The scenario is all too familiar: after months of negotiations, the contract for a new IT system is signed but months later, the project is already behind schedule, the customer has rejected some of the deliverables, and both sides disagree about the causes. What can you do to move forward? Find out the typical issues that arise and what you can do to mitigate your risks and optimise your position.
Assessing the current position
First, both customer and supplier should assess the technical and contractual framework to understand their rights and options – common issues include:
- What are the requirements and specification for the system, and in what form were they agreed? Just because a contract states the supplier will deliver "reporting" does not necessarily mean that the 80 specific reports the customer requires are a contractual deliverable.
- What are the deadlines? A missed deadline may not be a breach of contract, depending on the terms of the contract.
- Have there been changes of scope, and if so were these properly documented and agreed? If not, there is likely to be a dispute about how any changes affect charges and timescales.
- For the supplier, has the customer stopped paying on the basis of alleged breaches of contract by the supplier?
After establishing the contractual obligations and breaches, the next step is to consider your options. Typically, these will be to either: (i) continue the project and bring it back on track, or (ii) end the project and terminate the contract.
Option 1 – Continue the project and bring it back on track
Again, the parties should firstly look to the contract for guidance and consider:
- Are there contractual mechanisms for managing delays or issues to bring the project back on track? Some IT contracts contain provisions for joint project management meetings, issue analysis, and reporting as well as remedies in the event of problems.
- Does the contract include liquidated damages/service credits payable upon delay? This can be a "quick win" for customers to obtain financial compensation without the need for formal legal proceedings. However, under UAE law, liquidated damages are discretionary and the court can vary the parties' agreement to award the actual damage (whether less or more than stated in the contract).
If the parties are able to negotiate a way forward, which they can both live with, this should be documented in a variation to the contract; and possibly a settlement agreement to protect the parties' rights, and to ensure certainty of the resolution so both parties can move forward from a clean position.
Option 2 – Terminate the Contract
Even where there are clear breaches by the other party, terminating a contract carries significant risks, if not done correctly. This is particularly the case under UAE law, which provides that a contract cannot be terminated without the parties' consent, a provision of law or a judicial order.
Termination rights in an IT contract might include:
- a right to terminate for convenience i.e. without needing to prove a breach of contract after giving notice;
- a right to terminate for breach of contract, often after providing a notice and time for the defaulting party to cure the breach.
Whichever option is taken, it is important to strictly follow the exact process laid out in the contract for termination, in particular by serving notice in the correct form, on the correct date(s), and to the correct contact details. Failure to do so can render the termination invalid and may expose the party seeking to terminate to claims it has itself committed a breach of contract and claims for compensation.
Before terminating, it is also advisable to consider your exit strategy taking into account issues such as:
- Intellectual property rights– who owns the rights and what do the parties need to do after termination?
- Physical assets – does the supplier have hardware assets on the customer's site that will need to be retrieved upon termination?
- Exit support and transition to an in-house team or new supplier if necessary – will the customer need support from the outgoing supplier and if so how will this be achieved?
As more businesses continue to embrace technology to help deliver efficiencies and generate alternative revenue streams, we are likely to continue to see a rise in these kinds of disputes. We can work with you to help navigate these issues as they arise and guide you through to the best solution.