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IT Implementation Disputes; Giving It Another Shot or Cutting Your Losses

06 June 2005

Almost all businesses these days will, at some stage, enter into arrangements for computer hardware, software and support. The relationship between purchaser and supplier will be governed by the terms of the contract between them. Very many complicated contract disputes arise because of the lack of a written contract and a resulting uncertainty over the terms by which the parties agreed to be bound. Experience shows that given the relatively high cost of IT, its importance to the day to day running of businesses and the reality that for most it takes a relatively large chunk of the annual budget, written contracts do generally come into being. However, there is still plenty of room for dispute as to their application and interpretation.

An all too common situation is one in which the purchaser, some way into implementation, complains that insufficient progress has been made or that the implementation is in some way defective, very often both. With frustration mounting on both sides and possible personal differences, crisis point is reached and the purchaser is faced with the unenviable task of deciding whether to cut its losses or battle on in the hope that the project will come good.

The recent case of Peregrine Systems Limited v Steria Limited, decided by the Court of Appeal in March of this year, is a stark warning to a purchaser involved in such a scenario to tread very carefully.

As a matter of law, where a party to a contract commits a sufficiently serious breach of contract, the wronged party may be able to substantiate a right to ‘rescind’ the contract, or treat itself as discharged from the future performance of its side of the bargain. If the wronged party has suffered a loss, it can then sue for damages or compensation. However, another well established principle is that a party loses that right to treat themselves as discharged if they carry on with the contract after the breach; they are then said to have affirmed the contract. There is nothing new here, however, the application of these principles to software disputes may have a rather harsh result.

In the days of alternative dispute resolution, parties are rightly encouraged to do all that they can to work things out with a view to avoiding litigation thus keeping losses to a minimum on both sides of the dispute. In the Peregrine case the court concluded on the facts that there had not been a breach of contract legally entitling the Steria (the purchaser to terminate), however, it went on to say that even if there had been such a breach, Steria’s representative, in following a management direction that they should ‘fix it or forget it’ , failed to clearly and unequivocally set out its complaints and their seriousness or reserve its right to terminate in reliance brought about as a consequence. As a result, even if the court had been convinced that the breaches of contract deprived Steria of the whole or substantially the whole of the benefit of the contract and did justify the purchaser walking away, it did not preserve that right to rescind and could not therefore later rely on it.

A purchaser should not be criticised for trying to work things out. The lesson to be learnt however, is that proper advice should be taken so that the right to terminate brought about by the breach is protected despite future efforts to correct the problems that the purchaser is having. The purchaser can then have a last ditch attempt at resolving the matter without prejudicing its position.

When faced with a deteriorating situation the purchaser should take the following practical steps;-

1. Ensure that all complaints are logged, keep copies of complaint correspondence and emails, diarise the supplier’s attendances on site and keep brief notes of what was achieved.

2. Take advice as soon as serious problems are identified. Get a legal opinion as to whether or not the complaints are likely to amount to breaches of contract justifying termination of the contract. If you purport to terminate when you are not legally entitled to do so you may get sued for breach of contract.

3. If, despite the suppliers breach of contract, you wish to try to maintain the relationship, ask a solicitor to advise as to how you can safeguard your right to terminate in case things still don’t work out. An appropriately worded letter perhaps drafted by a solicitor but sent by the purchaser so as to be inconspicuous and non-inflammatory, can make the world of difference to how a court legally interprets actions and events later in the day.

4. If direct discussions between supplier and purchaser do not move the matter forward, consider alternative dispute resolution options such as mediation. Mediators do not impose decisions on individuals in the same way that courts do, they do however assist the parties to come to a workable agreement. Solicitors now routinely recommend mediation as an alternative to litigation in suitable cases and are accustomed to being involved in the preparation and conduct of the mediation.
 

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