Technology and outsourcing contracts in the recession

In the light of existing economic conditions, many organisations are looking at ways to reduce their running costs. One area that invariably comes under close scrutiny is the provision of IT services and investment in technology. Customers look to maximise efficiency, reduce costs, get the best value for their money or possibly to downsize the technology services they receive. Unfortunately, those aspirations are not necessarily compatible with contracts which may have been agreed several years previously. The result is that the number of disputes relating to technology and outsourcing contracts is likely to increase in the next twelve months or so. We are seeing two particular areas where disputes arise:

(a) Change Control

It is quite common for the needs and requirements of a customer to change during the course of a major technology project. Usually, such changes can be accommodated with the agreement of both parties. However, in the current economic climate, there is a tension between the customer’s reluctance to incur additional costs beyond those originally agreed and the supplier’s reluctance to do additional work for no extra money. This leads to the parties carefully scrutinising the small print of the contract to identify those provisions which most favour their position. Those positions can quickly become entrenched, quite often out of financial necessity.

(b) Milestone payments and milestone achievement

A regular area for dispute relates to milestone achievement and payment. Delays in achieving milestones are fairly common. In a fixed term contract where the term is linked to date of signature, where liquidated damages are payable or where the supplier feels pain in some other way, the reasons for delay will be analysed much more closely by both parties as they argue about the causes of the delay, whether the milestone has been achieved and what payments are due to whom.

In some cases, the legal position under the contract is clear cut. However, there are often financial or other commercial considerations which mean that the other party simply cannot fulfil their contractual obligations. In those cases, termination of the contract by the "wronged" party may be an option, but may not necessarily be the best way forward. Recent case law has emphasised that a party cannot terminate a contract for a mere technical breach. A wrongful termination may lead to the terminating party itself being the subject to a claim for substantial damages.

For a customer, terminating an existing contract may not be an option unless there are extensive termination assistance provisions in place to assist the transition to a new supplier, and even then a breakdown in relations may mean that termination assistance may not be attractive where the services provided may be critical.

From the supplier’s perspective, termination is also likely to be unattractive in all but the most serious of cases, because of the risk of reputational damage from exercising its right to terminate. The damages claims that can be brought as a result of termination may look strong on paper, but does the other party have sufficient assets to make pursuing them worthwhile? Would it actually be preferable for all concerned to try to maintain the relationship, at a reduced price?

With more disputes arising, a robust dispute resolution procedure in the agreement is a necessity. A well drafted dispute resolution clause should require the parties to escalate the dispute within their organisation, preferably to people who are not involved with the contract on a day to day basis. This can help both parties to see the big picture. If this does not resolve the dispute, it is quite common for the contract to require the parties to attempt some form of alternative dispute resolution.

Mediation is being used more regularly, with the Courts having the power to impose costs sanctions on parties if parties are unable to give a satisfactory explanation as to why mediation or negotiation has not taken place. The flexible and confidential nature of the mediation process allows the parties to explore with the mediator the real issues between them. The mediation process has a very impressive success rate of between 70% and 90% (depending on which mediation provider you talk to) and, to avoid the costs of litigating at Court, is well worth a try.

The final element of a well drafted disputes, resolution clause is a mechanism to resolve disputes if the parties are unable to do so by negotiation. This could involve the commencement of Court proceedings or an adjudication of the dispute by an independent expert with the appropriate technical knowledge.

The above is just a brief snapshot of some of the common issues that litigators are likely to see over the next twelve months. However, each technology or outsourcing project has its own particular features and technical elements. The challenge for litigators is to try to resolve disputes without damaging the ongoing relationship between the parties, if possible. Otherwise, both parties to the contract are likely to lose out.

Please click on this link to view the profiles of Morgan Cole's IT law group.