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In our Mid Term exam we were given a question based on a short case study

An internet software expert was needed for a breach of contract case between an online software developer and an internet content provider. The plaintiff (person who brings a case against another in a court of law) had developed a software based media and MP3 player that was available as a free internet download. The defendant purchased the plaintiff’s company & software. The merger agreement included a clause in which the defendant agreed to pay shareholders an additional amount determined by the average number of unique users of plaintiff's MP3 player during a specified period, to be determined by tracking software. However there was nothing specified what tracking software technology should be implemented. The plaintiffs alleged that the defendants did not take appropriate steps to implement the tracking technology needed to count unique users. The defendant maintained that the plaintiff shareholders had a responsibility to ensure that technology was in place to make the count possible. Is this breach of contract or do you see any loopholes in the contract? Point out the flaws and state your reasons as well

Now this was the answer that was later provided as a solution

Yes it is a breach of contract case. As it was part of contract that tracking software should be implemented in order to get proper counts of downloaders which certainly haven’t been done by the defendant so there is a clear breach of contract exists between them. There are certain loopholes are involved as it should be mentioned in contract which technology to be used and who should control it. If that had been explicitly added, there won’t be any ambiguity regarding who is responsible for what.

I agree with the part that there are some loopholes but my answer differed in the main part that It was not a breach of contract because they said that they should implement a tracking software and they didn't specify any ideas that how it should be done. So for one the number of unique downloads could be one download per PC or for one it could be number of times it was downloaded regardless of the PC. So my given answer was that it was not a Breach of contract as the person selling or signing the contract should have done their best to ensure that their are no more loopholes and since they signed it I don't think they are to be favoured in court for this contract. Can someone please clarify that if my answer was right or was wrong and give me some explanation to it about what exactly is going to be the breach of contract in case of loopholes.

PS: The Course was Professional Issues in IT

  • It's not true that "they didn't specify any ideas that how it should be done". The contract includes the wording "average number of unique users...during a specified period" which, except for the term "average", is not at all ambiguous. – A. I. Breveleri May 9 '17 at 15:57
  • @DevX: To confirm, my reading is that there is NO tracking software, but the defendant said that it was the plaintiff's responsibility. Is this correct? – sharur May 9 '17 at 19:39
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    To answer the question in the title, No. A loophole in a contract is not per se a breach of that contract. – phoog May 10 '17 at 8:21
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The pertinent part of the question:

However there was nothing specified what tracking software technology should be implemented. The plaintiffs alleged that the defendants did not take appropriate steps to implement the tracking technology needed to count unique users. The defendant maintained that the plaintiff shareholders had a responsibility to ensure that technology was in place to make the count possible. Is this breach of contract or do you see any loopholes in the contract? Point out the flaws and state your reasons as well.

The model answer:

Yes it is a breach of contract case. As it was part of contract that tracking software should be implemented in order to get proper counts of downloaders which certainly haven’t been done by the defendant so there is a clear breach of contract exists between them. There are certain loopholes are involved as it should be mentioned in contract which technology to be used and who should control it.

Your comment:

I agree with the part that there are some loopholes but my answer differed in the main part that It was not a breach of contract because they said that they should implement a tracking software and they didn't specify any ideas that how it should be done. So for one the number of unique downloads could be one download per PC or for one it could be number of times it was downloaded regardless of the PC. So my given answer was that it was not a Breach of contract as the person selling or signing the contract should have done their best to ensure that their are no more loopholes and since they signed it I don't think they are to be favoured in court for this contract. Can someone please clarify that if my answer was right or was wrong and give me some explanation to it about what exactly is going to be the breach of contract in case of loopholes.

The model answer and your answer both miss a key consideration which applies in every dispute over the performance of a contract when one party is given discretion over how to implement the contract terms that have some level of ambiguity.

This is the "duty of good faith and fair dealing". This implied obligation in every contract (even between sophisticated big businesses) requires a party which has unilateral discretion over how a contractual obligation is to be performed to do so in a manner that best reflects the mutual intent of the parties.

So, in this case, even though "nothing specified what tracking software should be implemented", the defendants had a duty to make a reasonable choice of tracking software to implement this provision in a manner reasonably calculated to determine the average number of unique users of the product which the contract called for payments to be based upon. While there probably isn't a single correct way to go about doing this, it would be required to use commercially reasonable means to come reasonably close to doing so.

What kind of approaches to implementing the tracking software would or would not satisfy the duty of good faith and fair dealing would generally be evaluated by looking at the course of dealings of the parties, by looking at common practice in the industry, and by comparing the cost of a more accurate tracking system with the impact that greater accuracy would have on the determination of the amounts due under the contract.

If the defendant could have spent $10,000 on a system that would cause $1,000,000 more to be due under the contract because it could capture more of the unique users, it would probably be held to have breached the contract by not doing that.

If the defendant would have had to spend $1,000,000 to make the tracking system more accurate and greater accuracy would only have increased the amounts due based upon unique users by $10,000, it would probably not breach their duty of good faith and fair dealing to refrain from purchasing this more expensive and more accurate tracking software, particularly if the defendant made a $10,000 allowance for the estimated number of omitted unique users as a result of using less accurate tracking software and increased compensation under the contract accordingly.

While I am coming at this question from the perspective of the common law of contract derived from English law, there are quite similar concepts that exist in most civil law jurisdictions, so this concept is pretty universal in modern contract law settings. (Early 18th and 19th century cases were often stingier on applying the duty of good faith and fair dealing although it was present in embryonic form even then.)

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We can assume there was a meeting of the minds when the contract was drafted, and both parties expected payments to me made based on product usage. Plaintiff alleges that this did not happen. Thus plaintiff is indeed alleging that the contract was breached.

Now plaintiff alleges that defendant broke the contract, while defendant counters that plaintiff broke the contract. "[T]o be determined by tracking software" is woefully ambiguous. The court will want to know which party drafted the contract, as disputes arising from ambiguity are often resolved in favor of the non-drafting party.

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