IT projects: contract protection when things go wrong
Adding up all the taxpayers’ money spent on abortive IT projects in recent years would make chilling arithmetic. There have been many well-publicised IT disasters in the public sector, such as the Magistrates’ Court Service, Post Office, Benefits Agency, Treasury Tax Credits Scheme, Passport Office, Probation Service, Immigration Service and the National Air Traffic Services Project.
A report published in April 2004 by the British Computer Society and the Royal Society of Engineers quoted the somewhat shocking – if nevertheless believable – statistic from a 2003 Oxford University study that only 16% of IT projects are considered successful.
The key failings identified in the report cover just about every aspect of any IT project: a low level of professionalism compared to other engineering disciplines; the lack of any teaching by most universities in the development of large IT systems; poor project management; poor risk management; poor system design (partly due to a lack of suitably qualified systems architects) and poor uptake of best practice in the IT industry.
The report makes many recommendations: notably, that all senior IT practitioners should have chartered status – coincidentally available from both of the report’s authors – before they are allowed to oversee projects of this scale. But what can lawyers do to help when businesses become embroiled in a complex IT project that goes wrong?
For starters, we can undertake a careful and objective review of the contract. It might seem obvious that, when large sums of money are at stake, parties might take a little care over the small print, to make sure they are protected.
Not so. In the long-running IT project dispute between the Co-operative Group and ICL (now Fujitsu), it emerged that the main weakness in the Co-op’s case was that no final contract for the work had been agreed between the parties. Recently, according to press reports, the Co-op agreed to accept a ‘drop hands’ settlement.
Even where there is a signed contract, parties often fail to consider their respective duties and obligations under the contract when things start to go wrong. Even though the contract often provides a mechanism for dealing with changes to the contract, the parties tend not to follow it. For example, in the heat of the moment, they will often fail to ensure that change requests are agreed and properly documented; or try, after the event, to blame any failure on the shortcomings of the other.
When a project has gone off the rails, the customer’s hardest decision will invariably be whether to continue with it or terminate it. At common law, the right to terminate will only arise if the other party is in material breach of its obligations.
This is easy to understand in many situations but, when the IT supplier is doing what it is contracted to do but not meeting the contractual timetable, it is hard to know when the delay becomes material.
One case reported in 2004 ruled that an IT supplier was not in material breach even though the software it was installing had not gone live seven months after the scheduled date for implementation. The court ruled that termination would only be permitted when, in commercial terms, the customer had been deprived of substantially the whole of the benefit of the contract.
Unfortunately, this will be a rare occurrence in IT contracts: even an unreliable IT system filled with bugs will usually provide some benefit to the customer.
And even when the wording of the contract expressly allows termination for any breach, the customer is not necessarily better off. Another 2004 case involved wording that required written notice to be served on the supplier if he breached the contract, requiring the breach to be remedied (if it could be). If it wasn’t remedied within 30 days, the customer could terminate the contract.
Unfortunately for the customer, the court decided that the clause only applied to material breaches, thus putting the customer in a worse position than he would have been in if the clause didn’t exist.
Because IT projects carry a significant risk of failure, not to mention the potential for almost unlimited business disruption when that risk becomes reality, it is especially important to entrust the drafting to experts and to take advice as soon as things appear to be going wrong.
Where the details are complicated, the lawyers will need to work in close partnership with IT professionals. It is a cliché but true nonetheless: prevention really is better than cure.
