Failed IT Projects
A result of an increasingly digitised global economy is the rise in ill-fated commercial IT projects, where contracting parties assign blame to one another in what can be a painstaking process to unravel against the backdrop of substantial costs and an uncertain outcome. Therefore, it is perhaps unsurprising that such disputes rarely progress all the way to court, which makes the case of CIS General Insurance -v- IBM [2021] EWHC 347 something of a rarity.
Background
In June 2015, Co-Op commissioned IBM to manage Co-Op’s move to a new IT solution for its insurance business, with the project completion date set for December 2017. The cost of delivering the new system was £50.2 million with a further £125.6 million for managing the system over the following ten years. Based on a third-party insurance platform known as “Insurer Suite” created by the Innovation Group, the project required IBM to engage the Innovation Group as a subcontractor to modify the coding of the “Insurer Suite” to be suitable for Co-op’s requirements.
However, by the beginning of the second phase of user acceptance testing in October 2016, the implementation project was heading for a crash. Hundreds of defects were recorded across various degrees of severity, with a solitary defect in either category one or category two rendering the implementation a certified failure.
As problems mounted, Co-Op refused to pay one of IBM’s invoices, which resulted in IBM attempting to terminate the contract in July 2017. Co-Op claimed the attempted termination was a repudiatory breach by IBM and brought a catalogue of claims against IBM as a result of the doomed project.
IBM Stuck in Unsafe Mode
A commercial IT contract will normally fix the supplier with a range of obligations to deliver the new system. The project’s success depends on the customer’s engagement and co-operation. The complexities of this relationship will normally precipitate a blame game when matters go awry, and it will be difficult to distil from the facts where liability rests.
However, in this case, IBM found itself caught between the failures of the Innovation Group as its subcontractor and its own failure to seek relief under the contract with Co-Op for problems encountered with the project’s implementation. IBM described the code developed by the Innovation Group as “very poor”, which contributed to the problems encountered in implementing the new IT system. However, IBM was contractually liable for the Innovation Group’s performance.
The contract between Co-Op and IBM contained a provision allowing IBM to obtain relief where the underlying problem was the fault of Co-Op. However, to obtain relief, IBM had to promptly serve a relief notice on Co-Op identifying that failure, which they did not do.
Consequently, even if Co-Op’s failure to adequately engage had contributed to IBM’s failure to complete the project milestones, IBM could not obtain any relief, as the court determined it was not possible to imply such a term into the contract since it would contradict the express relief clause already contained therein.
A Disputed Termination
Matters culminated when IBM issued Co-Op with an invoice, which was described as a milestone invoice but in reality constituted a delayed invoice for the costs of software licensed under the contract, which had been spread across the term rather than paid upfront and not, therefore, tied to the wider progress of the project.
Co-Op refused to provide a purchase order number and disputed the invoice since it felt IBM was not entitled to payment. In response, IBM purported to exercise its rights under the contract to terminate for non-payment. The co-Op then retaliated by claiming IBM’s termination notice was a repudiatory breach, which it accepted. Therefore, the contract had come to an end, but the question remained who was at fault.
The contract provided that invoices must contain a purchase order number, which the purported milestone invoice did not. However, Co-Op had wrongfully withheld the purchase order number and could not rely on its own breach to escape its contractual obligations. The court also held that the use of non-payment of an invoice to terminate the contract was a “high-risk strategy” given it was for “a modest sum in relation to the high value of the overall project”, indicative of the difficulties which can be encountered by parties to a complex IT dispute in seeking to establish a termination right, especially if the only termination right expressly provided for under the contract is for material breach.
Reliance Losses and Exclusion Clauses
While not all of the Co-Op’s claims against IBM succeeded, it had sufficiently shown that IBM repudiated the contract by wrongfully attempting to terminate for Co-Op’s non-payment of the milestone invoice. The primary claim for the repudiation was for £128 million of Co-Op’s wasted costs on the abandoned project. The contract contained an exclusion of liability clause for various heads of loss, including “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect)…” IBM argued that, on a proper construction, Co-Op’s reliance loss was caught by that exclusion.
The court determined that, on the evidence, Co-Op had contracted with IBM for the benefit of achieving substantial savings, increased revenues and enhanced profits through the effective use of data within its business which IBM was expected to facilitate. In this light, Mrs Justice O’Farrell held that the framing of the claim as one for wasted expenditure “simply represents a different method of quantifying the loss of the bargain; it does not change the characteristics of the loss for which compensation is sought.” On this basis, it was held that the claim for reliance losses was, in substance, one for loss of profit, revenue or savings and, therefore, was excluded under the terms of the contract.
Instead of the £128 million claimed by Co-Op as reliance losses, the court concluded that only £15.9 million of damages consequential on IBM’s pre-termination breaches was recoverable, set off against the £2.9 million Co-Op owed to IBM under the unpaid milestone invoice.
Given that the case took almost three years to progress to a final trial, which itself lasted two months and preceded a year-long wait for a judgment to be handed down, it is clear that the likely costs involved and extremely limited recovery of damages represented somewhat of a pyrrhic victory for Co-Op. As a result of the project’s failure, Co-op ultimately abandoned its pursuit of a new IT system altogether and sold off its insurance business. Had Co-op instead attempted to build a replacement system, the associated costs of doing so may have fallen outside the exclusion clause under the contract.
Conclusion
Exclusions of liability clauses for lost profits or savings are almost boiler-plate provisions in IT contracts, and a direct authority suggesting that they are apt to preclude reliance loss claims means that this judgment could have wide-ranging consequences. It is also a timely reminder of the key areas for those involved in IT implementation projects to check in their contracts and will likely result in the negotiation of supplier relief and deemed direct loss clauses becoming increasingly contentious.
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