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February 7, 1984


The opinion of the court was delivered by: BONSAL


Plaintiffs, AccuSystems, Inc. ("AccuSystems"), a New York corporation, and its founder and sole shareholder, William M. Selden ("Selden"), instituted this diversity action on October 8, 1980 against Honeywell Information Systems, Inc. ("Honeywell"), a Delaware corporation. Plaintiffs seek damages for fraud, negligence, and breach of contract arising out of the sale by Honeywell of computer hardware and software to AccuSystems. Following discovery, Honeywell moved for summary judgment dismissing the complaint. By Memorandum filed October 26, 1982 Honeywell's motion for summary judgment was granted with respect to the contract claims and denied in all other respects. The issues of fraud and negligence were tried to the court in September-October, 1983.


 Selden has been in the computer business for a number of years. He was employed by International Business Machines between 1954 and 1964 where he participated in software product development and taught computer science. In 1964 he became Chairman of the Board of Electronic Accounting Systems ("EAS"), a Delaware corporation in which he acquired a stock interest. EAS operated a computer service bureau *fn1" in Rochester, New York and provided its customers with computer processed payroll reports, checks, and other general accounting data. EAS was an Original Equipment Manufacturer ("OEM") *fn2" for Entrex computer equipment. In April, 1977 EAS asked Selden to conduct a study for EAS to determine what new computer equipment EAS might purchase for its service bureau business. During the summer of 1977 Selden, on behalf of EAS, met with Honeywell representatives and discussed upgrading EAS" payroll services through the use of Honeywell computers and related software. The discussions focused upon the possible use by EAS of a Honeywell computer consisting of hardware known as Level 6, and its related software, the TL-6 operating system. The TL-6 was developed by the Minicomputer Marketing Organization ("MMO"), a division of Honeywell.

 On August 23, 1977 Beard, a Honeywell salesman, spent 24 hours with Selden in Rochester observing EAS" payroll processing operations being run by another Honeywell computer. Selden told Beard that he needed a system to perform similar operations on a larger scale; a system which would support 32 terminals on line, and which would perform complicated multitasking. Beard represented to Selden that the Level 6 and the TL-6 operating system would support 32 terminals on line but advised that the number be kept down to around 20 to achieve faster response time. Around this time and on through early November, 1977 several Honeywell officials told Selden that the TL-6 operating system had been extensively tested and furnished to other locations where it was working well. Following these representations and other discussions with Honeywell sales people and technical people, Selden recommended to EAS that it purchase the Level 6 hardware and related TL-6 software. However, in September 1977 EAS decided not to make the purchase, and Selden told Honeywell that he was considering forming a new company to do so. Honeywell promised Selden that the new company would receive technical support from Honeywell in a joint effort to refine and improve the product if the new company should purchase it. Further discussions took place between Honeywell, Selden and Selden's associate Jay Shelley, in the course of which Honeywell told Selden that the new company might act as a test site for the TL-6. Later, Beard told Selden that the company Selden proposed to form could not become a test site because the test sites had already been selected; however, that the new company could become an OEM and could receive a discounted price and increased technical support.

 In November, 1977 Selden formed AccuSystems. On November 21, 1977 Selden, as president of AccuSystems, signed three contracts written on Honeywell forms:

 The first contract was entitled "OEM Agreement for Computer Equipment, Services and Software Products between Honeywell Information Systems Inc. and AccuSystems, Inc." This contract warranted that the equipment sold by Honeywell would be free from defects in workmanship or material under normal use and service for 30 days and limited Honeywell's liability in contract, tort, or otherwise to the repair or exchange of parts returned to Honeywell and found by Honeywell to be defective. It stated that Honeywell would not be liable for any indirect, special or consequential damages. Finally, it provided that "No action . . . arising out of this Agreement may be instituted by . . . Customer more than 2 years after the cause of action has arisen. . . ."

 The second contract was entitled "OEM Software Product License Supplement." This contract limited Honeywell's liability to AccuSystems in contract, tort or otherwise for any software product licensed to AccuSystems to 10% of the charges paid by AccuSystems to Honeywell for each applicable software product, or $5,000, whichever was less.

 The third contract was entitled "Maintenance Service Agreement for Data Processing Equipment between Honeywell Information Systems, Inc. and AccuSystems, Inc." This contract limited Honeywell's liability in contract, tort, or otherwise to the repair or exchange of parts returned to Honeywell and found by Honeywell to be defective, and provided that Honeywell would not be liable for any indirect, special or consequential damages. Like the OEM contract, any action must be brought within two years.

 All three contracts were signed on January 17, 1978 by G. W. Shipman, Director, Minicomputer Marketing Operations, on behalf of Honeywell, and are hereafter collectively referred to as "the Agreement."

 In his testimony, Selden described AccuSystems as having two purposes when it entered into the Agreement: (1) to serve as an OEM for Honeywell; that is, to purchase hardware and software from Honeywell, add value to it, and resell to end users; and (2) to itself act as an end user by functioning as an independent service bureau for small businesses. *fn3"

 The Level 6 hardware was delivered to AccuSystems in Avon, New York on February 2, 1978 and was installed by Honeywell representatives on February 6, 1978. The TL-6 software was installed at AccuSystems on March 21, 1978.

 Honeywell issued a document dated February 15, 1978 entitled "Preliminary - Honeywell Transactional Level 6 Concepts & Facilities" (hereafter referred to as the February 15 document), a copy of which was furnished to AccuSystems. The document states, on page 2, that it is "Preliminary - For Internal Use Only." In the introduction it is stated that "[t]he Level 6 minicomputer with the associated TL6 operating system software is a total product offered for commercial users." Then follow paragraphs describing the features which System Builders (OEMs) require and how TL-6 meets these requirements. Included in these requirements is "Stability - A System Builder should not have to spend time trying to figure out why a seemingly bug-free program does not work as it is supposd to work." As to stability, it is stated that the "TL6 evolved from prior operating systems and went through elaborate testing procedures at all stages of development." With respect to "multitasking," the importance of which Selden had stressed with Honeywell during their discussions, the document states that the "TL6 was built in compliance with the principle that the processing of any number of tasks in any combination may occur simultaneously. TL6 provides data integrity protection and efficient usage of core which is dynamically allocated according to current priorities" and that the "TL6 truly responds to application design considerations which fully employ the concept of multitasking in an interactive mode."

 At the trial, John Kallunki, who worked at Honeywell as a design programmer for software, admitted that no recorded testing occurred until more than one year after Honeywell sold the TL-6 to AccuSystems. These tests established that the TL-6 ran at a high risk and produced below average quality when processing mixed-mode, multi-user transactions.

 Following installation, AccuSystems experienced numerous difficulties with the Honeywell Level 6 and TL-6. Selden testified that Honeywell's initial shipment of hardware was incomplete and that the machine would not function when turned on.Selden stated that he ordered additional parts but that they did not work when they arrived and that these hardware difficulties continued until May, 1978. Selden stated that beginning in August, 1978 the system "crashed" while running programs.

 Throughout this period, Selden, on behalf of AccuSystems, repeatedly expressed his dissatisfaction to Honeywell. For example, on May 22, 1978 AccuSystems addressed a letter to Beard at Honeywell in which it stated:

 If we were to assume that under normal conditions the month of February would be required to get the system installed and broken in, it follows that we suffered unusual impairment for March, April, and the first part of May . . . We relied on the reputation of the Honeywell Company and the advice of representatives of Honeywell in placing our order for the Level "6" machine. . . . We did, however, rely upon the Honeywell Company being reasonably effective in making reasonable efforts to rectify the problems we encountered, a case for material measurable damages of up to $17,000. . . . In spite of that experience, but because of the longer background we have had and the reputation of Honeywell, and also because of the personal responses I have received from you, I am today still looking forward to basing my company's growth on Honeywell products and relying upon a continued cordial relationship with Honeywell people at all levels. I am, therefore, not at this moment contemplating a law suit on the grounds of Honeywell's failure to furnish a working computer; . . .

 Despite the representations made by Honeywell, many of which were later repeated in its February 15, 1978 document, AccuSystems continued to encounter serious difficulties in making the system work. On August 16, 1978 ...

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