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Bad Faith Mandatory Mediation by Software Developer

From the Disputing Blog of Karl Bayer, Victoria VanBuren, and Holly Hayes.

By Peter S. Vogel

The mandatory mediation provision of the software development agreement seemed like a good idea to me since a mediation conference was required before litigation could be filed. However, it turned out to be a ploy. The California software vendor had a contract for software development for the implementation of a new Enterprise Resource Program (ERP) system for a large company in Mississippi. Unfortunately as things turn out about 65% of the implementation of ERP systems fail, so it was not a surprise to me that the Mississippi customer demanded a refund of the monies paid. In response, the software vendor invoked the mandatory mediation provision. For the mutual inconvenience of everyone the mediation was in Houston, so I traveled from Dallas, the software vendor from California, and the customer from Mississippi.

Mediation As Normal

I should have known something was up since the software vendor did not bring a lawyer, rather showed up with just the CEO and VP of Operations. The customer brought the President, Information Technology folks, and their outside counsel. Each side made an opening statement in our joint session, and each made a demand. The customer wanted their money back or roughly $1 million, and the vendor wanted to be paid the balance of the contract which was also about $1 million.

Mediation Not So Normal

When I broke the parties into two rooms I met first with the customer, who explained their view of the case and was willing to pay the vendor a modest sum to terminate the contract so they could move on. So I explained to the software vendor the customer’s explanation of its position and its offer to pay a modest amount to the software vendor, and what happened next was astonishing to me. The software vendor refused to budge one cent, and the CEO told me that he had no intention of ever settling but now he understood the customer’s issues. He went on to tell me that he routinely used mediation conferences as a form of discovery, and that he had an E&O policy that would cover the cost the attorneys’ fees to defend the customer’s claims so it would not cost him anything.

It seems to me that the point of requiring a mediation conference before litigation should not be to get some advantage, but rather a way for the parties to avoid continued litigation. I was extremely disappointed about the software vendor’s business model and sorry that he took advantage of the mediation conference solely to help him in litigation, never intending to settle at the mediation conference.

Technorati Tags:  ADR, law, mediation

Peter S. Vogel is a trial partner at Gardere Wynne Sewell LLP where he is Chair of the Electronic Discovery Group and Co-Chair of the Technology Industry Team. Before practicing law he worked as a computer programmer, received a Masters in Computer Science, and taught graduate courses in information systems. For 12 years he served as the founding Chair of the Texas Supreme Court on Judicial Information Technology which is responsible for helping automate the Texas court system and putting Internet on the desktops of all 3,200 judges. Peter has taught courses on the Law of eCommerce at the SMU Dedman School of Law since 2000. Many of Peter’s topics are discussed on his blog


Victoria VanBuren

Victoria VanBuren holds a B.B.A. in Finance from Southern Methodist University and a J.D. from the University of Texas School of Law.  She focuses on intellectual property law and arbitration. Known as a "worker bee," she is an active legal blogger and is currently pursuing a degree in computer science.… MORE >

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