WIN WISE: IT Projects and dispute avoidance

The problem

Underestimated costs, unexpected delays and poor governance are just a few of the reasons why some IT projects fail. COVID-19 has now potentially created the perfect storm.

IT contracts invariably span a medium- to long-term period, with the supplier frequently required to meet certain milestones under the contract in order to release payment. This carries the risk that during the term of the contract, circumstances may change or events may occur that were not foreseen at the time the contract was signed.

This dispute-avoidance checklist highlights what parties can do during the lifetime of an IT project to minimise the risk of disputes and maximise the chance of the project being a success.

The selection process

• Thorough due diligence should be carried out during the partner selection process to determine the supplier best-suited to deliver the needs of the project. Cost will clearly be important, but it should not be the only factor influencing choice. For example, references should be taken up, and the supplier’s track record should be examined.
• The supplier should also carry out due diligence to ensure it understands both the customer’s business and its needs for the project concerned, so that the supplier can have confidence that its solution will be a good fit if the contract is secured. In particular, the supplier should ensure it can meet delivery expectations while offering affordable prices and realistic timescales.

Pre-contract: The initial stages of a project

A common cause of failure in technology contracts is the lack of involvement of members of the project delivery teams until after the contract has been executed. IT projects are particularly risky because of the number of variables and complexities involved. So it’s crucial that members of the project delivery teams are consulted, involved and aligned before the implementation phase to ensure the contract reflects how the project will actually be implemented in practice.

Successful projects:

• ensure the customer’s requirements and the supplier’s obligations are realistic and not overambitious;
• include contingencies in terms of time and cost in the event of delay or change being needed;
• communicate the shared vision with all stakeholders aligning their objectives with the overall goal of the project, rather than communicating individual goals to individual workstreams; and
• involve subject-matter experts/stakeholders from an early stage to reduce or resolve any initial or later issues.

The parties should consider the following during contract negotiation:

• The contract should provide for a clear procedure for dealing with change to mitigate the risk of change not being properly contractualised, and so leading to disputes as to what is in or out of scope. This will be particularly important when the project term runs over several years.
• The contract should define the scope of the project with sufficient detail, and how the project will be delivered and by whom, to guide the parties through the different stages.
• If the parties want the ability to vary the contract then the inclusion and effect of any “no oral modification” clause should be carefully considered. Following the clarifying judgment in Rock Advertising Ltd v MWB Business Exchange Centres Ltd, if the contract contains a clause requiring any variations to be agreed in writing, any agreed changes to the contract not made in writing will not have contractual force.
• Consider the grounds on which the contract should provide for performance to be excused, and make provision for relief notices to be served on the occurrence of specific events.
• In light of the COVID-19 pandemic, the parties should carefully consider the scope of any force majeure clause. The definition of what will constitute a force majeure event and the consequences of this should be carefully considered and recorded.
• Identify what breaches of contract will allow each party to terminate the contract. Do you want to specify what breach or breaches will constitute a material breach, if even on a non-exhaustive basis?
• The parties should also include exit provisions that address the obligations of the parties if the contract is terminated early.
• The parties might be tempted to deal only briefly with certain difficult aspects of the project when agreeing the terms of the contract, to quickly get the project off the ground. However, these aspects are unlikely to be easier to resolve after the project is live, while agreements to agree are not enforceable. Ideally, the parties should seek to agree all essential elements of the project in sufficient detail to avoid any future disagreement.

Continuing governance

The chances of a successful project increase if the parties do not allow the euphoria of contract signature to distract them from immediately implementing the contract in accordance with its terms. Below are key steps for ensuring the project remains on track after the contract is signed:

• Conduct introductory sessions with the project delivery teams responsible for the implementation to ensure each party knows its roles and responsibilities under the contract. In short: ensure that a proper handover takes place.
• Produce a key contract matrix/summary with the key clauses to help ensure the contractual terms are not overlooked or forgotten in the future and make sure those who need to see it have a copy.
• The parties should follow the governance procedure in the contract. This might include holding regular meetings to confirm progress, highlight any issues for resolution, and allow for any changes to be communicated between both between and within the parties.
• Consider making a member of the executive team accountable for monitoring the project. This is both to identify any potential risks so that they can be mitigated against; and to ensure appropriate contractual procedures are identified and followed (for example, the change control procedure and the service of relevant notices). The executive team should also meet regularly to address any issues. DLA Piper’s IT Project Healthcheck tool can assist in assessing key risks and issues.
• Any proposed changes to the contract should be assessed by the relevant stakeholders. The impact of the change should be considered in terms of time and money and agreed or rejected in accordance with the relevant contractual procedure.
• In short: exercise good contract management.

If things start to go wrong

• Any potential issues should be considered at the earliest opportunity and managed proactively, using the contractual dispute resolution procedure, if appropriate.
• A default or breach of contract does not necessarily mean the contract should be suspended or terminated. Carry out a risk versus reward balancing exercise with your legal advisors to determine the best way forward.
• The parties should seek legal advice to determine what options are available, which may include serving relief notices or exercising step-in, suspension and/or termination rights.
• As an alternative to termination, the possibilities for renegotiation should be considered by the parties with a view to varying the contractual terms to rebalance or reset the relationship between the parties.
• If the parties successfully renegotiate the agreement in principle, the terms of the agreement should be carefully documented by your legal team. The wider operational team must then be informed of any changes to the contract and the new contract kept under continual review.

In summary, the best way to resolve or avoid IT disputes requires:

• proactive management of disputes;
• an assessment of the merits of different courses of action;
• the avoidance of knee-jerk reactions; and
• the development of a clear legal/commercial and operational strategy and keeping it under review.