Everyone believes Digital Age construction disputes are coming and they think they know what the claims will look like, but such conflicts have yet to burst into the courts in a big way. One of the first to be fully litigated holds some warnings for software users that get into trouble, and offers a shield for technology developers and vendors who claim they need protection from consequential damages relating to use of their products.

The Supreme Court of Washington last year told Minneapolis-based building contractor M.A. Mortenson Co. Inc. what it didn't really want to hear after critical estimating software malfunctioned to the tune of $1.95 million during the preparation of a $70-million bid in 1993 on what eventually was a $115-million hospital in Seattle. Siding with lower courts, the court said Timberline Software Corp., Beaverton, Ore., successfully limited its liability for consequential economic damages with disclaimers.

In early 1993, Mortenson installed a new computer network operating system at its Bellevue, Wash., northwest regional office and found that the Timberline Medallion Bid Analysis software that it had been using would not operate on the system. It hired Softworks, a Beaverton-based Timberline dealer, to install the newer Precision version on its computers. Mortenson executed a purchase order on July 12, 1993, confirming the price, set-up fee, delivery charges and sales tax for eight copies of the software.

LOW BLOW M.A. Mortenson had a $1.95-million estimating error using Timberline software on Harborview Medical Center. (Photos courtesy of M.A.Mortenson Co.)

Timberline and almost all other brands of software are distributed to their users under license. In the Mortenson case, the full text of the license agreement was placed on the outside of each diskette pouch and on the inside cover of the instruction manuals and was referenced on the first screen of the program. Softworks installed the programs and had them operating before turning them over to Mortenson.

Mortenson used the programs in December 1993 to prepare a bid for the Harborview Medical Center. On the day of the bid, the software allegedly malfunctioned 19 times, displaying the message: "Abort: Cannot find alternate." After the contractor was awarded the project, it learned that its bid was $1.95 million lower than it should have been. Mortenson sued Timberline and Softworks in King County Superior Court, alleging breach of implied and express warranties.

According to court documents, a Timberline internal document dated May 26, 1993 indicated that there was a snag in the software. "[A] bug has been found [in the Precision software] that results in two rather obscure problems [that] happen if the following [four] conditions are met," said the document. "Given the unusual criteria for this problem, it does not appear to be a major problem."

Court documents also indicate that Mortenson's error message could be replicated if the four steps identified in the memo were followed.

In July 1997, the trial court granted Timberline's motion for summary judgment, ruling that the limitations on consequential damages in the licensing agreement barred Mortenson's recovery even though the contractor claimed that it never saw them. The state's Court of Appeals affirmed.

Last May, the state's highest court affirmed the lower courts (M.A. Mortenson Co. Inc. v. Timberline Software, Sup. Ct. Wash., Cause No. 67796-4 , May 4, 2000). After looking at judicial decisions not involving construction in other jurisdictions, the court concluded that a contract can be formed "in any manner sufficient to show agreement even though the moment of its making is undetermined." According to the court, "the terms of the license were part of the contract between Mortenson and Timberline, and Mortenson's use of the software constituted its assent to the agreement, including the license terms."

"Even accepting Mortenson's contention [that] it never saw the terms of the license, as we must do on summary judgment, it was not necessary for Mortenson to actually read the agreement in order to be bound by it," said the court.

The court also rejected Mortenson's argument that the limitations were unconscionable because of Timberline's failure to inform the firm of the defect in the software. "In a purely commercial transaction, especially involving an innovative product such as software, the fact that an unfortunate result occurs after the contracting process does not render an otherwise standard limitation of remedies clause substantively unconscionable," said the court.

Attorneys representing Mortenson were surprised with the court's ruling, "but we could see it coming," says Bradley L. Powell, of the Seattle law firm Oles, Morrison, Rinker & Baker LLP. He says that the court "went out of its way" to make sure that the ruling would apply in similar technological situations, even though software no longer is marketed that way.

Powell says that the most unusual aspect about the case was that Timberline knew about the defect. "That was the most shocking thing," he says. The program was supposed to analyze the subbids so that there was full coverage of the work and then pick the lowest price. "In some cases, it did not pick the low bid [or] it added wrong," Powell says.

One Mortenson executive says the project would have been "borderline" profitable with the error but the scope of the project changed greatly over time, so that it ended up being profitable. "The more sophisticated the programs get and the more dependent we become, the more likely an error will occur and the more difficult double-checking becomes," says the executive. "People have to be careful. The software industry is very organized and aggressive."

Timberline President and CEO Curtis Peltz believes that the limitation of damages is important in this case, but mainly because "the reality is that we feel the lawsuit was a very frivolous one." According to Peltz, who was one of two main programmers on the DOS-based product, the malfunction was caused by the contractor's operating system and personnel. That issue was not litigated because it was not germane to the court's decision on summary judgment, he says.

According to Peltz, the software was designed with a failsafe automatic recalculation feature that was prominently displayed on the software and manuals. The operator need only hit the F-6 key at the end of the program. The feature was included specifically because of the last-minute nature of construction bidding. Although Mortenson's system crashed 19 times, the contractor's estimators chose to continue and did not use the automatic recalculation at the end, Peltz claims. Analysis showed that the files were corrupted. "There is no proof that our product caused the malfunction," he says. Peltz adds: "Even if we had a bug, which we claim we didn't, what responsibility does the user have?...In this particular case, the facts would have shown that they abdicated their role."

Although Timberline won the case, there are repercussions. Peltz says the firm's insurance deductible now is 400% greater than it was before the lawsuit and this cost is amortized over all products. And he says the lawsuit "chilled" the firm from developing a Windows-based version of the bid analysis program, despite requests from customers. That project only now is beginning. Without the liability limitation, "our entire pricing model would have to change drastically," says Peltz. "Should I charge $990 for the program or $30,000?" he asks.

The exclusion of special and consequential economic damages is "fairly typical in licensing agreements," says Jeff Jinnett, a computer lawyer at LeBoeuf, Lamb, Greene & MacRae, New York City. Computer software is viewed as "goods" in most states under their Uniform Commercial Code and courts have allowed this liability exclusion in a business environment unless it is unconscionable or there is "a failure of essential remedy," he explains.

This failure would occur if a vendor could not repair or replace the software and that was the sole remedy offered, Jinnett says. In such cases, courts then will allow consequential damages. As a result, software vendors also allow users to recover reasonable direct damages up to the cost of the license "so there will never be a failure of an essential remedy," he says. Companies generally can't disclaim liability for personal injuries caused by their products, he adds.

In at least in two states, end users may be headed for even more onerous terms. Last August, the National Conference of Commissioners on Uniform State Laws approved a highly controversial final draft of the Uniform Computer Information Transactions Act. It has been adopted by Virginia and Maryland, both states looking to attract technology firms, and introduced in the legislatures of Arizona and New Jersey. The 200-page document has been described as a "vendor command-and-control regime" that allows technology firms to change material terms unilaterally after an agreement has been reached, says Jinnett. "More than 20" state attorney generals have opposed its adoption, he adds.

Liability also is limited because of software makers' status as nonprofessionals. "Software makers are deemed not to be professionals and therefore disputes fall into products liability" and not professional malpractice, adds construction lawyer John Rudy, also of Lebouf.

The movement of the industry to project Websites and extranets is raising the specter of similar types of disputes, but none have appeared--yet. "I've looked at this a lot," says Michael M. Feigin, executive vice president and general counsel of Bovis Lend Lease Holdings Inc., New York City. Project Websites and related tools deal with information from third parties that the company in control is not required to review or does not have the opportunity to review, posing "an opportunity for a dispute." For example, "if you are an architect putting information on a project Website, are you establishing a duty of care to people with whom you have no contractual relationship?" Feigin asks. This is a "matter dealt with by contract," he answers. Bovis has not altered its contracts, but "we have a project Website disclaimer," he says.

There haven't been any disputes because Web-based project management tools like that developed by Constructware "significantly reduce the opportunity for a dispute," says Scott Unger, CEO of the Alpharetta, Ga.-based firm. In posting all project documentation, "we know who did what when and everything is in plain view," he says. Legal disputes arise because things are not documented well, says Unger, who was a subcontractor.

One area of critical importance in any potential dispute or resolution is who owns the data and information on a Web-based system. "Somebody will take the initiative to push the technology on a project and that company will own the data," says Unger. "That party has control of the system and when the project is completed, that party can limit access."

The ownership issue can limit the effectiveness of project Websites although these things "have great promise," says Paul Berning, a construction lawyer in the San Francisco office of Thelen Reid & Priest LLP. "The key person on a project is the general contractor, but if the owner owns the system, [the contractor is] not going to put confidential data on the system," he says. Such items would include disputes with subs or what the electrical subbid is. "If the owners is buying the project on a lump-sum basis, it is none of their business," Berning claims. At that point of inhibition, a project Website system "becomes a glorified e-mail system," he says.

Even chat room discussions of projects raise concern about whether they may be used as ammo in litigation. "The good news is that nobody has done it. The bad news is that somebody will," says Robert Prieto, chairman of Parsons Brinckerhoff Inc., New York City. It already is well established that e-mails and computer hard drives are "are as discoverable [by opposing attorneys] as your filing cabinet," he notes.

According to construction lawyer J. William Ernstrom of Ernstrom & Dreste, Rochester, N.Y., attempts to limit liability are starting to reach absurd proportion. "I'm starting to see disclaimers coming with electronic documents [from design firms] that say that there is no guarantee that this is what was sent," he says. One client now refuses documents with this disclaimer, he says. The construction documents committee of the Associated General Contractors will take up the issue of disclaimers at the group's convention in March, says Ernstrom, who is "of counsel" to the committee.

"Disclaimers are a defense mechanism by the uneducated," claims Tom Weise, director of facilities, materials and services for Intel Corp., Chandler, Ariz. "I will aggressively defend" the right to have contracting parties do what they agreed to do, he says.

A disclaimer "sure as hell does" cut down on a document's usefulness, but asp project management tools "are the most exciting things I have seen in a long time, maybe the 30 years I have been a project manager," says William P. Tibbett, executive director of worldwide engineering services for Johnson & Johnson, New Brunswick, N.J. "The potential is almost unbelievable and there is very little downside."