Chatlos Systems v. National Cash Register

Chatlos Systems, Inc. (CSI) (plaintiff) designed and manufactured telecommunications equipment. CSI wanted a computer system, including hardware and related software, that could handle six functions: accounts receivable, payroll, order entry, inventory deletion, state income tax, and cash receipts. NCR Corporation (NCR) (defendant) approached CSI, became familiar with CSI’s needs, and represented that a specified computer system (the computer system) would perform the six functions, result in direct savings of labor costs, solve inventory problems, be programmed by capable NCR personnel, and be operational by March 1975. In reliance on NCR’s representations, CSI entered a financing transaction with a bank to lease the computer system, which was valued at about $75,800. Thereafter, NCR personnel repeatedly attempted to install the computer system at CSI but encountered technical problems. The only function that was operational by March 1975 was payroll. The state-income-tax function was not operational until September 1976. The other four functions never properly operated. CSI fully cooperated with NCR until September 1976, at which time CSI refused further accommodations. CSI sued NCR for breach of express and implied warranties. The court held a trial and received evidence on the transaction history and CSI’s damages, including the actual value of the computer system at the time of acceptance of about $6,000 and certain incidental or consequential damages sustained by CSI. For example, CSI did not save money on employee salaries and lost profits from not having an operational, automated computer system. NCR argued that the parties’ sales contract limited consequential damages to the repair or replacement of defective parts.