When it comes to arguments concerning the performance of IT contracts, clear and measurable obligations agreed at the outset will assist in avoiding an expensive dispute.
Two questions we are frequently asked by clients with IT projects that are not going to plan is, “where do I stand?” and, “what are my rights?”.
Of course, every case is different, but in this article we consider the more common situation where the buyer wants the option to bring the whole contract to an end. It is rarely the supplier that is seeking to end the contract. The law famously does not concern itself with trivia, so it is not every minor breach of a contractual obligation that will allow the wronged party to terminate the contract. Indeed, it is only a serious breach (called repudiatory, ie going to the root of the contract) that will permit a party lawfully to terminate the contract.
Answering those two questions requires a careful review of the terms of the contract to ascertain the quality of the breach or breaches. It is a sad fact that many IT procurement contracts leave much to be desired from the point of view of clarity and definition of the supplier’s obligations. The most troublesome of such contracts are work and materials contracts tied to a non-binding estimate, which the buyer believes is going to be the final bill, give or take a modest amount.
It follows that to establish whether a breach by the supplier of his obligation is sufficiently serious to enable the client to bring the contract to an end, depends very largely on how the obligations of the supplier have been framed in the contract. Not all IT contracts contain all the terms that would govern the parties’ relationship. The law will imply terms, if they are not expressed, that services are provided in a reasonably competent manner and that goods supplied will be of satisfactory quality and fit for their purpose.
Moreover, it would be wrong to think that IT contract problems arise only from issues under the supplier’s control. A frequent cause of problems is the buyer seeking to up-rate the specification of the system during the course of the project. IT contracts invariably allow for this, so it is no breach of the contract for the buyer to seek enhancement. It can have the effect of masking, or sometimes exacerbating, lack of performance on the supplier’s part. Where this occurs, disentangling the issues to identify a failure of performance by one party or the other will often become very much harder. Such difficulties often stem from a failure by both parties, at the outset, to identify exactly what the buyer wants or needs and whether the system can supply that functionality.
Where there is a complaint about the supplier’s performance, it will be measured against all the contractual terms, expressed and implied. The usual areas for dispute are the time taken to implement the system and how well the system does what was claimed for it, particularly the ease of use of the system by operators and the response time of the system to operator’s instructions. Another significant area for problems to arise, is in data migration where a new system is being substituted for an old one, but the data on existing databases is being retained and migrated into a new structure. Problems in these areas inevitably leave the client’s expectations unmet, but they do not inevitably lead to a breach of contract by the supplier, even when the problems are significant. If the contract allows the parties to measure by objective criteria the supplier’s performance, then any breach of contract will be readily identifiable and either remediable, or clearly grounds for termination.
If, however, the supplier’s obligations are not so clearly set out it becomes harder to identify that the lack of performance is a breach of contract at all, let alone one of sufficient seriousness to allow the buyer to end the contract. Nevertheless, often the buyer will want to end the contract because the element of trust in the supplier, essential to the successful implementation of both contract and system, has gone.
In such a case two potential options are, first, for the buyer to adopt a tough line speculatively to force a resolution or, second, to obtain an expert’s report. If the buyer’s real wish is to terminate the contract the expert report may be preferable. If the outcome of termination reaches the courts for arbitration, the supplier will be judged against the standard of a reasonably competent IT provider, or his equipment against a standard of satisfactory quality. Evidence is needed to establish the standard and an IT expert will be needed to do that.
If the expert’s opinion leads to the conclusion that there is at least one breach sufficiently serious to justify termination, discussions can commence to resolve the dispute, if necessary by bringing the project to an end. Resolution can often be achieved without litigation, but litigation remains a tool available to the buyer where a supplier is not prepared to address the buyer’s complaint.
The lesson for those engaging in IT procurement, whether as buyer or supplier, is that where supplier’s under-performance is alleged, the most important point of reference for the purpose of identifying the extent and nature of any under-performance and whether, if present, these are sufficiently serious for the contract to be ended by the buyer, is the stage of contract formation.
Inserting clear and objectively measurable obligations on the supplier at this stage means that both parties can measure the supplier’s performance and, if problems occur, either correct them or escalate them, hopefully without the need for expert evidence. Where there is an issue of specification ‘creep’ or other failure by the client, the ability to rule out supplier underperformance is of value to the supplier. The importance of this is magnified in smaller projects because the cost of expert investigation may be disproportionate to the cost and value of the system being installed, especially when the cost of the extra management time that a dispute inevitably involves is factored into the equation.