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Triangle Underwriters Inc. v. Honeywell Inc.

decided: July 17, 1979.

TRIANGLE UNDERWRITERS, INC., PLAINTIFF-APPELLANT,
v.
HONEYWELL, INC. AND HONEYWELL INFORMATION SYSTEMS, INC., DEFENDANTS-APPELLEES .



Appeal from order of the United States District Court for the Eastern District of New York, Nickerson, J., granting summary judgment to defendants, manufacturers and sellers of data processing equipment, and dismissing as time barred suit brought by purchaser of equipment, alleging causes of action sounding in fraud, breach of contract and negligence. Reversed as to count alleging fraud in the inductment of contract, affirmed as to other counts and remanded.

Before Feinberg, Circuit Judge, Mansfield, Circuit Judge, and Haight, District Judge.*fn*

Author: Haight

Plaintiff-appellant Triangle Underwriters, Inc. ("Triangle") commenced this action in the United States District Court for the Eastern District of New York against defendants-appellees Honeywell, Inc. ("Honeywell") and Honeywell Information Systems, Inc. ("H.I.S.") to recover damages for the alleged failure of performance of a computer system sold by appellees to Triangle. Jurisdiction in the district court was founded upon diversity of citizenship, 28 U.S.C. § 1332(a)(1), it being alleged that Triangle was a New York corporation, Honeywell a Minnesota corporation, and H.I.S. a Massachusetts corporation. Triangle's second amended complaint, which forms the subject matter of this appeal, charged in essence that the computer system installed by appellees failed entirely of performance, causing Triangle great damage and its ultimate commercial demise. The complaint alleged causes of action sounding in fraud, breach of contract, and negligence. The district court (Eugene H. Nickerson, Judge ) granted appellees' motion for summary judgment and dismissed the complaint in its entirety, on the basis that all claims asserted were time barred. 457 F. Supp. 765. This appeal followed. We reverse dismissal of one of the fraud counts, affirm dismissal of the other counts, and remand for further proceedings consistent with this opinion.

I.

In its second amended complaint, Triangle alleged that it was a general agent for many insurance companies, undertaking the placement of casualty insurance from brokers, and assuming responsibility to bind the carriers, bill the brokers, collect the premiums, remit the premiums to the carriers, keep records of payments, extensions, cancellations, credits, remit commissions to brokers, issue policies, and update all records.

Through the arteries of such an insurance organism flow quantities of paper. Triangle relied on computers to process this paper. As of January, 1970, Triangle had for some time been using an IBM 360-20 computer, coordinated with its own programs and manual card system. At that time, the complaint alleges, Honeywell solicited Triangle to replace the IBM equipment with the Honeywell H-110 computer system.

The H-110 system, as described by the district judge, is a package consisting of "hardware," or the core computer, printer, collator, and related equipment; and "software," the designation for programming created for use in connection with the hardware. Honeywell supplied both standard programming aids of general application to its computer, and "Custom Application Software" specifically designed for customer's individual needs.

Honeywell's blandishments bore fruit. On March 19, 1970, after a number of meetings between Honeywell and Triangle representatives, Honeywell sent Triangle a proposal which, in Honeywell's view, "indicates immediate economic and operational benefits will be derived from the installation of a Honeywell 110 Computer System." The proposal contemplated the leasing by Triangle of Honeywell hardware. Honeywell employees were to install the system and train Triangle employees in its use, who would then take over complete operation. Triangle signed the hardware lease on April 3, 1970. Honeywell thereupon began preparation of the "Custom Application Software." In December, 1970, Honeywell advised Triangle that the system was fully operational.

At that point, Triangle elected to purchase rather than lease the hardware. On December 5, 1970, Triangle entered into a contract of sale with defendant-appellee H.I.S., a separately incorporated division of Honeywell. The system was installed in January, 1971, at which time Triangle discarded the IBM system.

The new Honeywell system was brought on line with high anticipation. Triangle's president Robert Weinstein, present at the first computer run, used a poignant analogy: "A new baby was being born, and I was very concerned with the success of that baby and how healthy it was going to be." But the "delivery" gave immediate cause for concern. The system first tried to print out invoices on a summary form. It was immediately apparent that all of the figures in the first batch were wrong. Weinstein testified: "There was literally a scream and I panicked." Honeywell personnel, murmuring reassurances, threw out the first run of invoices and produced a second. This second set was sent out to Triangle's broker-customers. It produced a wave of complaints about billing inaccuracies. These complaints continued every month, "for the rest of the time we were in business."*fn1

In addition to billings, the system was supposed to produce "runs" on other statistics. The entire system was not run in January of 1971. In addition to the run on billings, there was a monthly run on production from each individual producer; a run on dividends paid by insurance companies to insureds; a run on Triangle's cash receipts, on a daily, weekly and then monthly basis; a renewal record run on a monthly basis; and a cancellation record run. The last-named run was never performed. The cash receipts were run to some extent during the month of January. The renewal records were run in March, April or May. The monthly run by producers was first performed in April. The run on dividends was first attempted perhaps a year after installation. Errors appeared repeatedly in each of these computer runs.*fn2

Subsequent to January, 1971, Honeywell personnel attempted without success to correct the deficiencies in the programs, modifying certain of them. Honeywell personnel worked on the system at the Triangle premises until some time in 1972, when they departed, never to return.

II.

Triangle filed its initial complaint on August 14, 1975. The second amended complaint contains nine counts. Count I charges Honeywell with fraudulent inducement, in that it falsely represented to Triangle that the H-110 system would be a "turn-key" system,*fn3 superior to Triangle's present computer in many ways. Count II charges Honeywell with fraud in falsely representing to Triangle that it was ready to install a fully tested and operative system commencing in January, 1971.*fn4

Counts III, IV and V allege various contract claims against Honeywell: breach of an oral contract to provide an effective system (III); and breach of express (IV) and implied (V) warranties in the written contract.*fn5

Counts VI-IX sound in negligence, asserting various theories against either or both appellees: failure to realize the system was inadequate (VI); negligence in preparation and design of the system (VII); failure to supervise and correct deficiencies in the system (VIII); and wrongful withdrawal of support personnel (IX). These last two counts Triangle characterizes as "computer malpractice."

The district court, applying statutes of limitation derived from New York law,*fn6 dismissed all counts as time barred.

III.

We agree that the contract claims are barred by the applicable statute of limitations.

The district court properly held that the written contract of sale of December 5, 1970 falls within the Uniform Commercial Code ("U.C.C."), § 2-725(1) of which provides:

"An action for breach of any contract of sale must be commenced within four years after the ...


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