In a companion piece to their recent article on the reasons for IT project failure, Lee Gluyas and William Hooper review the steps that can be taken to protect a party's position where a project is failing but recovery is being attempted.
IT projects can be lengthy and complex, especially where they are part of a broader outsourcing arrangement or business transformation. Even the simplest projects can quickly fall behind schedule. Often failing projects can be brought back on track or the scope can be changed to meet the customer’s revised requirements. However, as the relationship between the customer and supplier becomes strained, both parties should take steps to ensure their position is protected in case the issues cannot be resolved and the dispute escalates to legal proceedings whilst they pursue recovery.
In our previous article “Whose fault is it anyway? Why complex IT and outsourcing projects fail”, we looked at some of the common reasons for project failure. In this article we consider measures which both customers and suppliers should take if they find themselves in a position where a project is going off track.
1. Consider your objectives, decide what you want to achieve and be prepared to engage constructively
When delivery deadlines are slipping and a project is under strain, the parties may have differing views on how they want the project to progress.
In many cases, both parties will have the objective of getting the project back on track and delivered to an agreed specification. However, the position is not always straightforward, especially where the project has a long delivery time and the preferred outcomes and priorities of the parties may not be the same as they were at the time of contract signature.
The customer may decide that it no longer requires some of the functionality set out in the specification. It may have been developing its understanding of the business operations and processes to be delivered in association with the technology, leading to a changed understanding of the way the system should be used. In those circumstances, the fact that the project has drifted off track may provide opportunity to renegotiate the scope of delivery and change the agreement. In some cases, the customer may decide that it no longer needs the new system at all. In times of financial strain, customers may take (some might say cynical) advantage of problems during delivery to attempt to cancel the project altogether. That happened frequently in the period following the financial crisis in 2009, when many companies had to change their business forecasts from growth to contraction and found ways of saving costs by cancelling projects which they considered were no longer required. The Covid-19 pandemic may create a similar environment.
Suppliers may also reflect on the financial viability of a distressed project. The problems which the project is encountering may be caused by aspects of the delivery that are proving to be more complex than expected, perhaps due to lack of information from the customer at the time of contracting. In those circumstances, the best way forward for the supplier will be an increase in price or descoping of deliverables to enable it to complete the project without erosion of its margin.
The parties may have very different objectives but if the project is to succeed they will have to work together to find a satisfactory way forward. If there is to be a change in scope or approach, the parties will need to agree whether to process the changes through the change control procedure or by way of a variation of the contract. If there is to be an extension of the timetable for delivery, they will need to re-plan carefully to make sure that the project is deliverable against the revised plan and they are not just kicking the proverbial can down the road. If there is to be a change in resourcing to meet delivery schedules, they will have to agree how that requirement is to be met and who will pay.
Deciding what you want will be much more straightforward than securing the counterparty’s agreement, but it is a necessary starting point. Each party must consider its options and assess the legal viability of those options. Without an understanding of what is realistically achievable, a party will not be able to form a clear view on what would constitute an acceptable outcome.
2. Re-negotiating delivery
In the process of agreeing the contract, the customer and supplier will have been through a process of mutual discovery and negotiation. Assumptions will be made, and it is hoped, tested. Each party will generally seek to simplify what it has to do, in some cases complicating what the other party is asked to deliver. Where the degree of knowledge of the current state and of comparable deliveries is high, this risk will be low. Where fundamental change is being embarked upon and skilled, experienced resource is lacking, the risks are commensurately higher.
Good agreements frequently state principles upon which the approach to delivery is based. This reflects an architectural approach that defines the high-level elements and helps to establish understanding of their intentions. Should it be found that the base principles no longer hold, the implications are fundamental for delivery approach, time, cost and what needs to be done. A party can persist in the belief that a bit of violation does not really matter and that the other party should accommodate a change at modest cost. “Why have you not yet responded to my impact request, by the way, here are six others!” A supplier needs certainty of scope before being able to plan delivery. A customer needs to be certain that the technology will do what the business needs of it and confidence that the supplier is capable of understanding and delivering to the plan. Changes in the approach to transition from the current state to the new can have particularly far-reaching effects.
In the course of renegotiating delivery, the parties must first each come to a decision whether they wish to recover the project or terminate. This will not be simple and additional information will be required. Whilst the contract is in place there is the option to continue or terminate at a later date; once it is terminated that option is lost. A seriously troubled project will often go through several renegotiations and resets before eventually being terminated. Most attempts to recover performance are successful in avoiding termination.
The governance of renegotiation is an important aspect of undertaking this successfully. It is advised that both governance and the project management of the change are explicitly planned, resourced and managed. There will be elements that are shared with the other party and elements that are conducted in secret. Whist circumstances will differ from case to case, some questions commonly occur:
1. Do we currently believe that amendment can recover performance sufficiently to continue with the relationship?
2. What is the high-level approach to delivery and the implications for the agreement?
a. What do we need to change about ourselves to improve?
b. What do we want the other party to agree to change or do differently?
3. How do the best options for renegotiation compare with termination in terms of cost, business benefit, schedule and risk:
a. From the perspective of my organisation?
b. How will the counterparty see it?
c. How are key individuals and stakeholder groups likely to be affected and to behave?
Once these are established, the lower-level change is defined in detail for the contract change, the design, the project and the cost. This will require input from the business, from the customer’s IT, the supplier, legal, finance and senior managers from both organisations. Where relationships have broken down and credibility is lost, it may be appropriate to replace some individuals. The skill of managing stakeholders through such a traumatic change has a significant effect on the outcome achieved.
In the event of a decision that the probability of termination is high, the party deciding this should probably establish an internal project to prepare the necessary aspects before announcing the approach. We discuss the elements required in the remainder of the article. Until the moment of issuing formal notice of termination, there is always the option to stand such activity down. It is necessary but difficult to maintain secrecy. An alert counterparty may well detect signs from patterns of requests for information or requirements to deliver on neglected obligations. Should remediation be effective in the face of such requests and detection, that in itself may be a good outcome.
3. Be aware of contractual remedies
When problems are encountered, parties must be aware of their rights and obligations under the contract and the remedies open to them. We would encourage the parties to make frequent reference to the contract throughout the project and review relevant sections whenever there are disagreements, including in the context of re-negotiation of scope. Both parties should know at all times what has been delivered and what is outstanding. It is particularly important for a party to consider the contract carefully if it wishes to seek damages or other compensation for default or is considering terminating the contract.
Remedy set out in the contract
In some cases, the contract may record an agreed solution to the problems. For example, many contracts for the delivery of an IT system require the supplier to pay a specified sum as liquidated damages for each day’s delay in the achievement of a milestone. Similarly, many outsourcing agreements mandate the provision of service credits if the level of service provided does not meet agreed service levels. In those cases (subject of course to the provisions of the contract in question), the liquidated damages or service credits may be the sole and exclusive remedy for the delay or failure to meet service levels and there will be no basis on which the customer can seek any other legal redress.
The business and senior managers may well have assumptions regarding remedies available to them that are inconsistent with the contracted terms. We would advise that in the early stages of a dispute a member of the legal team should brief the governance group on the options available and manage overly hopeful assumptions that may otherwise lead to inappropriate action and statements. Such a briefing may also establish procedures to govern the handling of the dispute.
Termination for convenience
If a party wishes to terminate the contract, it will need to consider carefully whether it has a right to do so. Many outsourcing agreements contain a provision enabling a customer to terminate the contract by provision of a period of notice. This method of termination is often referred to as termination without cause or termination for convenience. It has the benefit of enabling a customer to exit an arrangement which is no longer of benefit without having to establish any fault on the part of the supplier. However, if the customer wishes to follow this process it should review the contract carefully. Often notice must be provided on a particular date (e.g. linked to the anniversary of contact commencement) and be served by a specified method. Failure to comply could result in the termination being ineffective or could itself be a breach of contract enabling the supplier to terminate and claim damages. In addition, the ability of a customer to terminate may be conditional on payment of an early termination fee, which may make this process commercially unattractive.
Termination for breach
If termination for convenience is not possible or appropriate, the party which wishes to get out of the contract may want to consider whether it can terminate for breach. It is important to recognise that not every failure to meet contractual obligations will give the other party a right to terminate for breach. The party wishing to terminate will need to consider whether the breach(es) in question are sufficiently serious to enable it to terminate.
Many contracts specify Events of Default. If a party can establish that the other party’s failure to deliver amounts to an Event of Default, it may be able to terminate with immediate effect, subject to following the contractual procedure for termination. Often, the failure in question does not easily fit in to one of the Events of Default or the contract specifies no events of default at all. In those circumstances, the party wishing to terminate will need to consider whether the failure to deliver in question nonetheless amounts to a material breach enabling it to terminate the contract. If there are multiple delivery failures, they may amount to a material breach when viewed collectively, even if individually they are immaterial.
The position may be further complicated by the presence in a contract of a requirement for a party accusing the other of breach to provide an opportunity for it to remedy the breach before the right to terminate arises. Failure to comply could put the party seeking to terminate at fault.
If there is no apparent contractual provision enabling a party to terminate for breach, it may nonetheless be possible for it to terminate on the common law principle of repudiatory breach. To do so, it will be necessary for it to establish that the breach in question was so fundamental to the provision of the contractual services and obligations that it can be concluded that the party in breach is unable or unwilling to perform its obligations under the contract. A party wishing to terminate by this process must act decisively, but with caution to avoid itself being in breach by making an accusation which is proven to be unsupportable.
Whether there is a right to terminate for breach is likely to be heavily fact dependent as well as dependent on the agreed contractual terms. Great care must be taken in considering whether it is appropriate to terminate for breach. Many legal disputes turn on the question of whether a party which serves a notice of termination was in fact entitled to do so, or whether the service of the notice itself was a breach of contract, enabling the receiving party to terminate and claim damages. In practice, even where a party is terminating for breach, there will be exchanges of correspondence prior to the notice of termination, recording intentions with a view to protecting the terminating party’s position.
Consequences of termination
A party wishing to terminate a contract should consider the broader impact of such termination before serving notice. Some contacts specify the consequences of termination, largely focused on the future relationship between the parties. Many do not. Even where consequences are specified, thought should be put into other potential issues not articulated in the contract before notice of termination is served.
This is particularly important for a customer as termination may leave it without services on which its business is dependent. If the contract is for development of an IT system, the customer will need to consider whether it can appoint an alternative supplier to continue the development, or whether it can revert to its existing systems. If the agreement is an outsourcing agreement, the customer will need to transition to an alternative provider or bring the services in-house. Many agreements contain exit provisions which require an outgoing supplier to cooperate with the customer and/or an alternative supplier to ensure continuity of service. The customer should review those provisions before termination to ensure that they are still adequate for its needs.
Collating data to go to market and engaging suppliers takes months in normal circumstances. Time is likely to be short as will good quality data, adding significantly to risk. Exit obligations such as the preparation of knowledge to transfer and the drafting of an exit plan are often neglected. Securing cooperation of an outgoing supplier on exit management may prove challenging if not approached carefully and properly planned. A party which plans thoroughly may gain significant leverage in any subsequent negotiation.
Dispute resolution procedure
The contract is likely to incorporate a dispute resolution procedure. Sometimes it will simply record whether disputes should be resolved by arbitration or a court process. However, in many contracts there will be an escalation process starting with a meeting of project managers, then a meeting of senior management and ultimately arbitration or litigation. Sometimes mediation will be encouraged; sometimes it will be mandatory. Some contracts may suggest or require the parties engagement in the SCL Adjudication Scheme.1 It is important that the parties follow the dispute resolution procedure. Doing so will increase the chances of an early resolution of the dispute. Failing to do so may lead to the dispute escalating and could also attract criticism from the court if legal proceedings are commenced.
4. Engage senior management
As noted above, the dispute resolution procedure will often include a step which requires the parties to engage at management or executive level to try to resolve the dispute without formal legal proceedings. Even if there is no such requirement, it is important for senior stakeholders to be aware of the issues which have caused the dispute and play an active part in trying to reach a resolution.
Often, detachment from the day-to-day delivery or management of the project enables senior management to consider issues from a dispassionate perspective. The project management team may find this difficult due to the frustrations of trying to manage what they perceive to be a challenging supplier or customer. They may have entrenched views on allocation and apportionment of blame. Engagement of management may open the door to solutions which benefit both parties, such as replacing individuals whose relationships with the counterparty have broken down and who may themselves be the barriers to progress.
Whilst senior management may not welcome being involved in discussions on technical issues, they will want to avoid legal proceedings if possible and it is important that they are engaged in attempts to reach a resolution at an early stage. They can also make an appraisal of what could be done to recover and authorise resources to support negotiations.
5. Ensure your position is protected if legal proceedings are commenced
Whilst legal proceedings may be the last resort, the possibility of escalation should not be ignored. Parties should ensure that that they protect their position and avoid any steps which could prejudice them in proceedings. There can be a tension between optimal actions to resolve a situation and avoidance of such prejudicial consequences.
Do not fail to perform your obligations
The fact that one party to a contract considers that the other has failed to perform its obligations does not mean that it is relieved of its own obligations. For example, a customer which believes a supplier to be in breach should be cautious about withholding payment. Similarly, if a customer has failed to pay sums due in relation to part of a project the supplier should not simply cease to perform, certainly not without first taking legal advice. A party may believe its actions to be innocent and taken only as a consequence of the failings of the other party. However, if it is wrong in its analysis of the situation it may find that its action (or inaction) entitles the other party to terminate the contract, which will not be a desirable outcome, especially if it leads to legal proceedings. Any application of perceived set-off rights should be taken only in the context of contractual rights and procedure and following legal advice.
Parties should continue to perform their obligations under the contract until the contract has been terminated and those obligations discharged unless they specifically agree a moratorium whilst they try to resolve their differences.
Do not make any admissions
Parties should be encouraged to attempt to resolve the dispute without resorting to legal proceedings, whether that resolution involves delivery of the project on a revised basis or a commercial exit.
Attempts to reach an agreement are likely to involve some compromise and concession by both parties. Parties should be aware that admissions of culpability made in open dialogue are difficult to retract and could form the basis of a claim or be used as evidence in legal proceedings. If concessions are made, it is important that they are measured and do not go too far, to avoid future difficulties. A party may commit additional resources and modify an approach to delivery in an attempt to recover performance without admitting past failings.
Often negotiations will be approached on a without prejudice basis, especially if the purpose of the negotiation is to exit the contract with payment of compensation by one party. This is a safer way to proceed but is not without its limitations, especially if the negotiations are not successful. Admissions made in without prejudice correspondence cannot be used as evidence in legal proceedings but they will still give the other party an insight into the admitting party’s perception of its legal position, and whilst the parties should properly engage in a without prejudice dialogue they will inevitably have this fact in mind.
Documents and other evidence
If legal proceedings are commenced, the parties will have to disclose documents which are relevant to the matters in issue in the dispute. This disclosure process can be far reaching and includes a broad range of electronically created documents as well as hard copy documents. If a party fails to disclose documents (for example, if those documents have been destroyed), will be in breach of its obligations to the Court. Furthermore, if it is clear from the context that documents which must have existed have not been disclosed, that can be prejudicial to the party’s case. A Judge may be inclined to assume that such documents are being suppressed or have been deliberately destroyed because they are harmful. It is important that steps are taken to preserve all relevant documents as soon as the parties become aware that there is a dispute.
It will also be prudent to identify witnesses who may be able to assist in legal proceedings and prepare written accounts of the evidence of those witnesses at an early stage when the relevant facts are clear in their minds and easy to recall. This may be particularly important if individuals involved in the delivery are contractors rather than employees or their ongoing assistance can otherwise not be assumed. However, it is important to ensure that any documents of this nature are produced in a manner which enable them to benefit from legal privilege.
In addition to witnesses of fact, parties in a legal dispute may want to rely on opinion evidence of experts. In disputes relating to IT projects, the parties frequently appoint IT experts to provide opinion evidence on the reasons why the project was or was not suitable for the customer’s requirements, the reasons for delay and other aspects of the project which are in contention. In addition, parties often appoint experts in other disciplines who can assist the Court in understanding issues relevant to the calculation of damages. For example, a customer may want to appoint an economist to provide evidence of the business benefits of the project if properly delivered. Forensic accountants are frequently appointed to assist with calculation of damages.
A further type of evidence which may be needed during a trial of an IT dispute is the system or software which should have been delivered. In some cases, as part of their opinion evidence, the experts may require access to the development environment in order for them to comment on the suitability of the product and the extent of development against schedule. This may require the supplier to mothball the system until the dispute is resolved at trial or otherwise. This can be a complex undertaking when many linked systems are involved. The integrity of configuration and version of components can become an issue.
Be careful what you put in writing
The obligation on a party to disclose documents includes documents created after the dispute has arisen which comment on the matters in dispute, including assessments of the issues and the strength of the arguments. These documents may give the other party and the Judge or Arbitrator an account of events which is unfavourable and may bring into focus facts and opinions which might otherwise remain in the background.
Certain documents are excluded from the disclosure obligations if they benefit from legal privilege, but that exclusion is subject to strict requirements. Unless a party has legal advice confirming that a document relating to the issues in dispute will be privileged, it should work on the default basis that the document will ultimately fall into the hands of the other party and also be read by a Judge. If documents are created, the authors should keep in mind that colourful language can later prove embarrassing.
Experts are generally not appointed until the dispute has escalated to legal proceedings and the nature of their engagement will generally mean that records of their opinion and draft reports are privileged. However, it is not uncommon for a customer to engage an IT consultant at an early stage of a dispute to advise on the reasons for project failure and steps which can be taken to put things right. A report of that nature (commissioned by the customer rather than the customer’s lawyer) is likely to be disclosable. Given that a true assessment of the problems in delivery of a project is likely to comment on shortcomings by the party which has commissioned the report as well as the other party, disclosure may not be desirable. If a party does commission a report of this nature it should do so in the knowledge that it may be disclosable and couch statements accordingly. Such investigations can be useful in efforts to recover performance. Otherwise harmful elements may be reserved for private oral communication.
6. Take independent advice
There is much to be gained by taking advice during the early stages of a dispute rather than when the dispute has escalated towards legal proceedings.
Lawyers knowledgeable in IT and outsourcing projects with experience of the common reasons for failure may be able to assist in negotiating a re-scoped project, ensuring that any agreed changes to project delivery are properly documented. If that proves not to be possible, they may assist their client to formulate a clear understanding of its rights and obligations under the contract and the merits of the claim at an early stage, informing the strategy to be adopted and ensuring that the client’s legal position is protected as the reasons for failure of the project are analysed and documented. In some IT projects, lawyers are engaged throughout, providing general legal and commercial advice as the delivery of the system progresses. In many projects that will not be necessary or practical, but in those cases, lawyers should be engaged as soon as there are any signs of dispute.
Similarly, engaging IT consultants at an early stage of a dispute can be instrumental in dispassionately and evenly developing a path to resolution if the decision to terminate has not been made. If an IT consultant is engaged in circumstances where a legal dispute is a realistic possibility, it will be preferable for that engagement to be made in the context of a legal investigation and under privilege.
Legal disputes are costly and time consuming. Often reputations are on the line and sensitivities high. Early independent advice can offer perspective and encourage compromise, whilst also ensuring that a party’s position is protected in the event that legal proceedings are commenced.
1. The parties can of course agree to the referral of a dispute to the SCL Adjudication Scheme even where it is not mandated in the contract
Lee Gluyas is a partner at CMS who specialises in managing disputes in the technology and telecoms sector. He is a member of the Society of Computers and Law and can be contacted on +44 20 7524 6283 and firstname.lastname@example.org
William Hooper acts as an expert witness in IT and Outsourcing disputes and a consultant in service delivery. He is a member of the Society of Computers and Law and a director of Oareborough Consulting. He may be reached on +44 7909 958274 or William@Oareborough.com