The plaintiff operated several wholesale auto supply houses in Minnesota. The Service Bureau Corporation (SBC) had provided a successful computer system to a Chevrolet dealership, with whom Clements was affiliated. SBC and Clements subsequently entered into an agreement whereby SBC was to supply Clements with a computer system which included inventory control software. The system provided by SBC proved unsatisfactory, and Clements sued for rescission, breach of implied warranty, breach of contract, reformation and fraudulent misrepresentation.
Trial Court Proceedings
The trial court found that SBC had made misrepresentations to Clements when its salesmen stated that the only way that Clements could obtain an inventory control system was to automate his entire accounting system. SBC conceded that the statements were false, but contended that the statements were "so patently unbelievable that no reasonable reliance could be placed on it." In fact, the court found that most of the difficulties encountered with the computer system arose from SBC's attempts to automate the accounting area. The court found that these efforts were not necessary to provide Clements with the proposed inventory control system.
SBC had also recommended the specific data input equipment to be used. The hardware proved to be too slow to handle the volume of transactions which Clements experienced. Finally, the computer system was full of errors and provided inadequate controls, despite SBC's representation "that there were controls built into the system which were adequate to prevent any but a minimal number of errors.”
SBC attempted to have all statements regarding the computer system made during the sales negotiations excluded on the grounds that the contract contained a valid integration clause excluding those statements, and that Clements had waived all express and implied warranties. The court held that the exclusion and waiver provisions were valid defenses only against Clements' breach of contract claim, and that SBC could not avoid liability for misrepresentation by reliance on cleverly drafted contract provisions.
Throughout the time period that Clements had experienced difficulties with the computer system, SBC made significant efforts to rectify the problems, and it was not until several years after the contract was originally signed that Clements brought suit. The trial court awarded Clements $480,811 in damages for SBC's misrepresentations.
Appellate Court Proceedings
The Eighth Circuit Court of Appeals, while upholding the decision, reduced the award to $247,000, since it found that Clements was not justified in relying upon the representations of SBC for as long as it had, and should have taken steps earlier to mitigate its damages.
The court, however,held that Clements was not required to mitigate damages until two years after the contract was executed.
Despite the subsequent reduction in damages, Clements was still reimbursed for the increased out of pocket costs incurred as a result of the poorly designed computer system, including the extra clerical and supervisory salaries required to deal with the computer system's erroneous output.
- The elements of fraudulent misrepresentation under Minnesota law were:
- 1. There must be a representation;
- 2. That representation must be false;
- 3. It must have to do with a past or present fact;
- 4. That fact must be material;
- 5. It must be susceptible of knowledge;
- 6. The representer must know it to be false, or in the alternative, must assert it as of his own knowledge without knowing whether it is true or false;
- 7. The representer must intend to have the other person induced to act, or justified in acting upon it;
- 8. That person must be so induced to act or so justified in acting;
- 9. That person's action must be in [[reliance] upon the representation;
- 10. That person must suffer damage;
- 11. That damage must be attributable to the misrepresentation, that is, the statement must be the proximate cause of the injury.
- Id. at 183.
- Id. at 182-83.
- Id. at 175.
- Id. at 176.
- Id. at 178-79.
- Id. at 173.
- Id. at 191.
- Id. at 187.
- Id. at 191.