What to do when things are going wrong – managing a distressed IT project
This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
IT projects can be lengthy and complex. Even the simplest projects can quickly fall behind schedule as the customer’s understanding of the system to be delivered evolves and the scope of delivery changes. 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.
We set out below a few of the main things to consider if a project is going off track.
1. Read the contract
If problems are encountered both parties must be aware of their rights and obligations under the contract and the remedies open to them. The contract may, for example specify that the supplier must make payment of a specified sum as liquidated damages for each day’s delay in the achievement of a milestone or it may contain provisions concerning service credits.
In addition, and importantly, the contract is likely to incorporate a dispute resolution procedure, setting out the steps which the parties should take in the event of contention, often involving an escalation process starting with a meeting of project managers, then a meeting of senior management and ultimately arbitration or litigation. It is important that the parties follow the procedure. Doing so will increase the chances of reaching an early resolution of the dispute. Failing to do so may lead to the dispute escalating and may also attract criticism from the court if legal proceedings are commenced.
2. Engage the 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 give rise to the dispute and play an active part in trying to reach a resolution.
Whilst they 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 the attempts taken to reach a resolution at an early stage.
3. Consider your options and decide what you want
The parties may have very different objectives. The supplier will want to complete the project it has been appointed to deliver and receive payment. The customer may also want the project to be delivered or it may want a change in the scope of the project or it may simply want to bring the arrangement to an end. If there is to be a change in scope the parties will need to consider whether to progress that arrangement through the change control procedure or by way of a variation of the contract.
Each party must consider its options and assess the legal viability of those options. Without an understanding of the options which are realistically available, a party will not be able to form a clear view on what would constitute an acceptable outcome.
4. Do not fail to perform your obligations
The fact that one party to a contract considers the other has failed to perform its obligations does not necessarily mean that it is no longer required to honour 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.
Parties should continue to perform their obligations under the contract until the contract has been formally terminated unless they specifically agree a moratorium whilst they try to resolve their differences.
5. Do not make any admissions
Such a moratorium may involve meetings between representatives of the parties who will try to find a way to take to project forward. Any admissions by a party that it has failed to perform could form the basis of a claim or be used as evidence in legal proceedings. Whilst the parties should be encouraged to make concessions as part of a constructive dialogue to try to find a way forward, they should be cautious not to say too much and avoid a situation where they say something which could create future difficulties.
Admissions made in without prejudice correspondence may not be used as evidence in legal proceedings but 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.
6. Be careful what you put in writing
A party to a dispute should also be aware that it may be obliged to provide copies of internal documents to the other party if legal proceedings are commenced. This would include documents which relate to the matters in dispute including assessments of the issues and the strength of the arguments, such as internal reports. Certain documents are excluded from this requirement if they benefit from legal privilege, but that exclusion is subject to strict requirements and parties should work on the default basis that any document created may ultimately fall into the hands of the other party.
Be cautious when creating documents which comment on the dispute and take advice from a lawyer to ensure that legal privilege attaches to documents created wherever possible.
7. Preserve the evidence
As well as documents which provide commentary on the dispute, documents which relate to the broader dealings between the parties and management of the project may be disclosable during legal proceedings. The 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), that can be prejudicial to the party’s case and a court may be inclined to assume that documents which cannot be disclosed have been deliberately destroyed for a reason. 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 may also be prudent to identify witnesses who may be able to assist in legal proceedings and take statements of the evidence of those witnesses at an early stage when the relevant facts are clear in their minds and easy to recall. However, it is important to ensure that any document of this nature is produced in a manner which enables it to benefit from legal privilege.
8. Take legal advice
There is much to be gained by taking legal 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 re-scoping the project or managing a commercial exit. If that proves not to be possible, they may assist their client to formulate a clear understanding of its entitlement 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 this will not be necessary or practical, but in those cases lawyers should be engaged as soon as there are any signs of dispute.
If you would like to discuss any of the matters raised in this article or you are concerned about an IT project which is running into difficulty please let us know. We will be happy to help.
