The ninth module in the Foundations of IT Law programme was ‘Renegotiation and Disputes’, a seminar hosted by Herbert Smith Freehills LLP, and chaired by James Farrell, a partner in the Disputes Division of Herbert Smith Freehills LLP.
The seminar set out some of the key points that both contentious and non-contentious lawyers should have in mind in relation to disputes in the IT sector, taking into account common areas of dispute, mechanisms for resolving such disputes and areas where disputes may be solved by the renegotiation of contractual arrangements between the parties. The seminar included presentations by (i) James Farrell, (ii) Sarah Walker, who is a partner at King and Spalding, and (iii) Alex Charlton QC of 4 Pump Court.
The first presentation was given by James Farrell who identified some common areas of IT disputes. James noted that IT disputes often differ from more general disputes and that the critical importance to a business of IT systems can add significance to a dispute over even a low value software component.
James identified the fact that there is generally a correlation between the complexity of the system to be delivered and the risk of delay or difficulties at the delivery stage, delay being a major cause of disputes. In part this can be because of difficulties in understanding exactly what the customer wants and how the solution can be delivered.
James then referred to BSkyB Limited v HP Enterprise Services UK Limited (formerly Electronic Data Systems Limited) [2010] EWHC 86 (TCC) as an example of a case where issues in the procurement stage had led to problems further down the line – in that case EDS was in fact found to have made fraudulent misrepresentations in relation to the time required to complete the project.
Other areas that James indicated often lead to disputes included the parties’ understanding and use of RASIC (Responsible, Approve, Support, Inform, Consult) matrices and the problem of ‘scope creep’. James pointed out that in many situations it can be difficult to identify the difference between developing a solution in a manner that is anticipated by the contract and ‘scope creep’, where a customer seeks further functionality from the solution that it was not intended the supplier would deliver. This is particularly so when the details of the agreed solutions were not sufficiently provided for in the agreement between supplier and customer. James also emphasised the importance of carefully drafting milestones, particularly when such milestones may trigger payment obligations or the missing of a milestone may allow one of the parties to terminate the agreement.
Sometimes the difficulties encountered in James’ experience relate to poor contract management and James gave examples of the potential consequences and difficulties to a party’s legal position where the parties have agreed to carry out work which is not included in the original contract without amending the agreement in some way.
James also identified outsourcing as a frequent area of disputes and commented that there will be a steep learning curve under first generation outsourcing agreements and that generally a customer would be expecting ‘the same or better service but at a lower price’. James explained that re-tendering was also a common area of disputes as both the customer and supplier frequently disagree in relation to exit arrangements. Separately it is often the case that it is difficult to baseline the service standards of a new supplier and these problems will be particularly important where service level failures are triggers for termination of the contract. James also stressed the importance of ensuring that, when a service provider is sub-contracting some of the work it has agreed to carry out, that the terms of the head contract and sub-contract are ‘back-to-backed’ so that it is clear where each of the parties’ responsibilities lie and that the prime contractor is not ‘stranded’ with certain liabilities. Finally, James also indicated that one area where disputes may be seen in the future is in relation to multi-vendor outsourcing contracts.
The second presentation was given by Sarah Walker who explained the various dispute resolution systems that the parties may elect to include in their agreements.
Sarah explained that, when considering dispute resolution mechanisms, planning and management were essential and there was a need for both parties to be proactive. Sarah referred to a study carried out in 2010 by Queen Mary’s College where it was suggested by many practitioners that the dispute resolution mechanism was a ‘2.00am clause’ and explained that in her view it was important to ‘plan at the pre-nuptial stage’. This involved the parties considering the advantages and disadvantages of each type of dispute resolution system (including its effectiveness in jurisdictions relevant to the work performed under the agreement or the parties).
Sarah went on to explain the various types of dispute resolution mechanisms including negotiation, early neutral evaluation and mediation and explained that dispute resolution systems could be either determinative or non-determinative. In Sarah’s experience, multi-tier dispute resolution mechanisms were the most commonly used in IT contracts, often involving notification, followed by negotiation between CFOs, mediation and then litigation or arbitration if the matter cannot be resolved. Sarah went on to expand on some of the positives and negatives involved in each of the systems and stressed the importance of ensuring that disputes were defined at each stage so that it was clear exactly how each type of dispute was to be treated and at what point either of the parties can escalate a dispute to the next level in the dispute resolution mechanism.
Sarah was very much of the view that one size does not fit all and that there are many considerations to take into account when deciding on dispute resolution systems, including the nature of the parties, the value of the contract and the likely remedies that will be required by the parties. In some instances it will be appropriate for different dispute mechanisms to apply to different disputes under a contract (for example, some technical elements may be most appropriately dealt with by expert determination whilst a court will be best placed to rule on the meaning of terms within an agreement). Sarah provided the attendees with some drafting tips and suggested that simplicity is key and that practitioners should look to tried and tested dispute resolution clauses where possible.
Finally, Sarah explained that she had recently heard success stories in relation to so-called ‘in-life mediation’ where a mediator might be involved at the contract negotiation stage and would, in the event of a subsequent dispute, be engaged by the parties as a mediator but would not make binding decisions and would not be governed by any prescribed rules. Sarah suggested that the process would involve the mediator preparing a memorandum of understanding with the parties at the time that the contract was agreed. The memorandum would set out each party’s needs and objectives under the agreement and the mediator would use the memorandum of understanding to focus the parties’ attention in the event of a dispute.
Alex Charlton QC then went on to present the final topic of the day and started out by suggesting that renegotiation was not always suitable and does not necessarily sit well with disputes as to what contractual terms mean (suggesting instead that a Part 8 claim in the High Court may often be a preferable way of resolving a dispute over the wording in an agreement). Whilst noting that renegotiations are common place (and often successful), Alex noted that in some circumstances renegotiations between parties were inappropriate and bound to fail, and that it would have been better for both parties to go their separate ways earlier on.
Alex went on to consider the psychology of a renegotiation exercise and that one of the curiosities with IT contracts is that the IT director and board who have chosen the solution have a professional interest in ensuring its success. Alex thought that a customer should always be minded to consider whether it has a dependency on the supplier and that, equally, the psychology of renegotiation can be difficult for a supplier as it will often be conflicted between preserving an income stream and ensuring its reputation is not damaged.
It is then essential for each party to consider what it wants to do. Does the customer’s original need for the solution still exist or has the business moved on? Is there better technology now in place? Is the supplier making a loss?
Alex stressed the importance of understanding the customer’s requirements when a project is re-baselined as, whilst this is often useful for a supplier (who has its income stream preserved), the customer should wonder whether it will ever get those services. Alex commented that many contracts come to an end before the difficult workstreams are delivered by the supplier so it is important to understand what the challenging development tasks are and why a customer needs that part of the solution.
Alex then went on to emphasise the importance of ‘working the contract’ in order to improve a party’s position by sending out relevant notices where it considers that another party (either customer or supplier) is in breach. Alex pointed out that it may be important to have a parallel open chain of correspondence even when there are without prejudice discussions going on at the same time. As part of the negotiation the parties should always be minded to consider any disclosures that it makes (even when done on a without prejudice basis), whether a customer will be able to give a reference for a supplier, the effect of any representations made during the renegotiation and whether it would be appropriate to revise the liability cap if, for example, the customer had agreed to pay further amounts of money under the contract as part of the renegotiation.
Finally, Alex explained that, whilst it is not usually appropriate to provide for time being of the essence in an IT contract, it can be appropriate to consider making time of the essence when approaching the negotiation exercise as it may be a powerful argument to bring the contract to an end. If this is not expressed in the contract, it will be important to ensure that an accurate document trail is in place.
Martin Hevey is an Associate in the Disputes Division at Herbert Smith Freehills LLP.
