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March 16, 1990.


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

[14 Kan. App. 2d 268]

      was oral and no written order for the software was ever issued. Credit Union was converted to the SDMI Generic System on February 1-2, 1987.

  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, 1987.

  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.

[14 Kan. App. 2d 269]


  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 judgment.

  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 ...

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