The case of De Beers v Atos involved a diamond business who entered into a fixed price contract with a vendor. Subsequently, both parties sought judgment for repudiatory breach of contract after delays and costs overrunning. In order to prevent such a dispute arising, it is important to foreshadow legal issues that are likely to arise in IT development contracts and project management.
The scale of the IT project and the sums at stake in De Beers v Atos were significant. The commercial and legal issues encountered in the case are not however unusual in any size of contract for an IT projects.
Complex IT projects and the IT consultancies working to design and implement IT projects need to be particularly mindful of a number of issues. These include the scope of the commercial IT contract, the contingencies put in place to manage unexpected complexities and the termination provisions if things do not work out.
The diamond business, De Beers, sought to transfer a number of its operations to the Republic of Botswana and required the upgrading of legacy IT systems for its diamond supply chain management process. De Beers selected a shortlist of two potential vendors after an invitation to tender, and invited two companies to provide their best and final offers. Atos was selected. To facilitate a fixed price contract, Atos and De beers entered into an analysis and discovery contract (“the Discovery Phase”) to investigate and analyse De Beers’ systems, with a view to then entering into a fixed price contract for the project itself, with a value of £2.9m in November 2007.
Delays to implementation and cost overruns ensued. De Beers refused to pay an invoice for services. Atos first forced a variance to the delivery schedule and this was shortly followed by it invoicing, in the interim, De Beers for work completed to date.
The failure on the part of Atos to gather enough information at the Discovery Phase resulted in progress of the main project falling significantly behind schedule.
There were a series of reasons for the delays in the project:
One of the issues in dispute was whether De Beer knew of the delays at the time, and if it did, did it inform Atos.
De Beers refused to pay the invoice, due to the delays and the unsatisfactory quality of work. Following that, Atos then threatened to suspend all further work unless an additional £4m was paid. De Beers brought a claim against Atos, and Atos subsequently counter-claimed for repudiatory breach of the software development contract for the IT project.
In making their respective claims both parties sought judgment for repudiatory breach of contract. The Court was asked to decide whether the contract was repudiated by De Beers withholding payment or Atos suspending work.
Mr Justice Edwards-Stuart ruled that the refusal of Atos to complete the work constituted a repudiatory breach of contract. Atos had threatened and then suspended performance until the terms of the contract were actually varied and therefore that the behaviour of Atos betrayed an intention only to fulfil different terms to those originally entered into. This was because the changes in conditions which led to the requirement of extra work to be undertaken by Atos were, for the most part, changes in the “depth” and not the “breadth” of the contract’s scope. Changes in the former, where the contract was in that case silent, did not include changes in functionality but mere changes in the scale or complexity of the work.
Judgment was given in favour of De Beers on the basis that Atos, having gone into the contract “with its eyes at least half open”, should have anticipated such complexities when conducting its preliminary research of De Beers’ procedures and systems.
The court ruled that Atos’ claim that De Beers had breached the contract by withholding payment, was not sufficiently serious as to amount to a repudiatory breach. Atos’ actions amounted to an anticipatory repudiatory breach, entitling De Beers to treat the contract as at an end.
The requirements and specifications define what an IT supplier is required to deliver for any particular IT contract. Suppliers expose themselves to great risk of disputes by failing to properly scope IT projects, and customers themselves are at risk of not receiving what they are contracting for.
When the customer is not as clear as they might be defining specifications and user requirements, what can be seen as scope creep enters the fold, dark clouds appear on the horizon. When parties to contracts experience problems with the scope or requirements of IT contracts, it is important that their contracting party is made aware of the problem and steps taken sooner rather than later, before suppliers commercial IT project suppliers cite the contract and demand further payments.
The experience of the De Beers case is that the supplier, being the expert supplying the services needed to be aware at the end of a discovery phase what it is required to implement, and define it where there was any significant ambiguity. Some may say that the Agile development is incompatible with commercial contracts for IT projects. That is not the case – it is when the unknown unknowns greatly exceed the scope of the known unknowns which are required to be developed for the customer which causes the problems.
If circumstances arise where a supplier is contemplating stopping work, it should think twice before taking those steps. Suspending and terminating contracts is a serious business which may easily backfire. Parties to commercial IT contracts should tread with care to prevent a repudiatory breach from occurring unexpectedly and terminating the agreement, giving rise to exposure to significant damages claims and litigation.
Our debt recovery solicitors provide legal advice on guarding against the traps which may get in the way of successful debt collection, by foreshadowing the legal issues which are likely to arise. Our solicitors in London have advised on many software development and project management issues with successful outcomes. Leigh Ellis advises on IT contracts and averting disasters when projects start unravelling.
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