part: Prior to the Closing, for purposes of calculating the principal amount of the Note on a preliminary basis ..., [Intergraph] shall provide Bentley with a schedule (`Schedule 7.1') which lists all Maintenance Agreements in effect in the United States as of October 31, 2000 and in effect outside of the United States as of July 31, 2000, specifying, without limitation, the products covered thereunder, the remaining terms thereof and the Maintenance Agreements that are scheduled to expire on or before the MCO Date. . . . Within 50 days following the Closing, [Intergraph] shall use [its] good faith efforts to complete and shall provide to Bentley an updated Schedule of Transferred Maintenance setting forth all Maintenance Agreements in effect as of the MCO Date (the `Initial Updated Schedule of Transferred Maintenance'). The Initial Updated Schedule of Transferred Maintenance shall clearly show all changes from the initial schedule that was delivered at the Closing. . . . If, despite [Intergraph's] good faith efforts, the Initial Updated Schedule of Transferred Maintenance does not reflect all Maintenance Agreements in effect as of the MCO Date, then [Intergraph] shall, within 150 days following the Closing, provide Bentley with a further updated Schedule of Transferred Maintenance (the `Second Updated Schedule of Transferred Maintenance') setting forth all Maintenance Agreements as of the MCO Date. The Second Updated Schedule of Transferred Maintenance shall clearly show all changes from the initial schedule that was delivered at the Closing and the Initial Updated Schedule of Transferred Maintenance. (Emphasis added.) It is undisputed that Intergraph did not comply with section 7.1 concerning the delivery of the TM schedules. The 50-day updated TM schedule was over a month late, having been due on February 14, 2001, and delivered on March 23, 2001. The 150-day TM schedule was due on May 25, 2001, but was never delivered as a comprehensive schedule. Instead, Intergraph provided various files to Bentley piecemeal throughout June and July. In the meantime, Bentley employees worldwide were attempting to transition the CRP maintenance agreements from Intergraph to Bentley without the proper information. Although Intergraph was late with its comprehensive schedules, it did deliver some of the required data directly to Bentley Systems Europe in a timely fashion on February 14, 2001, and May 25, 2001. Bentley contends that such deliveries were nevertheless improper because the APA required all official communications made under the APA to be delivered to Bentley's corporate headquarters in Pennsylvania. Section 11.6 of the APA concerning notices provides: Any notices or other communications required or permitted hereunder ... shall be deemed given if sent by registered or certified mail (postage prepaid), overnight delivery via nationally recognized courier, or facsimile transmission. . .; in each case addressed as follows: If to [Intergraph], to: Intergraph Corporation One Madison Industrial Park Huntsville, Alabama 35894-0001 Attention: John W. Wilhoite Facsimile No.: (256) 730-2048 If to Bentley, to: Bentley Systems, Incorporated 690 Pennsylvania Avenue Exton, Pennsylvania 19341 Attention: David G. Nation, Senior Vice President and General Counsel Facsimile No.: (610) 458-3181 Even if we accepted Intergraph's theory that the 50- and 150-day updated TM schedules were not late because the required data was delivered on time to Bentley Systems Europe rather than to the corporate headquarters, the fact still remains that the data so delivered was only for certain countries and in no way complied with Intergraph's obligation to provide updated TM schedules for every country in which CRP maintenance agreements were to be renewed. Intergraph's own expert witness testified that Intergraph did not comply with the deadlines set in the APA. Q. Is it your understanding that the APA provided for two updates of the transferred maintenance schedule? A. It's my understanding that the APA had an update process and it had dates. It's also my understanding that those dates were not met. . . . . Q. . . . Did you understand that there was a third update to the transferred maintenance schedules that was made? . . . . A. There were several updates made. I mean, there was a bunch of them. So yeah. There was three. Q. What do you mean by there were a bunch of updates? A. The process as outlined in the APA in 7.1 and 7.2 did not occur. Okay? It did not occur. And a different process occurred.
Bentley next contends that when Intergraph did submit the data, it was incomplete and inaccurate. According to Bentley, key information necessary to transition maintenance agreements to Bentley was missing and key information changed from submission to submission, indicating that one or the other or both submissions were incorrect. Bentley maintains that what it describes as late data and bad data greatly frustrated its ability to create seamless maintenance transitions for its new CRP customers. Timely and accurate data, Bentley says, was key to the smooth transition of any CRP maintenance agreement, requiring such information as the expiration or renewal date of the agreement, the contact person, and the products covered. Bentley personnel observed problems resulting from the inaccurate data early in 2001, reporting such problems as marketing mailings being returned because names or addresses were incorrect, inability to ascertain the correct contact person, inability to ascertain the correct business location in which to pursue renewal of the maintenance agreement, and the failure of certain data, for example, the number of CRP parts or licenses listed, to match the equipment or software the customer actually owned. In addition to the problems associated with the incomplete and inaccurate data supplied by Intergraph, Bentley had to contend with a myriad of changes Intergraph made in each updated TM schedule submitted, changes that went well beyond the addition of agreements as contemplated by the APA. Bentley points out that the 150-day updated TM schedule was not intended to correct earlier mistakes, but was merely a safety net to allow Intergraph to supplement the 50-day updated TM schedule with any agreements that had been inadvertently omitted. During the course of his work as Intergraph's principal contact concerning the APA, John Carter summarized the flaws in the data provided to Bentley in an e-mail exchange with a European Intergraph executive, Marc Krans. Per the meeting that we held in April, it was agreed by the parties that serious questions remained as to the quality and extent of the data in the first update (referred to as the March submittal); therefore, a second update would be made by INGR. Per the APA, the second formal submittal (which is referred to as the July update), was suppose [sic] to have corrected any errors within the March submittal. However, it was known, even before being submitted, that the July update did not have all of the necessary corrections, as Bentley Europe and INGR Europe were continuing to update the data; hence the agreement (reached in in [sic] June), that the parties would continue definitizing the data. Intergraph's director of finance at its European headquarters, Reinder van Weperen, acknowledged in an e-mail exchange with Carter in May 2001 that Bentley's complaints about the data were valid, although he also indicated that he thought Bentley was partly to blame. The complaint that `Bentley is getting bad or inaccurate information' is true. Largely because of Bentley's own lack of initiative to arrange for the transfer of the billing responsibility, providing information has been like shooting at a moving target. When the information was submitted initially in August 2000, it was based on giving notice to the customers in [the third quarter]. Since Europe did not hear anything until December 28, business continued as usual. New information submitted in February was based on giving notice in [the first quarter]. The latest information submitted last week is  hopefully  based on having given notice in [the second quarter]! Erika Linsalata, a member of Bentley's CRP task force, testified about the problems that the inaccurate data and the changes in the data from update to update caused for Bentley. Q. And you said you became aware of these issues [problems caused by inaccurate data provided by Intergraph] in February of `01. Had you received updated  well, do you know if there had been any updated data from Intergraph between February of 2001 and May of 2001? A. Yes. I am aware that there was more data. Q. . . . [D]o you know ... where that came from within Intergraph or how it got to Bentley? A. No, I don't. Well, it got to Bentley I think through Bob Hewitt. . . . It's my understanding that when we got the first round of data that Intergraph said, `we're going to do some more work to get you more data.' So early  like, as we got through the month of February as people did contact me, I'd tell them, `I understand we're going to get more data. . . . That additional data we got, we started referring  I don't know if everyone called it this, but I know on the task force, we called it the St. Patrick's Day data. Since we called it that, I guess we must have gotten it roughly around St. Patrick's Day. But I don't have an understanding or recollection of the details in regards to the difference between the February and the March. I do know that St. Patrick's Day data didn't make our lives any easier. Q. Did it contain any improved information or was it the same ... information as what Bentley received in February? A. I can't recall for certain. I think... that in some areas it was better. In other areas, it was worse. So when you look all and all, that made it even harder because now we had information we already had on our accounts in [Bentley's computer system]. Then we have February data that had some information but not all good. Then we had the March data which had some good information but not all. So now we had to spend time saying account by account what's the most recent up-to-date info that we should work off of. Other Bentley employees made similar complaints about the extra work caused by Intergraph's inaccurate data submissions, the maintenance agreement renewal opportunities that Bentley lost, and the difficulties created by the changes in the updated TM schedules.
Finally, Bentley contends that Intergraph repeatedly renewed CRP maintenance agreements for its own account contrary to the express prohibition against such renewals in the APA. Bentley faults Intergraph for renewing agreements for which quotes had been issued before the APA closing and for its handling of the evergreen contracts in Europe. Bentley states in its brief to this Court that Intergraph admitted in its answers to interrogatories that it renewed more than 675 agreements after the APA closing. Further analysis of Intergraph's maintenance data shows, Bentley says, that after the closing Intergraph renewed 329 agreements in the United States, representing over 14% of the 2,287 maintenance agreements in place, and renewed 1,794 agreements outside the United States, representing 40.4% of the 4,436 maintenance agreements in place. After Bentley discovered that Intergraph was renewing agreements for its own account, Intergraph made arrangements to repay Bentley the revenue Intergraph had collected from those agreements. John Carter acknowledged in an e-mail exchange with David Nation in May 2001 that Intergraph had renewed agreements after the APA closing. He stated: To the issue of stopping the renewal and/or billing `beyond the expiration dates of the contracts', I believe that for the most part this matter is being addressed, particularly for the United States  although there is certainly some room for improvement. As for our subsidiaries, there does appear to be some level of noncompliance  which is most likely cause [sic] by confusion on their part as to fully understanding the details of the [APA]. I am in the process of `reeducating' each of the Company's major regional leaders, and as necessary, with the individual Intergraph country manager. We reject Intergraph's attempt to justify its renewal of agreements based upon outstanding quotes and its delay in resolving the issues presented by the evergreen contracts. Our review of the record supports Bentley's contention that Intergraph renewed a significant number of agreements despite Bentley's complaints about that activity. Most of those renewals were based upon Intergraph's self-serving interpretation of the APA concerning what Intergraph perceived as its right to renew agreements for which quotes had been issued. Intergraph also created problems for Bentley's renewal efforts with the evergreen contracts. Intergraph had an obligation to inform Bentley of all CRP maintenance agreements the term of which extended beyond the APA year. All of the evergreen contracts should have been listed; none were. When Bentley began complaining about the changing renewal dates on those contracts in the updated TM schedules, Intergraph began to take action to terminate the contracts so that they could be transitioned to Bentley. However, in many cases, Intergraph simply terminated the evergreen contracts without providing Bentley with the information necessary to allow Bentley to pursue the renewal of the contracts in time to forestall any gaps in maintenance coverage. Intergraph's activities in this regard were more pronounced in its foreign subsidiaries where, in the words of Intergraph's chief executive officer, those responsible for complying with the APA disapproved of the APA and feigned misunderstanding rather than taking the appropriate steps to comply with it. See Part IV of this opinion for further discussion of the issues concerning outstanding quotes and the evergreen contracts.
During oral argument, the trial court discussed with the parties three grounds it had concluded could prevent Bentley from recovering on its counterclaim: waiver, immaterial breach, and substantial performance. Bentley argues that none of those grounds supports the trial court's judgment in favor of Intergraph on its counterclaim. Intergraph has offered no argument in support of any of these grounds.
The trial court opined that Bentley's acceptance of additional maintenance data after the dates on which the 50-and 150-day updated TM schedules were due waived its breach-of-contract claim. Bentley contends that the updated Hoofddorp TM schedule on which the trial court based its waiver theory was provided to Bentley long after the APA deadlines had passed, that it was itself erroneous, and that it failed to correct all of the deficiencies in the previous data submissions. Although Bentley's use of this data mitigated its damages to some extent, Bentley says, it certainly did not waive Intergraph's previous breaches of the APA. Correspondence from Bentley to Intergraph makes that point clear: Nothing in our meeting [in Hoofddorp] or the attached written summary was intended or should be read to modify or otherwise change the CRP contracts, which will continue to govern all issues relating to the transaction. Finally, Bentley says, section 11.8 of the APA required any waiver of its terms to be in writing. Section 11.8 states: The observance of any term of this Agreement may be waived ... by the party entitled to enforce such term, but such waiver shall be effective only if it is in writing signed by the party against which such waiver is to be asserted.
The trial court suggested that because Intergraph eventually provided data after the APA deadlines, any breach of contract it committed would have been immaterial. Bentley contends that Intergraph's breaches of the APA were material, striking, it argues, at the core of the contract. The CRP maintenance agreements were the most significant asset covered by the APA, Bentley says, and Intergraph's failure to provide timely, complete, and accurate data, together with its improper renewals of maintenance agreements, threw Bentley's transition efforts into disarray and caused Bentley to spend additional effort and expense to salvage the anticipated renewals of CRP maintenance agreements with minimum lapses in coverage. Even if Intergraph's breaches of the contract could be considered immaterial, Bentley argues, Intergraph would still be liable for damages to a certain extent.
Bentley argues that the trial court also misapplied the doctrine of substantial performance. Substantial performance is not a defense to a breach-of-contract claim, Bentley states, but permits a recovery for a breach of contract by a party that has not performed all of its obligations under a contract so long as its performance has been substantial, citing Bay City Construction Co. v. Hayes, 624 So.2d 1031 (Ala.1993). Bentley argues that Intergraph is not positioned here to invoke the doctrine of substantial performance in relation to Bentley's counterclaim because it is not the party seeking relief, and that the doctrine of substantial performance simply has no applicability to the facts of this case.
This Court has spent considerable time and effort reviewing the voluminous record in this case. After doing so, we have come to the inescapable conclusion that Intergraph did indeed breach the APA in the manner outlined by Bentley. The transaction undertaken by the parties was a complex one involving worldwide businesses with thousands of customers, and it is readily apparent that neither party fully appreciated the difficulties that resulted from the deal they struck. Nevertheless, the parties negotiated for and executed the APA, and the fact that complying with its provisions turned out to be more difficult that they had anticipated does not excuse their noncompliance. When sophisticated business entities negotiate and execute a contract with one another, they should not expect a court to extricate them from the bargain they have made. In this case, Bentley has found the computation of the note principal difficult, but as discussed in Part IV of this opinion, that computation must be governed by the APA provisions. Intergraph, on the other hand, found itself unable to compile in an accurate and timely fashion the data that it had agreed to provide to Bentley. Intergraph also renewed CRP maintenance agreements in violation of what this Court considers to be a plain and unambiguous provision in the APA that flatly prohibits such renewals on Intergraph's part. A telling portion of the evidence in this regard are communications from Intergraph's own personnel. In his deposition, Larry Miles, an Intergraph executive, testified about the extent of the changes contained in the 50-day updated TM schedule furnished by Intergraph: Q. I want to turn to the original e-mail that you sent to Mr. Nation. . . . [Y]ou begin by saying to Mr. Nation that you have all the details required for CRP maintenance. What are you referring to? A. This is related to the transferred maintenance schedules. Q. Is that related to the first update of transferred maintenance? A. I believe so, yes. Q. And you say it's in a form you should be able to use but it's not marked for changes as specified in the APA. What does that refer to? A. The schedule was a complete redo of the schedule that was done as to the placeholder and therefore what I was trying to communicate here was you need to take this as the schedule and ignore the original, the thing we had as a placeholder, because it's superseded in its entirety by this and this is the way thatjust take this and start with it. Q. And did you understand that the APA required the changes in the transferred maintenance schedule to be marked as compared to the initial schedule of transferred maintenance? A. Yes. Q. But you didn't do that? A. Well, I handled that by saying it's all changed. You need to just start over again. In May 2001, David Nation wrote to Larry Miles to complain about the problems Bentley had encountered. Several issues under the CRP transaction agreements persist which are of the utmost urgency. In each case, it appears that the cause of the problem is the failure of Intergraph's foreign subsidiaries (many of them) to comply with the agreements made on December 26, 2000. Our people in Europe [have] tried to resolve these issues with their local Intergraph counterparts. But, by now, the offenses have become so egregious and the inability or unwillingness to resolve them locally so apparent, that Bentley has no choice except to turn to Intergraph Huntsville for a prompt resolution. The problems are twofold, and not new. First, Bentley is getting bad or inaccurate information (or none at all). Second, Bentley is not getting paid. Miles forwarded Nation's e-mail to Intergraph's chief executive officer, James Taylor, who responded: Sorry for the frustration. I believe that we have a problem and will commit the resources to fix it. I believe that our subsidiaries do not like the deal and are acting like they do not understand it rather than execute according to the agreement. I have assigned John Carter to work this issue. He will contact you to get any specific information or set up a visit if necessary. I will stay on top of this until it is on track. In a May 2001 e-mail, Carter stated to Marc Krans: In accordance with the terms of the Asset Purchase Agreement (APA), Bentley was required to undertake a re-evaluation of the Note against the update that was to be provided fifty (50) days from the MCO, unless there was a question over the validity of the information. In such an event, then a second update was to follow at one hundred and fifty (150) days from the MCO and the note adjusted against this latest update. (It is notable that for both of these submissions INGR was late in providing the data.) In October 2001, in an e-mail from Carter to Miles, Carter acknowledged Intergraph's breach of contract, while also stating his opinion that Intergraph had rectified any such breaches: This entire process is very complicated at a number of levels. In all frankness, the deal has been further complicated by our failure to adhere to all of our obligations. This has in turn required a considerable amount of damage control on my part. However, based upon my last meeting with Bentley, it now appears that INGR has done an effective job of rectifying any prior or current deficiencies, and just as important, left Bentley without the basis for an effective claim of damages for any such non-compliance. The difficulty in this case comes not from determining whether Intergraph breached the contract, but from determining questions such as to what extent did the breach occur, to what extent was Bentley damaged thereby, to what extent did Bentley's own actions contribute to the harm it suffered, and to what extent was Bentley able to mitigate its damages. As to those questions, the record reflects sharp factual disputes that we cannot resolve on a cold record consistent with our obligation to render a just judgment. § 12-2-7(1), Ala.Code 1975. For example, the parties dispute the reason for the creation of Bentley's CRP task force and its effect upon the CRP maintenance-agreement renewals. Bentley contends that when it realized how many problems had been created by Intergraph's failure to provide the data Bentley needed and realized that the level of CRP maintenance-agreement renewals was not meeting its expectations, it created the CRP task force to address the problems, to gather data in any way that it could, and to assist Bentley employees in transitioning maintenance-agreement renewals to Bentley, thus mitigating the damages Bentley had suffered. On the other hand, Intergraph contends that the fact that Bentley did not create the CRP task force until late April or early May 2001 indicates that Bentley was not fully prepared to take over the CRP business and did not act quickly enough with the data that it had to transition the maintenance agreements. Likewise, this Court cannot resolve the question of damages resulting from Intergraph's breach; that question is also sharply disputed by the parties and their experts. Northcut(B) calculated that Bentley's lost profits resulting from Intergraph's breach totaled $9,427,715. However, as previously stated, we find that Northcut(B) did not sufficiently explain the basis for his damages calculation in his deposition to allow us to accept his report without additional explanatory live testimony. Alexander(I)'s criticism of Bentley's damages calculation is likewise insufficient without additional explanatory live testimony. Our review of the record compels us to agree with Bentley that the three grounds upon which the trial court based its conclusion that Intergraph should prevail on the counterclaim do not support its decision. [9] A waiver consists of a voluntary and intentional surrender or relinquishment of a known right, Dominex, Inc. v. Key, 456 So.2d 1047, 1058 (Ala.1984), and the burden of proof in establishing a waiver rests upon the party asserting the claim. Murray v. Webster, 256 Ala. 248, 54 So.2d 505 (1951). Whether there has been a waiver is a question of fact. Id. We find no waiver on Bentley's part. Furthermore, we find that Intergraph's breach of the APA was material. A material breach of a contract is one that touches the fundamental purposes of the contract and defeats the object of the parties in making the contract. Sokol v. Bruno's, Inc., 527 So.2d 1245, 1248 (Ala. 1988). Finally, Bentley is correct that the doctrine of substantial performance does not apply in this case. See Bay City Construction, supra. Because we find that Intergraph breached the APA, we reverse the judgment insofar as the trial court held in Intergraph's favor on Bentley's counterclaim, and we remand the case with directions to the trial court to take steps necessary to resolve the disputed issues and then to calculate the damages Bentley sustained as a result of Intergraph's breach of contract in accordance with the guidelines set out above, using a special master in this aspect of the case, if necessary, as discussed in Part IV.C.9. of this opinion.