## Facts

- Indiana, through the Indiana Family & Social Services Administration (FSSA), contracted with IBM under a 10-year, roughly $1.3 billion Master Services Agreement (MSA) to modernize and operate the state’s welfare eligibility system.
- The project shifted eligibility processing from county offices to a centralized, technology-based model using call centers, document imaging, and related infrastructure.
- Indiana asserted chronic performance failures, including long call waits, unanswered calls, processing delays, and backlogs affecting benefit determinations; federal oversight also found untimely access to Medicaid benefits.
- In July 2009, the parties adopted a Corrective Action Plan to address deficiencies.
- In October 2009, Indiana terminated the MSA for cause, asserting IBM’s failures constituted a material breach; IBM disputed material breach and claimed the termination breached the contract.
- After a bench trial, the trial court found IBM breached but not materially, held Indiana was not entitled to terminate for cause, and awarded IBM various contractual payments and prejudgment interest.
- Indiana appealed the no-material-breach determination and resulting monetary awards.

## Issues

1. Whether IBM’s performance failures under the MSA constituted a material breach that justified Indiana’s termination for cause.
2. Whether materiality should be assessed primarily by the MSA’s materiality and performance provisions or by general common-law material-breach factors.
3. How damages should be handled when the State retained some deliverables but asserted a right to recover damages and offsets for IBM’s breach.

## Decision

- The Court of Appeals reversed the trial court’s determination that IBM’s breach was not material.
- The court held IBM’s failures—especially the inability to deliver timely and reliable eligibility determinations and benefit access—went to the “heart of the contract” and were material when viewing the agreement as a whole.
- The court recognized that IBM could still be entitled to certain contractually defined payments tied to items or benefits the State retained, but those amounts were subject to the State’s claims for damages and offsets resulting from IBM’s material breach.
- The case required reworking of the parties’ financial positions consistent with material breach and offset principles.

## Legal Principles

- A breach is material when it substantially deprives the non-breaching party of the expected benefit of the bargain, evaluated in light of the agreement as a whole and the contract’s central purpose.
- In determining materiality, courts may consider general common-law factors (such as the extent of deprivation and prospects of cure) while giving substantial weight to the contract’s stated objectives and performance metrics in defining the bargain.
- In mutual-claim contract disputes, a breaching party may recover amounts owed for retained deliverables only to the extent permitted by the contract and subject to offsets for the other party’s breach damages.

## Conclusion

The Court of Appeals held that IBM materially breached Indiana’s welfare-system outsourcing contract because the persistent service failures defeated the contract’s core objective of timely, reliable benefit delivery, thereby justifying termination for cause and requiring damages to be recalculated to account for the State’s offset rights while recognizing limited recovery for retained deliverables.


State ex rel. Ind. Family & Soc. Servs. Admin. v. Int'l Bus. Machs. Corp., 4 N.E.3d 696 (Ind. Ct. App. 2014)