Vermont Pure Holdings, Ltd. v. Descartes Systems Group, Inc. is a federal district court decision about the dispute resolution clauses in a software licence agreement. It is included because it shows how an arbitration clause in a licence can control the forum for a wider dispute about a delivered software system, a point that applies to licence managers reviewing older Descartes contracts and related services agreements.[1]
Background
Vermont Pure, a Delaware corporation based in Vermont that bottles spring water and supplies coffee to business customers, alleged that in early 1999 Descartes proposed a package called the Energy Suite to manage its distribution by computer. On 1999-03-30 it signed two contracts: a Software License Agreement (SLA), under which Descartes would supply computer hardware and software, and a Professional Services Agreement (PSA), under which Descartes would provide design, training, technical support and project management for installation and implementation.[1] Descartes later assigned its rights and obligations under both contracts to Endgame Systems, Inc., and the court treated the two defendants alike for the motion.[1]
The two contracts differed on dispute resolution. The SLA said it was governed by the laws of the Province of Ontario and that the parties submitted to the exclusive jurisdiction of the Ontario courts for matters properly resolved by judicial decision, and it also required disputes arising out of or relating to the agreement to be negotiated and, failing that, determined by a single arbitrator under the Arbitration Act, 1991 (Ontario). The PSA required Ontario law but had neither a forum selection clause nor an arbitration clause. Both contracts had integration clauses, and the SLA contained a broad disclaimer of warranties while the PSA required services to be performed in a workmanlike manner by personnel with commensurate skill.[1]
Vermont Pure alleged that the new system had not performed as promised and had not been satisfactorily installed. It said Descartes had demanded additional payments of about 422,841 US dollars, of which roughly 320,100 related to the PSA and 103,507 to the SLA, and that the overruns were mostly under the PSA. The complaint, filed on 2000-07-27, asserted two counts for breach of the PSA and a third count seeking a declaration that Vermont Pure was not liable for any of the amounts demanded, including those under the SLA.[1]
The motion
The defendants moved to dismiss for improper venue. They argued that the SLA’s forum selection clause chose the Ontario courts, that the two contracts were so intertwined that they should be treated as one, and, alternatively, that the arbitration clause in the SLA applied on its face to disputes arising out of the PSA because the PSA “relates to” the SLA.[1]
The decision
On 2001-04-10 Judge Sessions granted the motion to dismiss. The court applied the Second Circuit’s approach that federal policy strongly favours arbitration, that arbitration clauses are construed as broadly as possible, and that doubts about scope are resolved in favour of arbitration, with the policy even stronger in international business transactions. It applied Ontario law, as the contract’s governing law, to interpret the words of the clause according to their plain and ordinary meaning.[1]
The court held that the SLA clause covering disputes “arising out of or relating to” the agreement is a paradigm of a broad arbitration clause, so claims that relate to the SLA are presumptively arbitrable. “Relating to” has a wider meaning than “arising out of”, so even if Vermont Pure’s claims did not arise out of the SLA, they could still relate to it.[1] The court looked at the factual allegations rather than the legal labels. The complaint concerned the poor performance of the Energy Suite, which consisted at least in part of the software and hardware covered by the SLA. Vermont Pure also admitted at the hearing that the system had been designed for the bakery business and that Descartes had promised to adapt it under the PSA, which implied that part of its problems stemmed from the software itself.[1] The court would not let Vermont Pure avoid arbitration by casting its suit as one under the PSA.[1]
Count III, the declaration of non-liability for amounts due under both agreements, explicitly related to the SLA, and the court rejected the argument that it was merely a set-off remedy for breach of the PSA. Because the SLA’s arbitration clause covered all the claims, the court did not decide whether the SLA and PSA formed a single contract or whether the forum selection clause would also apply.[1]
Limits of the decision
The decision is a venue ruling at the pleading stage. It does not decide whether the software performed as promised, whether Descartes’ charges were due, or what an arbitrator in Ontario concluded. The court did not decide the “inextricably intertwined” argument, and the opinion records that the motion was not one to compel arbitration, though the same approach applied.[1] The contracts in the case predate Descartes’ current Master Terms, which choose Ontario law and Ontario courts after a negotiation step rather than arbitration.[2]
Lessons learned
- Read the licence’s dispute clause against every related contract. A broad “arising out of or relating to” arbitration clause in a software licence can capture claims that a customer pleads under a services agreement without such a clause, when the underlying facts concern the licensed software.[1]
- Labels do not control scope. The court examined the factual allegations and refused to allow a claim to escape arbitration by being framed under the services contract.[1]
- Governing law and forum travel with the licence. Ontario law governed the interpretation of the clause even though the dispute was litigated in Vermont, so customers should expect the licence’s governing law to apply to forum questions.[1]
- Disputed charges under one contract can engage another contract’s clause. A claim for a declaration that nothing is owed under both contracts brought the licence agreement, and so its arbitration clause, into play.[1]
- Check current terms. Descartes’ current Master Terms (version DSG26.0) provide for good-faith negotiation, then Ontario law and the exclusive jurisdiction of Ontario courts, so the forum position differs from the 1999 licence in the case.[2]