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‘Poetic licence and get the buggers out’

‘Poetic licence and get the buggers out’

Sub–optimal outcomes in feral ICT contracts are avoidable – so why are they very common in the New Zealand business landscape? asks ICT lawyer Michael Wigley.

A recent court decision illustrates what we have seen time and again among the numerous ICT disputes on which we have advised. We use the decision to provide a check list for those facing ICT disputes so they can reduce losses. The focus of the case is on the supplier’s problems, but the issues apply as much to customers as well.

The judgment even has the perfect gotcha “Poetic licence and get the buggers out” smoking gun email to watch out for, a nightmare email the supplier would never have thought would have been seen by the customer and the court.

The thing that we often see is that, when an ICT contract turns feral, the parties end up, understandably, fighting bushfires, without making sure they take optimal steps to protect and document carefully their positions, in parallel.

For example, the parties, their project managers and other professional staff, will typically be flat out trying to sort out the problems. Time and again, and typically without giving it much thought, they’ll leave the documentation and other key steps to be sorted later. They’ll often even explain this as their rationale for shelving that detail. Usually, by then, it is too late, and often things will have been written that make it worse.

Too hard to capture then all the necessary information in what are nearly always complex situations. And too late to fix unhelpful or non-existent paper trails.

Any party with bad news documents under the hood will generally settle to avoid opening the kimono.

ICT lawyer Michael Wigley

It’s hard to get the balance right, because the primary focus is, usually correctly, on trying to sort out the problems in the first place, leaving little time for shoring up the legal position. But this really is a time to try and find resource and focus to optimally deal with the latter given usually the sums involved are considerable (expense, damages claims, lost revenues, and so on). In this case, failure to do that proved to be very costly for the supplier.

What happened in the case?

This played out like so many other problematic contracts we’ve seen over the years, so much so we could insert other names and details in the same story for disputes we’ve seen.

Large incumbent UK telco, BT, has a substantial outsourcing business. In 2013, it took on a £160M 10-year outsourcing contract for Cornwall Council and related parties, to provide ICT and other services. As is usual, the contract had KPIs and SLAs, with a service credit regime where KPIs were not met. But, particularly where there were repeated breaches of KPIs, the customer could also give notice terminating the agreement, in some instances without having to give BT the opportunity to remedy the breaches.

Soon after the contract started, breaches of SLAs and KPIs started to mount. Focus by both BT and the customers escalated over time, including discussions around re-baselining the agreement, such as agreeing revised KPIs. BT spent a great deal of time and money in trying to sort out the problems. Project teams for both BT and the customers, and the equivalent of a steering committee, were engaged. For the customers, they also had a great deal at stake both in terms of money and in terms of deliverables to their ratepayers. This wasn’t just a problem for BT.

BT pulled the stops out, as, again, we’ve seen often with suppliers engaged in problematic contracts (where, as here, there is almost always fault on both sides). The customer even acknowledged that “BT could hardly have done anything more” in making considerable efforts to rectify things.

Internal reviews set out the options: try and remediate the problems or terminate. While trying to fix things and re-negotiate, in June 2015, the customers advised BT that they were looking to terminate the agreement instead, due to the multiple breaches of the SLAs and KPIs. That’s always a big call to make, legally, and practically.

BT argued that the customers couldn’t terminate as the agreement didn’t allow termination, and that in any event the circumstances were such that the customers had waived their rights to terminate, given the discussions around revised KPIs, etc, and what was said in those discussions. BT said the right to terminate was taken away via an oral agreement (or that there was a legally enforceable waiver of rights, under the legal principles of waiver and estoppel).

What the court had to decide

Could the customers terminate, or was BT right? That was the issue addressed by the court in BT Cornwall v Cornwall Council. The answer from the court was: yes, the customers could terminate. The outsourcing agreement allowed it, and there was no legally enforceable arrangement overriding the agreement, nor had the customers waived their rights. BT hadn’t done enough to make sure that, as part of the remedial steps it was taking, arrangements had been made to remove the termination option.

Where BT fell down

Essentially, BT didn’t create a paper trail to achieve this, and it seems to have assumed that the customers had waived their rights to terminate. Additionally, the judge didn’t accept evidence from BT people that rights to terminate had been waived in discussions. Therefore, the original terms of the agreement applied and they, in addition to service credits for breach, also allowed termination for the same breaches.

Read more: Software audits – why vendors’ clauses may not be as strong as they think

Although not fully clear from the judgment, it looks like BT were doing all they could to sort out the problems. What they didn’t do, as we’ve seen so often, is to make sure the legals were covered off, and they therefore ended up in the pickle of spending much time and money to sort the problems, only to face the great cost of termination (entailing having to pay damages and so on, on top of lost revenue, damage to reputation, etc).

Checklist

What does the case tell us? Before turning to the focus of this article, we note that the actual agreement was lousy and there was much both parties could have done to improve it. BT got into trouble initially due to terms that ran against it. Said the judge:

“The Agreement is, as a document, very hard to work with, including by reason of its impractical length, and the imprecision in some of its drafting. It runs to several lever arch files without that length providing clarity in return. Its oversight and governance arrangements proved inadequate for all parties when things started to go wrong.”

Our experience is that not enough time is spent on getting the contract right in the first place, as we’ve outlined in our article, “So what! The contract just goes in the bottom drawer.”

Up next: ‘Paper trail, paper trail, paper trail’ or what to do when the agreement turns feral

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