The 11th module in the Foundations of IT Law programme was
‘Renegotiation and Disputes’.
The seminar, chaired by James Farrell, a partner in the
Disputes Division of Herbert Smith Freehills LLP, 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) Ben Williams, a
Senior Associate at King and Spalding, and (iii) Alex Charlton QC of 4 Pump
Court.
James Farrell
The first presentation was given by James Farrell who, with particular
regard to contracts for systems development and integration and IT outsourcing,
identified some common areas in which disputes arise.
James highlighted the fact that there is often a correlation
between the complexity of the system to be delivered and the risk of delay or
difficulties at the delivery stage – leading to disputes. Other causes include
customers having unrealistic expectations and contractors low-balling a bid with
subsequent issues regarding ‘scope creep’.
James pointed out that often it can be difficult to distinguish
between decomposition of the agreed functional requirements and ‘scope creep’
where a customer seeks further functionality from the solution that it was not
intended that the supplier would deliver. He also emphasised the importance of
carefully drafting objective milestones, particularly when such milestones
trigger payment obligations or the missing of a milestone may allow one of the
parties to terminate the agreement. In his experience, sometimes the
difficulties encountered relate to poor contract management on both sides; he noted
that difficulties often arise where the parties have started carrying out work
which was not included in the original contract without properly amending the
agreement.
James also considered disputes in outsourcing agreements,
both first generation and subsequent agreements, where exit provisions (or the
lack thereof) can cause disputes. Benchmarking clauses and SLA Schedules in
general are also the source of difficulties.
James also stressed the importance of ensuring, when a
service provider is sub-contracting some of the work it has agreed to carry
out, that the terms of the prime contract and sub-contracts are ‘back-to-backed’
so that the prime contractor is not ‘stranded’ with certain liabilities. This
is especially important in multi-vendor environments.
Ben Williams
The second presentation was given by Ben Williams, who covered various
dispute resolution mechanisms that parties may elect to include in their
agreements.
Ben explained that, when considering dispute resolution
mechanisms, planning and management were essential, there was a need for both
parties to be proactive, and that the earlier the dispute resolution mechanism
was considered in the drafting process, the better. Ben canvassed the opinion
of the disputes lawyers in attendance, the vast majority of whom confirmed that
they often came across poorly drafted dispute resolution clauses.
Ben went on to explain the various types of dispute
resolution mechanisms including ADR mechanisms such as negotiation, early neutral
evaluation and mediation. He explained that dispute resolution systems could be
either determinative or non-determinative. In Ben’s experience, multi-tier
dispute resolution mechanisms were the most commonly used in IT contracts,
often involving notification, followed by negotiation between CEOs, mediation
and then litigation or arbitration if the matter could not be resolved. Ben
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 could escalate a dispute to the
next level in the dispute resolution mechanism.
Ben 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 mechanisms, including the nature of the parties, the value
of the contract and the likely remedies that will be required by the parties. Ben
warned against simply recycling precedents from previous contracts without
considering the particular issues at stake but noted that, in regard to
arbitration clauses, the prominent arbitral institutions had excellent
precedent wording to use as a starting point.
Ben said that 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 may be best placed to rule on the meaning
of terms within an agreement). To conclude, Ben emphasised the importance of
addressing the dispute resolution mechanism early, simplicity in drafting, and
that one-size does not fit all.
Alex Charlton
Alex Charlton QC then went on to present the final topic of
the day, renegotiation. Alex began by addressing some of the case law relating
to termination rights, damages and remedies as the merits of a party’s position
in these areas often determines the context in which a renegotiation takes
place. Alex spoke about the clarification that has been provided in Omak Maritime v Mamola Shipping [2010]
EWHC 2026 (Comm) that expectation loss and reliance loss had the same juridical
basis and that a party claiming reliance losses could not be put in a better
financial position than if the contract had been properly performed.
Alex also addressed the difficulty in obtaining injunctive
relief mandating a party to continue to perform its obligations under an IT
contract because damages would almost always be an adequate remedy, although
Alex also considered the implications of AB
v CD [2015] EWCA Civ. 229 in which an injunction was granted because the
Court of Appeal considered that a limitation clause in the contract meant that
damages would not be an adequate remedy.
Alex went on to consider renegotiation exercises. He noted
that IT contracts often needed to be renegotiated, often on multiple occasions.
Alex said that one of the curiosities with IT contracts is that the IT director
or CTO and board who have chosen the solution have a professional interest in
ensuring its success. Alex noted that a customer should always consider whether
it is overly dependent on a supplier (particularly if the agreement includes
inadequate exit provisions). Alex said that, in his experience, the contractor
is often less worried about reputational damage arising from a dispute than may
be assumed and that this does not necessarily provide leverage for the
customer.
Alex then went on to explain the siege tactics that some
parties partake in so as to improve their position. These include: sending out voluminous
correspondence when it considers that another party (either customer or
supplier) is in breach and working to rule. Alex pointed out that it is important
to have a parallel open chain of correspondence even when there are without
prejudice discussions going on at the same time.
Daniel Woods is an Associate in the Disputes Division at
Herbert Smith Freehills LLP.
