Kansas City Post Office Employees Credit Union, appeals the
trial court's judgment in favor of Systems Design and Management
Information, Inc., (SDMI) on its counterclaims for breach of
contract and fraudulent and negligent misrepresentation. It also
appeals the trial court's application of Kansas law. SDMI
cross-appeals on the trial court's entry of judgment for the
credit union on SDMI's breach of contract claim.
On November 1, 1986, the Kansas City Post Office Employees
Credit Union merged into the Kansas City Telephone Employees
Credit Union. The surviving credit union is now called the
Communications Credit Union (Credit Union). SDMI develops
computer software programs for credit unions, using Burroughs,
now Unisys, hardware. SDMI is not a service bureau. It does not
furnish computer services from its computer system to credit
unions or manage any data on a daily basis. SDMI furnished
software to the Kansas City Post Office Employees Credit Union
and had an ongoing business relationship with it beginning in
1984. Prior to the merger of the two credit unions, Robert
Miller, a salesman for Burroughs, told Davis Tyler, president of
SDMI, about the proposed merger and the two developed a proposal
in an attempt to get the new credit union's account.
This proposal was jointly offered by SDMI and Burroughs, using
the so-called Generic System software, the subject of this
litigation, and Burroughs hardware. This proposal was dated
November 4, 1986, and contained the following clause:
"The preliminary information and expression of
confidence set forth in this recommendation of
Burroughs products and/or services are submitted for
your consideration and guidance only in the hope that
we may be favored with your order. Since this
proposal is preliminary only, the order when issued
shall constitute the only legally binding commitment
of the parties."
Sometime in November 1986, a demonstration of the software was
held at SDMI's offices. Daniel Yantis, president and general
manager of Credit Union, and Donald Cooper, vice-president in
charge of marketing of Credit Union, recommended the purchase of
the Generic System software and the credit union board accepted
their recommendation. On November 25, 1986, Cooper phoned Davis
Tyler of SDMI to say Credit Union would purchase the SDMI Generic
System. This agreement between the parties
was oral and no written order for the software was ever issued.
Credit Union was converted to the SDMI Generic System on February
Immediately, major problems with the system became apparent.
Some of the problems included inability to run the payroll,
inability to generate certain daily reports, some nonfunctioning
printers and terminals, and an inability to perform all the
normal operations during regular working hours.
There is disagreement as to the cause of these problems.
Ultimately, there were about 11,000 accounts after the merger of
the credit unions. The parties disagree as to whether Credit
Union disclosed or whether SDMI knew how many accounts the system
would have to handle. There is further disagreement whether the
number of accounts was misrepresented by Credit Union as 8,000 to
9,000 and whether Credit Union was informed by SDMI that with
that number of accounts the system would not work efficiently. In
any event, even after discovering that the system would have to
handle 11,000 accounts, Cooper recommended that Credit Union
proceed with the conversion.
After the conversion, there were many out-of-balance accounts,
perhaps thousands. Through the efforts of both parties, the
number of out-of-balance accounts was reduced to 293 by March 25,
On March 23, 1987, a meeting between Cooper and Tyler was held
and they signed a "status chart" which outlined the major
problems still to be solved by SDMI. This form stated, "When
these items have been resolved all monies due SDMI will be paid."
Apparently, all the items listed except installing a program to
"correct blocking" were performed. The purpose of that program
was to speed up the system and to accommodate the total
membership of Credit Union. Also on March 23, 1987, Cooper gave
Tyler a letter expressing understanding that "few conversions
come off without a hitch" and thanking him for SDMI's efforts to
deal with Credit Union's problems.
On March 19, 1987, Yantis and Cooper met with representatives
of another company seeking software to replace the SDMI Generic
System. Credit Union quit using the SDMI software on April 25,
1987, without having notified SDMI that it was switching to
another software program.
SDMI filed suit against Credit Union to recover the outstanding
indebtedness on the software. Credit Union counterclaimed for
damages based upon breach of contract and negligent and
fraudulent misrepresentation. The trial court entered judgment in
favor of Credit Union on SDMI's cause of action and judgment for
SDMI on Credit Union's counterclaim. These appeals followed
SDMI's business office is located in Kansas. Credit Union's
business offices are located in Missouri.
Credit Union argues that the trial court should have applied
Missouri law in this case. The trial court applied Kansas law,
acknowledging the lex loci contractus principle. The court then
found the demonstration of the Generic System was in Kansas,
Credit Union telephoned SDMI at SDMI's Kansas office to express
intent to purchase the ...