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 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. The issues may not be resolved and the dispute may yet escalate to legal proceedings whilst recovery is pursued.
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 where a project is going off track.
1. Consider your objectives, decide what you want to achieve and be prepared to engage constructively
In many cases, both parties will have the objective of getting the project back on track. However, the position is not always straightforward. This is especially where the project has a long delivery time. Priorities and desired outcomes may have changed since contract signature.
No longer Needed?
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. This may change understanding of the way the system should be used. Such a situation may provide opportunity to renegotiate the scope of delivery and change the agreement. Sometimes, 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 projects. That happened frequently in the period following the financial crisis in 2009. Then, many companies had to revise their business forecasts and found ways of saving costs by cancelling projects. The Covid-19 pandemic may create a similar environment.
Suppliers may also reflect on the financial viability of a distressed project. The problems may be caused by aspects that are proving to be more complex than expected. This may have arisen from a lack of information from the customer at the time of contracting. In those circumstances, a good way forward for the supplier may be an increase in price or de-scope of deliverables. This would enable it to complete the project without eroding its margin.
Conflicting Objectives
The parties may have conflicting objectives but if the project is to succeed they will have to work together. If there is to be a change in scope or approach, the parties will need to agree this. Changes are reflected through the change control procedure or by a variation of the contract. Where there is to be an extension of milestone dates, they will need to re-plan to make sure that the change can be delivered. There is no advantage in just kicking the proverbial can down the road. If there is to be a change in resourcing to meet delivery schedules, that will have to be paid for.
Deciding what you want is 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. Parties need to understand what is achievable so they can assess what would constitute an acceptable outcome.
2. Re-Negotiating Delivery
In the process of agreeing the content of 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.
Is Change Fundamental?
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 the base principles no longer hold, there are fundamental implications for delivery approach, time, cost and approach. A party may believe that a bit of violation does not really matter and that the other party should accommodate change at modest cost. “Why have you not yet responded to my impact request, by the way, here are six others!”. A supplier needs certain of scope and approach before being planning delivery. A customer needs to be certain that the technology will do what the business needs of it. It will also seek 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.
Can it be Saved?
Whilst renegotiating delivery, each party must first decide 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:
Ask yourself
- Do we currently believe that amendment can recover performance sufficiently to continue with the relationship?
- What is the high-level approach to delivery and the implications for the agreement?
- What do we need to change about ourselves to improve?
- What do we want the other party to agree to change or do differently?
- How do the best options for renegotiation compare with termination in terms of cost, business benefit, schedule and risk:
- From the perspective of my organisation?
- How will the counterparty see it?
- How are key individuals and stakeholder groups likely to be affected and to behave?
Defining the Detail for Resolution
Once these are answered, the lower-level change is defined in detail for the contract change. These deliver the design, project effort, duration and 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.
Should the assessment indicate termination, the party deciding this should establish an internal project to prepare the necessary aspects before announcing its 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 encourage parties to make frequent reference to the contract throughout the project. 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. This applies particularly to those seeking 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, some contracts require the supplier to pay a specified sum as liquidated damages for each day’s delay in the achievement of a milestone. Others mandate the provision of service credits if the level of service provided does not meet agreed service levels. The liquidated damages or service credits may be the sole and exclusive remedy. There will then be no basis on which the customer can seek any other legal redress.
The business and senior managers may have assumptions regarding remedies available to them that are inconsistent with the contracted terms. In the early stages of a dispute, a member of the legal team should brief the governance group. The briefing should describe the options available and manage overly hopeful assumptions. Those may otherwise lead to inappropriate action and statements. Such a briefing may also communicate procedures to govern the handling of the dispute.
The business and senior managers may have assumptions regarding remedies available to them that are inconsistent with the contracted terms. In the early stages of a dispute, a member of the legal team should brief the governance group. The briefing should describe the options available and manage overly hopeful assumptions. Those may otherwise lead to inappropriate action and statements. Such a briefing may also communicate procedures to govern the handling of the dispute.
Termination for convenience
If a party wishes to terminate the contract, it should 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 permits a customer to exit an arrangement which is no longer of benefit without having to establish any fault. However, if the customer wishes to follow this process it should review the contract carefully. Often notice must be provided on a particular date and be served by a specified method. Failure to comply could result in the termination being ineffective. Worse, it could itself be a breach of contract enabling the supplier to terminate and claim damages. A customer’s ability to terminate may be conditional on payment of a fee which may make this process unattractive.
Termination for breach
A party which wishes to get out of the contract may also consider whether it can terminate for breach. Not every failure to meet contractual obligations will give the other party a right to terminate for breach. Rights arise only when the breach(es) in question are sufficiently serious.
Many contracts specify Events of Default. If a party can establish that the other’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. Some contracts do not specify events of default at all. Then, the party wishing to terminate will need to consider whether the failure amounts to a material breach. If there are multiple delivery failures, they may amount to a material breach when viewed collectively. This may apply even where individually they are immaterial.
Fair Opportunity
The position may be complicated by obligations to give opportunity to remedy a 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 to invoke 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 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. Caution is warranted to avoid itself being in breach by making an accusation which is proven to be unsupportable.
Take Care!
Whether there is a right to terminate for breach is likely to be heavily fact dependent. It will also depend on the 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 entitled to do so. The service of the notice itself may breach the contract, enabling the receiving party to terminate and claim damages. Even where a party is terminating for breach, there will be exchanges of correspondence prior to the notice of termination. These seek to record 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.
Going to Market
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, such as 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
The dispute resolution procedure will often include a step that requires the parties to engage at management level to seek resolution. 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 dispassionately. The project team may find this difficult due to the frustrations of trying to manage a challenging situation. They may have entrenched views on allocation and apportionment of blame. Engagement of management may open the door to solutions. This benefits both parties, such as replacing individuals whose relationships have broken down. They may themselves be barriers to progress.
Senior management may not welcome being involved in discussions on technical issues. They will however want to avoid legal proceedings if possible. So 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
Accusing a party to a contract of failing does not mean that the accuser is relieved of its own obligations. For example, a customer which believes a supplier to be in breach should be cautious about withholding payment. Equally, if a customer has failed to pay sums due, the supplier should not simply cease to perform. A party may believe its actions 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. This would not be a desirable outcome, especially if it leads to legal proceedings. Any application of perceived set-off rights should be taken only with great care under advice.
Parties should continue to perform their obligations under the contract until the contract has been terminated. The obligations should be discharged unless the parties 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. Resolution may involve 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. Admissions of culpability made in open dialogue are difficult to retract. They 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. A party may commit additional resources or modify an approach to recover performance without admitting past failings.
Often negotiations will be approached on a without prejudice basis. This applies particulartly to negotiation to exit the contract with the payment of compensation. This is a safer way to proceed but is has its limitations, especially if the negotiations are not successful. Admissions made in without prejudice correspondence cannot be used as evidence in legal proceedings. They will still give the other party insight into the admitting party’s perception of its legal position. Whilst the parties should properly engage in a without prejudice dialogue they will inevitably have this in mind.
Documents and other evidence
If legal proceedings are commenced, the parties will have to disclose documents relevant to the matters in the dispute. The disclosure process can be far reaching. It includes a broad range of electronically created documents as well as hard copy and databases. If a party fails to disclose documents, it will be in breach of its obligations to the Court. If it is clear that documents must have existed, 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. Steps should be taken to preserve all relevant documents as soon as the parties see there is a dispute.
It will also be prudent to identify witnesses who may be able to assist in legal proceedings. They should prepare written accounts of the evidence of those witnesses. This is best done at an early stage when the relevant facts are clear in their minds. This may be particularly important if individuals involved in the delivery are contractors rather than employees. If not, their ongoing assistance can be difficult to secure. The preparation of any documents of this nature should be done in a way that preserves their legal privilege.
Expert Advice
In addition to witnesses of fact, parties in a legal dispute may want to rely on opinion evidence of experts. IT experts may provide opinion evidence on the reasons for the project’s fit to the customer’s requirements. Experts may address delay and other aspects of the project which are in contention. Parties often appoint experts in other disciplines who can assist the Court. 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 addresses the performance of software. The experts may require access to the development environment in order for them to comment on issues. 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. These may include 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. This 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. That exclusion is subject to strict requirements. Unless you have legal advice confirming that a document relating to the issues in dispute will be privileged, assume it will ultimately fall into the hands of the other party and be read by a Judge. If documents are created, the authors should keep in mind that colourful language can later prove embarrassing.
Legal Privilege
Experts are generally not appointed until the dispute has escalated to legal proceedings. The nature of their engagement will generally mean that records of their opinion and draft reports are privileged. However, it is common for a customer to engage an IT consultant at an early stage of a dispute. Such an advisor may report 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. As a dispassionate 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, 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 and experience of common reasons for failure may be able to assist in negotiating a re-scoped project. This ensures that any agreed changes to project delivery are properly documented. If that is not possible, they may assist their client’s understanding of its rights and obligations. They also support evaluation of the merits of the claim, informing the strategy to be adopted. This helps to ensure that the client’s legal position is protected. In some IT projects, lawyers are engaged throughout, providing general legal and commercial advice. For many projects, that will not be necessary or practical. In those cases, lawyers should be engaged as soon as there are any signs of dispute.
Impartial Assessment
Similarly, engaging IT consultants at an early stage of a dispute can be instrumental in dispassionately developing a path to resolution. If engaged where a legal dispute is a realistic possibility, it is best for the engagement to be made 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.
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Notes
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.
A version of this article was first published in Computers and Law, the Magazine of the Society of Computers and Law. It is reproduced with permission.
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 lee.gluyas@cms-cmno.com
