The growing trend of ICT disputes was explored by a panel of MinterEllison technology legal and consulting professionals, and industry experts, in Sydney recently at our third Technology Breakfast for 2019. We share our key insights from the discussion.
ICT disputes and their causes
We mostly see disputes arising due to a failure by a supplier to provide quality services and deliverables as expected, or as a result of delays to ICT projects. Other factors which could give rise to an ICT dispute include:
- misunderstandings between the customer and supplier around the requirements of the project and the role of each party in ensuring success;
- incorrect project scope, and unclear deliverables, dependencies, assumptions and expectations;
- unrealistic internal expectations about the realities and challenges of the project, and the absence of a strong internal capability managing the project;
- commitments made by either customer or supplier during contract negotiation that later prove to be undeliverable;
- lack of an appropriate governance and reporting framework to ensure strong communication channels between the parties; and
- unresolved or unsolvable technical issues.
Understanding the desired outcome in an ICT project
When things go wrong in an ICT project, and the parties are in dispute, the situation can be overwhelming for all involved. A key to successfully managing a dispute is being clear about the desired outcome. This is particularly important when settling a dispute by way of expert determination, arbitration or mediation. In these cases, you need to have a well-formed objective in mind.
In particular, you need to think about how you would like the relationship with the supplier to look like in the aftermath. Would you like to preserve the relationship despite the dispute, or is it more important to win at all costs? We deal with this point in more detail below.
Understand the organisation's rights and obligations under an ICT contract
All relevant personnel need to read and understand their organisation's rights and obligations under an ICT contract., Even more importantly, they need to understand the procedures that must be complied with to ensure that rights within a contract can be enforced. An understanding of the contract is essential if the project is to deliver to expectations and will assist parties in identifying and managing minor instances of non-compliance before these become larger problems for the project.
Preparing and circulating a contract summary will allow all relevant personnel to understand their relevant rights and obligations, as well as key clauses, processes, dates and risks. Legal Counsel should review this summary to ensure that it accurately reflects the relevant transaction.
Understanding your potential role in the ICT dispute
Customers as well as suppliers can contribute to project delays. It is important to be honest and realistic about the role that you may have played in creating or aggravating the circumstances leading up to a dispute. For example, a supplier may be on-track to deliver as specified in the contract, but your lack of appropriate, internal resourcing results in a project delay. We often see this during projects, as customers sometimes believe that they don't need to do anything further beyond engaging a third party to provide a service.
In fact, both parties need to work with each other to achieve the desired outcome. While suppliers need to ensure they deliver in accordance with contract, customers need to allocate an appropriate budget for internal management of the ICT project, and ensure they are able to assist with delivery. This is especially critical if there are multiple vendors delivering parts of the same project.
Customers should consider:
- Are you confident that you understand, and have satisfied your obligations and deliverables under the contract?
- Have you understood the project resourcing requirements?
- Have you assessed whether you have the internal capability required for the project to succeed?
Suppliers and customers should know each other's pain points
Throughout the negotiation of a contract, both suppliers and customers should develop an understanding of each other's pain points, the parts of the project they may struggle with.
Remember that the ultimate goal is successful project delivery. Taking steps to understand each other's pain points will allow you to monitor the supplier's performance during the project and be proactive in developing contractual and procedural workarounds to prevent and mitigate any issues that may arise.
How to preserve/avoid eroding rights in the lead up to and during a dispute
When preparing to take-on your supplier, it is important to preserve your rights under your contract, and at law.
Once again, being thoroughly familiar with the contract is essential. This means being familiar not only with the tools available under the contract, which may help in the dispute context, but also understanding the processes that must be followed to ensure that no rights are waived. Examples of this include:
- The dispute resolution clause – you must adhere to the process articulated in this clause to be able to correctly, and legally, initiate a dispute;
- The delay clause – you need to be conscious of the process contemplated under this clause so as not to waive any of your rights which may assist in, or even avoid, a dispute, when there is an actual or potential delay to the project timeline. For example, if a supplier has not taken the required steps under the contract to notify the customer of a delay to the project, then the supplier may give up their right to an extension of time. Even where a customer has caused or contributed to the delay, the supplier's non-compliance with this notification procedure could mean that it may relinquish its right to extend due dates.
Understanding the contract will assist you to know what rights are available to you, and more importantly, when to exercise them.
Document, document, document!
Often, you will struggle in the lead up to a dispute because you have not diligently documented the behaviour and performance of the ICT vendor. As we stated earlier, having the right governance and reporting framework in place will make it much easier to identify issues in performance.
Furthermore, detailed documentation should be kept of all interactions leading up to the dispute. For example, a supplier may have, in their communications with the customer, admitted fault as to a particular breach or project delay. Retaining records of this admission will assist you to establish fault from an evidentiary perspective. Some practical tips to maintain effective documentation include:
- Maintain detailed meeting minutes;
- Read and respond to any assertions made by the supplier, particularly in situations where they attempt to allege fault; and if The assertion is false, no matter how small it may appear at the time, make sure to address it early;
- Document the key points of contention during the initial negotiation of a contract, as these may continue to cause issues during the performance of the contract;
- Pay attention to, and document, any and all instances of failure or breach – this may assist your overall case in taking the desired action against the supplier. Disputes don't always arise as a result of a big failure; often they result from an accumulation of lots of smaller issues.
Establishing fault
If you have diligently documented instances of non-compliance by the vendor, then establishing their breach of contract or some other fault should be relatively simple. However, this is not always the case, and the view as to who is ultimately at fault may not be clear.
As a customer attempting to establish the supplier's breach or fault, you should be both self-aware and self-critical. Realistically review the actions of both yourself and the supplier to assess the extent to which you may have contributed to, or even caused, the relevant failure. As we stated earlier, it is important to understand that both customers and suppliers have a role to play in project delivery.
It is important to adhere to the governance and reporting regime, particularly for the monitoring and reporting of the failures of the supplier. This promotes constructive and open communication between you and the supplier, allowing you to more easily establish the underlying issues.
Deciding on the action to take
As well as being clear about why you are engaging in a dispute, you also need to consider the overall commercial context of the dispute, as this will inform the path you can choose to take. Before committing to a course of action however, you should think about:
- Can you afford to give away this relationship?
- Is this supplier the best in the market for the product or service they have been asked to provide? Is this supplier relationship valued internally? Is your organisation dependent on the services provided by the relevant supplier? Does the supplier have the capacity to properly perform and complete the relevant work? Are you receiving value from the supplier and do you think the relationship is worth preserving? Could the same goods or services be procured from another supplier for less?
- How dependent is the supplier on your organisation's business? Knowing this could give you additional bargaining power.
Even if there are other suppliers who could provide the same service for an equivalent or lower price, you should still evaluate the time and cost (including personnel and legal cost) of going back to market and negotiating an arrangement with a new supplier, against the cost of remediation with the existing supplier.
Finally, it is important to take a longer-term view of the dispute in the context of the broader program of works. Consider a way to resolve the dispute (which may include not getting into a dispute in the first place) that will have minimal consequences for the program.
Terminating
A good, comprehensive termination regime under a contract, including a right for a customer to terminate for convenience, can not only act as a good performance incentive for suppliers, but can also provide an easy dissolution of the relationship, without the need to establish breach of contract. Increasingly, we see clients deciding to deal with a dispute by terminating its arrangement with the relevant supplier, and even more often, clients like to leverage their right to terminate for convenience (if available).
- However, when deciding to terminate, for convenience or otherwise, it is important to consider:
- If terminating for breach, can you clearly establish a breach? This is where adherence to the governance and reporting regime under a contract, and your diligence in documenting, will be crucial.
- If terminating for convenience, will there be anything to pay? A contract may identify a specific 'termination for convenience fee' but in other cases, your liability to pay may be more subtle. Ordinarily, a supplier will have a right to be paid all fees due and payable up to the date of termination, but what about circumstances where a customer terminates before a particular payment milestone is achieved by a supplier, and the supplier's right to payment has not yet crystallised? In this instance, a supplier may still be able to make a claim and pursue the customer for amounts of work done up to the date of termination. We recommend that in such circumstances you seek legal advice to assess what your financial liability may be.
- It is vitally important that you adhere to the process provided for in the contract before exercising the right to terminate. You need to be able to demonstrate that you have taken all actions required by the contract, and a missed step can have serious consequences.
