information communications & technology
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0ďż˝â MaddocksâInformationâCommunicationsâ&âTechnologyâUpdate
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Information Communications & Technology
W h e n d i a m o n d s a r e n â t a contractorâs best friend
Inâ Decemberâ 2010,â theâ Technologyâ andâConstructionâCourtâinâLondonâhandedâdownâitsâdecisionâinâDe Beers UK Limited (Formerly: The Diamond Trading Company Limited) and ATOS Origin IT Services UK Limited 2010 EWHC 3276 (TCC),âinâwhichâDeâBeersâwasâ awardedâ substantialâ damagesâ inâ theâcontextâofâaâfailedâITâproject.
Theâ succinctâ andâ accessibleâ judgmentâ isâcommendedâ toâ allâ ITâ projectâ managersâ andâlawyers.â Manyâ familiarâ themesâ emergeâ fromâit,â asâ wellâ asâ someâ salutaryâ lessonsâ ââ bothâforâcustomersâandâsuppliers.â Inâ thisânoteâweâwantedâtoâdrawâoutâsomeâofâtheâsalientâpointsâfromâtheâcustomerâsâpointâofâview.
BaCkgroUnD
Followingâ aâ competitiveâ tenderâ processâ andâaâroundâofâBestâandâFinalâoffersâ(BAFO)âDeâBeersâUkâLimitedâ(formerlyâtheâDiamondâTradingâCompanyâLimited)â(De Beers)âengagedâtheâUkâarmâofâanâinternationalâITâoutsourcingâcompany,âaToSâoriginâITâServicesâUkâLimitedâ(ATOS)âtoâdesignâandâdeliverâaâmajorâITâsystemsâupgrade.âTheâprojectâwasâintendedâtoâdeliverâtoâDeâBeersâstreamlinedâ diamondâ handlingâ processesâacrossâitsâinternationalâoperations.
Theâ projectâ wasâ anâ ambitiousâ andâ complexâundertakingâ whichâ requiredâ theâ integrationâofâ businessâ processesâ acrossâ aâ numberâ ofâfunctionallyâ independentâ andâ geographicallyâdispersedâbusinessâunits.âToâdeliverâtheâsystemâsoughtâbyâDeâBeersâwasâgoingâtoârequireâanâintimateâknowledgeâofâitsâbusinessâprocessesâandâpractices.
Theâcomplexityâofâtheâprojectâappearsâtoâhaveâbeenâ aâ factorâ inâ aâ previousâ failedâ attemptâtoâ deliverâ anâ integratedâ stockâ managementâsystem.â accentureâ wasâ engagedâ toâ doâ thisâworkâbutâaccordingâ toâ theâ judgmentâhandedâdownâbyâtheâcourt,1ââafterâthreeâyearsâthisâearlierâprojectââwasâterminatedâwithoutâachievingâmostâofâitsâobjectivesâ.
1âParagraphâ11âofâtheâjudgement.
in this issUeWhenâDIaMonDSâarenâTâaâConTraCTorâSâBeSTâFrIenD
âItâ wasâ aâ prudentâ strategyâ onâ theâ partâ ofâ DeâBeersâ then,âbeforeâmovingâtoâ theâ fullâprojectâcontractâ inâ novemberâ 2007,â toâ enterâ intoâ aâLetterâofâIntentâwithâaToSâunderâwhichâaToSâconductedâ aâ requirementsâ analysisâ exerciseâbetweenâJuneâandâoctoberâ2007.â
TheâlaudableâintentâofâthisâexerciseâwasâtoâclarifyâDeâBeersââbusinessâandâprocessârequirements,âtoâenableâaToSâtoâenterâintoâaâfixedâprice,âfixedâscopeâcontractâonâanâaccurateâbasis.
howeverâasâtheâcourtâremarks,âthisâturnedâoutâtoâbeâaâflawedâexerciseâwhichâinânoâsmallâpartâsowedâtheâseedsâforâtheâfailureâofâtheâprojectâaâ littleâ moreâ thanâ sixâ monthsâ afterâ contractâsignature,âwithâaToSâstaffâdowningâtoolsâandâhandingâinâtheirâsecurityâpassesâatâtheâendâofâtheâdayâonâFridayâ6âJuneâ2008.
What led to this drastic situation so soon?Disputesâoverâscopeâchangeâandâperformanceâensuedâsoonâafterâcontractâsigningâandâquicklyâescalated.ââInâMarchâ2008âDeâBeersâwithheldâaâsignificantâmilestoneâpayment.âUnderâtheâtermsâofâtheâprojectâagreement,âDeâBeersâwasâentitledâtoâwithholdâpaymentâofâdisputedâamounts.â
aToSâ respondedâ quiteâ aggressivelyâ toâ thisâstateâ ofâ affairs.â Itâ wroteâ toâ Deâ Beersâ statingâthatâ itsâconductâ inâwithholdingâ theâmilestoneâpaymentâ amountedâ toâ repudiation.â aToSâinformedâ Deâ Beersâ thatâ itâ âacceptedââ theârepudiation,âbringingâ theâcontractâ toâanâend,âpavingâ (soâ itâ hoped)â theâwayâ forâaâdamagesâclaimâagainstâDeâBeers.â
howeverâtheâcourtâdisagreed.âWhileâitâdoubtedâtheâ contractualâ rightâ toâ withholdâ theâ entireâmilestoneâ paymentâ hadâ inâ factâ crystallised,âtheâcourtâfoundâthatâinâwritingâtoâDeâBeersâinâthisâ mannerâ aToSâ hadâ itselfâ repudiatedâ theâagreement.
DeâBeersâwasâultimatelyâawardedâapproximatelyâÂŁ1.4âmillionâinâdamages.âWhileâthisâawardâisânotâinsignificant,âitâwasâsignificantlyâlessâthanâtheâÂŁ8.7âmillionâclaimedâbyâDeâBeers.
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0ďż˝â MaddocksâInformationâCommunicationsâ&âTechnologyâUpdate
MarChâ2011
Information Communications & Technology
ProJeCTâ ManageMenTâ LeSSonSâFroMâThISâCaSe
Managing Contract Change ProposalsManyâ ITâProjectâManagersâwillâ haveâhadâ theâexperienceâ ofâ receivingâ theirâ firstâ ContractâChangeâ Proposalâ (CCP)â almost,â itâ seems,âbeforeâtheâinkâisâdryâonâtheâcontractâsignatures.âInâaâfixedâprice,âfixedâscopeâcontract,âthisâcanâcomeâasâsomethingâofâaâshock.âButâCCP001âisâlikelyâtoâbeâtheâfirstâofâmany.âhowâshouldâaâprojectâmanagerârespond?
obviouslyâeveryâcontractâ isâdifferent.âButâtheâjudgmentâinâthisâcaseâprovidesâaâveryâpithyâandâusefulâ analysisâ ofâ theâ questionâ ofâ whenâ andâwhetherâaâcontractorâ isâentitledâ toâadditionalâpaymentâforâscopeâchange.2â
Theâ provisionsâ ofâ theâ contractâ dealingâ withâcontractâchange,âasâsetâoutâ inâ theâ judgment,âwereâfairlyâtypical.âForâthisâreasonâtheâcourtâsâdiscussionâofâcontractâchangeâcontainsâsomeâusefulâ principlesâ thatâ canâ beâ appliedâ moreâbroadlyâtoâfixedâpriceâandâscopeâcontracts.
anâexpertâwitnessâcalledâbyâaToSâdistinguishedâbetweenâchangesâinâscopeâwhichâareâchangesâinââbreadthâ,âandâthoseâwhichâareâchangesâinââdepthâ.
Changesâinââbreadthââwereââtrueââchangesâinâscope,âintroducingânewâfunctionality.âChangesâinââdepthâ,âonâtheâotherâhand,âwereâchangesâaddingâ âscaleâ orâ complexityââ butâ withoutââextend(ing)âfunctionalityâintoâwholeânewâareas.ââThisâ isâ whereâ theâ familiarâ dangerâ ofâ âscopeâcreepââmanifestsâitself.
Theâ courtâ regardedâ thisâ characterisationâ asâbeingâ aâ littleâ simplistic,â insteadâ preferringâ toâaskâ whetherâ additionalâ workâ wasâ requiredâthatâ couldâ notâ âfairlyâ beâ saidâ toâ fallâ withinââtheâcontractedâspecifications.âIfâthisâtestâwasâsatisfied,âtheâcontractorâwouldâbeâentitledâtoâaâCCPâandâtoâadditionalâpaymentâforâthatâwork.
2â Seeâ paragraphsâ 237â -â 241â ofâ theâjudgement.
Inâ thisâ caseâ thereâ wereâ numerousâ changeârequestsâ raisedâbyâaToS.âDeâBeersâdidâ notâconsentâ toâallâofâ them,âandâtheâcourtâagreedâthatâaToSâwasânotâ entitledâ toâbeâpaidâextraâunderâchangeârequestsâunlessâtheâworkâtrulyârepresentedâaâchangeâinâscope.
aToSâarguedâthatâ inârespectâofâaânumberâofâchangeârequests,âitâwasâentitledâtoâbeâpaidâforâextraâworkâwhereâtheâhighâlevelârequirementsâphaseâ hadâ notâ revealedâ theâ fullâ extentâ ofâdetailedâworkâ requiredâ toâdeliverâaâparticularâaspectâofâtheâproject.â
Theâcourtâdisagreed.âWhileâthereâwasâreasonâtoâ believeâ aToSâ hadâ notâ fullyâ appreciatedâtheâscopeâofâworkârequiredâasâaâresultâofâtheârequirementsâphase,âandâDeâBeersâmayâhaveâbeenâ awareâ ofâ this,â theâ courtâ observedâ thatâaToSâshouldâhaveâincludedâaâcontingencyâinâitsâpriceâandâdeliveryâtimetableâtoâaddressâanyâsuchâuncertainties.âTheâcourtâalsoâheldâthatâtheâriskâthatâdetailedârequirementsâanalysisâwouldârevealâaâneedâforâmoreâworkâtoâbeâdone,âwasâaâriskâforâaToS,ânotâDeâBeers.
Lesson 1: Manage change requests carefully. Reject change requests that do not address a need for a change in scope as originally contracted.
Lesson 2: Consider whether to structure your project with a pre-contract requirements analysis phase.
Customer inputsTheâcourtâfeltâthatâbothâpartiesâshouldâacceptâsomeâresponsibilityâforâtheâfailureâofâtheâproject.âWhatâisâclearâisâthatâinâaâmajorâITâproject,âwhereâtheâcontractorârequiresâanâintimateâknowledgeâofâ theâ customerâsâ businessâ toâ deliverâ theâoutcomesâsought,â theâcustomerâsimplyâmustâshareâtheâresponsibilityâforâmakingâtheâprojectâhappen.
asânotedâatâtheâoutset,âthisâwasâaârelativelyâlarge,ârelativelyâ riskyâ implementationâ whereâ aToSâneededâ toâ undertakeâ anâ extensiveâ businessâanalysisâexerciseâinâorderâtoâdesignâtheâsystemâforâdelivery.âForâthisâprocessâtoâbeâsuccessful,âaToSâneededâtoâhaveârelativelyâopenâaccessâtoâDeâBeersâsubjectâmatterâexperts,âandâ theâtermsâofâtheâagreementâreflectedâthis.â
aâfactorâ inâ theâfailureâofâ thisâprojectâappearsâtoâhaveâbeen,âatâvariousâtimes,âtheâlackâofâDeâBeersâstaffâtoâprovideâsubjectâmatterâexpertise,âandâalsoâatâtimes,âtheâinabilityâofâDeâBeersâtoâagreeâ andâ communicateâ requirementsâ andâspecifications.â
Theâprovisionsâofâtheâagreementâdealingâwithâthisâissueâasâreportedâinâtheâjudgment,âplacedâaâ significantâ butâ undefinedâ obligationâ onâ DeâBeersâtoâprovideâassistance.3â
Deâ Beersâ wasâ required,â forâ example,â toââpromptlyâ provideâ ...â accurateâ andâ completeâinformationâ concerningâ itsâ operationsâ andâactivitiesâ ...â asâ theâ Supplierâ mayâ reasonablyârequire.â
Thisâ mightâ soundâ innocuousâ enoughâ atâ firstâglance.âhoweverâmanyâââandâperhapsâmostâââorganisationsâsimplyâwillânotâhaveâdocumentedâtheirâbusinessâprocessesâandâpracticesâtoâtheâextentâwhereâ theseâcanâ readilyâbeâ translatedâintoâsystemâspecifications.âSoâonceâaâprojectâkicksâoffâandâtheâcontractorâstartsâaskingâforâthisâinformation,âtheâcustomerâmayâsuddenlyâfindâitâdoesânotâhaveâitâonâhand.âWhatâisâtoâbeâdone?âeitherâ theâ customerâ mustâ findâ theâ internalâresourcesâ toâ prepareâ thisâ documentationâââprobablyâwithoutâsufficientâtimeâtoâdoâtheâjobâproperlyâ-âorâtheâcontractorâmustâdoâtheâwork.âTheâcontractorâwillânotâonlyâwantâtoâbeâpaidâforâthisâwork,âworse,âitâmayâalsoâbeâtemptedâtoâpointâtoâthisâasâaâdelayâfactorâorâasâaâfactorâotherwiseâexcusingâitsânon-performance.
Weâwouldârecommendâthatâasâmuchâdefinitionâasâpossibleâbeâgivenâtoâcustomerâobligations,âby,âforâexample:
avoidingâ open-endedâ obligationsâ suchâ asâthoseâdescribedâabove;expresslyâ definingâ âCustomerâ Inputsââ andâsettingâthemâoutâinâaâSchedule;âandexpresslyâ definingâ whatâ humanâ resourcesâtheâcustomerâisâtoâprovide,âatâwhatâlevels,âwithâwhatâskills,âandâforâhowâmanyâhoursâorâdaysâduringâtheâproject.
3âSeeâparagraphâ202âofâtheâjudgment.â
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0ďż˝â MaddocksâInformationâCommunicationsâ&âTechnologyâUpdate
MarChâ2011
Information Communications & Technology
oneâ excellentâ articleâ onâ thisâ caseâ suggestsââreverseâkPIsââââkeyâperformanceâindicatorsâthatâ theâ customerâ signsâ upâ to,â toâ provideâsomeâcertaintyâaroundâwhatâisâexpectedâofâtheâcustomer.4â
Ultimatelyâthisâissueâdidânotâfigureâsignificantlyâinâtheâdamagesâclaim,âbutâasâaâgeneralâcomment,âinâorderâforâaâcomplexâimplementationâinvolvingâaâ detailedâ businessâ analysis/requirementsâgatheringâprocessâ toâsucceed,â theâcustomerâmustâ ensureâ thatâ relevantâ resourcesâ areâavailable,â thatâ itâ makesâ decisionsâ inâ aâ timelyâmannerâwhenârequiredâtoâdoâso,âandâthatâitâisâableâtoâsatisfactorilyâdefineâorâcommunicateâitsârequirements.
Lesson 3: If possible, avoid agreeing to ill-defined or open-ended requirements to provide inputs or assistance.
Lesson 4: Make sure you have adequate resources available to manage the implementation and the contractorâs performance, and to respond to requests for information or assistance.
Fixed fees, fixed scopeFixedâ fee, â f i xedâ scopeâ isâ aâ commonâenoughâ commercialâ basisâ forâ complexâ ITâimplementations.âhoweverâsuchâarrangementsâcarryâwithinâthemâanâinherentâpressure.âIfâtheâcontractorâembarksâonâ theâprojectâ andâ findsâthatâtheâjobâhasâbeenâunder-priced,âtheyâmayâseekâtoârecoverâtheirâpositionâbyâraisingâchangeâcontrolâ requests.â Ifâ theseâ areâ resisted,â theâcontractorâmayâbeâfacedâwithâtheâunpalatableâprospectâofâhavingâtoâperformâanâuneconomicâproject.âItâmayâbeâbetterâ(financially)âforâthemâtoâabandonâitâthanâtoâcontinue.
4â Seeâ Bierceâ andâ Jones,â âFailedâ SoftwareâDevelopmentâ-âDeâBeersâDebacleâ,âavailableâatâhttp://www.outsourcing-law.com/tag/breach-of-contract/â
Lesson 5: For a fixed price contract, ensure that your requirements have been sufficiently identified to enable the supplier to price appropriately.
Lesson 6: See Lesson 4.
Repudiation
Itâisâtriteâlawâthatâaâpartyâevincingâanâintentionânotâtoâbeâboundâbyâaâcontractâwhichâitâhasâenteredâintoâmayâbeâtakenâbyâtheâotherâpartyâasâhavingâabandonedâorârepudiatedâtheâcontract.âInâsuchâcircumstancesâtheâaggrievedâpartyâmayâelectâtoâacceptâtheâotherâpartyâsârepudiation,âbringingâtheâcontractâtoâanâendâandâ(moreâthanâlikely)âgivingâriseâtoâanâentitlementâtoâdamages.
Thisâbeguilinglyâsimpleâprincipleâneedsâtoâbeâhandledâ withâ cautionâ however,â asâ thisâ caseâdemonstrates.
asânotedâatâtheâoutset,âaToSâbecameârepudiatorâratherâthanârepudiateeâbecauseâtheâcourtâfoundâthatâDeâBeersâhadânotâ inâ factâdoneâanythingâthatâamountedâtoârepudiation.âaToSâthereforeâexposedâitselfâtoâaâclaimâforâdamages.
Thisâ inâ factâ mayâ haveâ ultimatelyâ playedâ toâaToSâsâ advantage.â Theâ courtâ observedâ thatâtheâamountâofâdamagesâawardedâbyâitâmayâwellâhaveâbeenââlessâthanâtheâadditionalâcostsâthatâaToSâwouldâhaveâincurredâifâitâhadâcontinuedâtoâperformâtheâContractâtoâcompletionâ.ďż˝
Thisâwasâdueâinânoâsmallâpartâtoâaâmysteriousâissueâthatâcouldânotâbeâdisclosedâ-âevenâtoâtheâcourtâ-âreferredâtoâcrypticallyâinâtheâjudgementâasâ theâ âblankââ issue.âBecauseâofâ theâ âblankââissue,âtheâcourtâcouldânotâfindâthatâDeâBeersâintendedâ toâ procureâ aâ replacementâ system,âmeaningâ thatâ theâ courtâ couldâ notâ awardâ aâsubstantialâ componentâ ofâ damagesâ claimedâbyâ Deâ Beers.â Wereâ itâ notâ forâ thisâ issue,â theâdamagesâ awardâ mayâ haveâ beenâ significantlyâhigher.
ďż˝âSeeâparagraphâ380âofâtheâjudgment.
Thisâ illustratesâthatâtheâ internationalâdiamondâtradeâisâaâmysteriousâandâintriguingâbusiness,âbutâ moreâ relevantâ toâ thisâ article,â itâ suggestsâthatâ repudiationâ canâ beâ aâ dangerousâ andâindiscriminateâweapon,âandâshouldâbeâtreatedâwithâcaution,âbyâcustomerâandâsupplierâalike.
Lesson 7: Consider your position carefully before suspending or withholding payment.
Lesson 8: Be very sure of your position if you want to allege repudiation.
Lesson 9: Donât do anything that puts you in the position of repudiating the agreement â unless you are very sure that is your strategy.
Lesson 10: Seek legal advice.
author:âSeanâField,âSeniorâassociate
0ďż˝â MaddocksâInformationâCommunicationsâ&âTechnologyâUpdate
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