Joe Reevy advises on how to approach and manage an IT dispute. He considers the basic legal issues and the steps to take to minimise problems when things go wrong.
Computer Systems frequently fail to perform . ask anyone! It is quite normal for systems to fail to function as intended and sometimes at all. What is important in any performance failure is how critical the process which has failed is to the business. If it is not critical it may be merely a nuisance, unless there is an obvious ‘work around’ which allows the failure to be overcome. If it is critical, the business is in trouble! According to a survey by IT dispute resolution specialists Contention Management plc, over three-quarters of UK companies have significant problems with their IT systems, so it is a good idea to know how to proceed and where to go for help should you find yourself in this situation.
Both critical and non-critical problems can lead to disputes with suppliers, but the effects, relationship management and outcomes in both cases may be very different. What is important, in each case, is that the competitiveness of the business is maintained at as high a level as possible throughout the problem and its resolution.
This article is about how to manage an IT systems dispute to make sure that the losses resulting from non-functioning IT are minimised.
The problems, which are core to the resolution process, are:
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the need to get the system operating satisfactorily as soon as practicable
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the need to maintain the relationship with the IT supplier if the strategy is to continue with the same supplier
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calculation and settlement of any compensation due
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minimisation of the risk of future problems.
Although IT systems, like other goods, are governed by the Sale of Goods Act, they are almost always sold with a specific agreement. Often, the biggest problem in enforcing any IT agreement is ascertaining liability. This is especially difficult when hardware, software and maintenance come from separate suppliers, so if this can be avoided, it is advisable. When there is only one provider there is no doubt who is responsible.
The agreement under contract is central. The more detailed the specification you are able to agree, the easier it will be to ascertain responsibility if something goes wrong. Take care to make sure your agreement specifies as many outcomes (rather than systems specifications) as possible. In other words, it contains clauses specifying that the system will, for example, produce monthly statements to a required format, not will contain 256mb of RAM. When you specify outcomes (‘standard purposes’) it is easier to rely on the Sale of Goods Act, which states that goods must be ‘fit for the intended purpose’.
If the system you buy is unfit for the intended purpose you are entitled to reject it and demand a refund if it has already been paid for. The fact that precise capabilities are not specifically mentioned in the contract does not necessarily mean that satisfaction under the Sale of Goods Act will not apply – all accounting systems should, for example, produce accounting information – but failure to be precise makes it more difficult for you to reject the system.
In addition, your contract with your supplier will include any representations they have made to you (verbally or in writing) on which you rely in making your purchase. For obvious reasons, it is important to ensure that these are evidenced in writing as far as possible. There is no difference in the law between an IT system and a new TV (for example) as far as your right to get goods fit for the purpose are concerned. It must do what it is claimed to do. Also, any exclusion clauses which the supplier puts in the contract can only be relied upon if they are reasonable (Unfair Contract Terms Act 1977). A common term in IT contracts, which may be unreasonable, is one which excludes consequential loss. When negotiating with a supplier whose system is deficient, your consequential losses are a big motivator for them to reach a satisfactory agreement with you – fast.
Considering Your Options
When considering a resolution involving scrapping the existing contract and starting again, there are two further points which should be considered. Firstly, does the supplier have the financial resources to refund your money and compensate you? There is no point in pursuing a supplier who cannot pay. If the purchase is financed then the finance house may be jointly liable. If so, you can stop paying them, although whether this is likely to be worth the inevitable hassle it will cause needs careful thought. Secondly, remember that the limitation period for bringing an action starts from the time you should have been able to discover a defect, not from when you did, so it is generally advisable to act fast.
Relying on one’s rights under contract is the long-stop position. Litigation is seldom likely to be as effective as a co-operative approach, mainly because once litigation is in progress there is likely to be little co-operation and the systems failures are likely to be continuing.
It is normally preferable to achieve a satisfactory solution based on making one’s existing system work. This means maintaining a business-like and satisfactory working relationship with your IT supplier while managing an imperfect system and safeguarding your contractual position. The object of the exercise is to get things running satisfactorily within a short space of time, so your business suffers as little as possible. The object is not to suffer losses and then suffer the pain, anguish and expense (let alone the lost time) of a legal fight.
The keys to this process are involving the supplier at the outset, acting quickly and non-confrontationally and documenting each step of the process.
Firstly, when aspects of the system are not performing as agreed, prepare a written ‘needs analysis’ of these and advise the supplier immediately. Specify the priorities (and required dates) for implementation which are, in your opinion, the responsibility of the supplier. Such analysis must not lose sight of the long-term needs of the business. One cardinal mistake here is to approach this from a ‘fire-fighting’ point of view. The needs analysis must be prepared based on the needs of the business as anticipated over the next several years, not weeks. Solving a problem now without proper regard to whether the ‘patch will hold’ in the future may well prove to be a false economy as well as potentially damaging to your position if the ‘patch’ fails.
Secondly, make sure that all reasonable steps are taken to mitigate your loss. Typically in an IT dispute, unless it relates to short-term problems promptly fixed, 80% of the losses suffered are commercial losses. If the dispute goes to litigation failure to mitigate losses could reduce the amount of any financial settlement. The standard set here is usually high, so ensure mitigation is considered carefully and appropriate steps taken (even if it costs money). Ensure the supplier is aware of the steps being taken, gives assent (if possible) and knows the costs. Seeing costs piling up which ultimately may land on their desk is a powerful motivator. Above all, make sure everything done is done in a way which protects your contractual position.
What is clear is that litigation (or the threat thereof) can ruin the relationship between you and the supplier at exactly the time when a joint approach to solving the problem is most needed. Using specialist IT mediators may well assist here: to ascertain exactly where and how the problems have arisen and to operate as a ‘go-between’. The advantage in the first case is that, being independent, they can help greatly to work out who is responsible for the system deficiency; this is especially important when the system comprises components supplied by a number of suppliers. The advantage of having a ‘go-between’ is that they will speak the language of both sides. A big problem in IT disputes is one of communication. Suppliers of a highly technical product often struggle to communicate well with their customers and this is exacerbated when the relationship becomes strained.
Also, a supplier will be deterred from trying to blind the customer with science if there are IT experts on hand. The mediators will, hopefully, keep the temperature of negotiations at a level which is warm but not so hot that it ‘fries the relationship’!
The most important aspects of claims for losses are that they include consequential losses (not just the direct ‘fix’ cost) and that they are worth pursuing. The guidelines offered by Contention Management plc on whether a claim is worth pursuing are:
1. Did the system (including development and training) cost over £30,000?
2. Are the defects serious?
3. Did the supplier represent himself or herself as an expert in your industry?
4. Is the supplier financially strong enough to pay, or insured for, the claim?
5. Are you within the limitation period?
6. Have the problems affected your business financially?
7. Can you demonstrate the loss stemming from the problems and quantify them?
8. Have your attempts to get the supplier to resolve the problems failed?
9. Have you taken all reasonable steps to mitigate your loss?
10. Is your documentation strong and supportive of your position?
The more ‘yes’ answers to the above questions, the more likely it is that mediation or commencing litigation will produce a result.
The Real Solutions
If you are buying IT, the best position is clearly to get it right first time. If that doesn’t work, then try to solve problems amicably. Try to follow the memorable edict of ‘walk softly but carry a big stick’ – you will get a better result and you will need the big stick if you do have to go to court!
Joe Reevy MSc FCA MAE is director of BestPracticeOnline Ltd. (www.bestpracticeonline.com). He acknowledges the kind assistance of Allan Watton of IT dispute resolution specialists Contention Management plc (www.contention-management.com) in preparing this article. They can be contacted at joe@bestpracticeonline.com and Alan@contention-management.com
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