Responsibility increases for Outsourcing/Technology partners
Outsourcing/Technology Contract Management
Can you contractually rely on the professional advice from your technology/outsourcing partner?
A judgment from a recent court case suggests you can now contractually rely on the advice from your outsourcing/technology partner - even if the contract terms try to exclude it.
Key points to take from this article. Your outsourcing/technology partner:
1. Is responsible for ensuring its service is fit for its intended purpose before they deliver the services for you
2. Cannot state that your pre-contractual requirements were ambiguous if challenges arise during the delivery of the services. It is up to the partner to validate your requirements prior to them accepting the outsourcing/technology project
3. Cannot ‘contract out of’ being responsible for its advice. If its terms try to exclude responsibility for giving you the wrong advice or misrepresenting its capability or expertise, then it is likely a court would deem such terms invalid
4. Cannot expect you (the purchaser/client) to be responsible for being able to validate whether its service is appropriate for your requirements. The partner must make it clear what process it must go through to validate whether its services are suitable to meet your expectations or not
5. Must ensure that its warranty periods are fair and reasonable – even if the contract terms state otherwise.
Contracts - hidden responsibilities you might not be aware of
A recent court case judgment has re-enforced the ‘duty to warn’ that professional advisors/specialist vendors (such as outsourcing/technology partners) have to their clients.
The case, J Murphy & Sons Limited v Johnson Precast Limited was not a technology or outsourcing based dispute. However, the judgment of the case applies equally well to both technology and outsourcing projects that involve external partners. Essentially, the case involved a specialist pipe vendor that represented itself as an expert in pipe technology and underground pipe laying. The case revolved around a construction company (Murphy) ordering pipe from the vendor (Johnson), although Murphy was responsible for the installation through another contractor. After the project had commenced, the structure of the construction project changed in that the type of pipe and the methodology for installation was no longer suitable. Although Murphy was aware of the changing nature of the project, it did not tell Johnson. Both Johnson and Murphy did not realise the changing nature of the project would have impacted the suitability of the pipe supplied by Johnson. Murphy, through its sub-contractor installed the pipe regardless. The materials used caused the pipe to fracture and caused significant damage to the rest of the structure. Murphy sued Johnson for not warning it of potential problems that, given it had represented itself as a specialist in its field, it must ought to have known would exist given the change in the project scope.
Contracts in the traditional sense have written terms. These terms usually outline the responsibilities each party has to one another. They also usually include what process will be followed and what costs will be payable to each party if the contract terms are not followed (breached).
However, there are also terms in contracts that are enforceable, but are not written down. They are called ‘implied’ terms. These are terms that because of the conduct, or expectation of conduct, from one party to another, the law states that certain responsibilities will exist between parties in an agreement.
Some contracts try to exclude these unwritten terms. However, the courts usually take a dim view where a party who has the most to gain tries to rely upon the exclusion (usually an external outsourcing/technology partner), even though it would be unreasonable for them to do so.
Your outsourcing/technology partner’s ‘duty to warn’
A not very well publicised case, Stephenson Blake (Holdings) Limited v Streets Heaver Limited helped set the scene for organisations that purchase professional services. Basically, the judgment confirmed that when you purchase goods or services from an organisation and you rely on their professional advice (for example, your outsourcing or technology partner), then those organisations have a ‘duty’ to ‘think for you’ and to ‘warn’ you of any issues that might have a material impact on your project – before you enter into the contract. In essence, the your outsourcing or technology partner is under a duty to:
· Explain what their advice covers
· Validate what it does not cover
· Validate the consequential impact on the project of what their advice does not cover
If the organisation does not explain these items appropriately to you pre-contractually, then it usually becomes liable to remedy any misunderstandings over your project at its own cost.
An ‘on-going’ duty to warn
The ‘Murphy’ case outlined at the beginning of this article, now confirms that professional services vendors are not only responsible for this ‘duty to warn’ pre-contractually, but that these duties are still in place throughout the life of the project. Therefore, any vendor whose professional advice you are reliant upon has a duty to warn you of any issues that may continue to adversely impact your project, even if the project has already been entered into.
How implied terms work
Terms implied by your actions. If one or both of the parties in a project continue to perform actions that are not actually part of the contract, but neither party formally complains about those actions, then it can usually be ‘implied’ that those actions now form part of the contractual responsibilities each party has to each other. In practical terms, it is as though each party had re-written the contract to include these new activities.
Terms implied by fact. If an activity in the project is so obvious that it would have been obvious that it would apply to the project, then a court will usually apply that to be an activity that should be undertaken within the project at no further charge.
Terms implied by law. There are certain obligations that are implied by statute under the Sale of Goods Act 1979. For example, that the outsourcing or technology service you have purchased actually meets your expectations; that the advice provided by your outsourcing/technology partner is appropriate for the project they are involved in and so forth. Other terms also exist where judges have taken account of other cases that apply to the current matter in hand.
There was a specific technology case some time ago called Anglo Group Plc v Winther Browne & Co Limited [2000] 72 Con LR 118. This was an interesting case in that the Judge presiding identified six key principles that should be implied (for example, these responsibilities exist although they are not in writing within the contract terms) into any project involving professional services, namely:
· The purchaser communicates clearly any special needs to the supplier.
· The purchaser takes reasonable steps to ensure that the supplier understands those needs.
· The supplier communicates to the purchaser whether or not those precise needs can be met and if so how they can be met. If they cannot be met precisely, the appropriate options should be set out by the supplier.
· The supplier takes reasonable steps to ensure that the purchaser is trained in how to use the system.
· The purchaser devotes reasonable time and patience to understanding how to operate the system.
· The purchaser and supplier work together to resolve the problems which will almost certainly occur. This requires active co-operation from both parties. If such co-operation is not present, it is likely that the purchaser will not achieve the desired results from the system.
Even more responsibility
To identify just how powerful your actions on a project can be in overturning the written terms of a contract – as in the Winthur Browne case, Clause 15(i) of the Murphy contract said: ‘The Customer must rely on its own skill and judgment and recognise good civil engineering practice in relation to the goods and shall satisfy himself that goods specified are suitable for the Customer’s intended purpose.
On the face of it, this term stated that the customer was responsible to make sure that any advice it received and any good/services it purchased from the vendor was suitable for its purposes. It expressly excluded the vendor from having any responsibility in this respect.
Despite this term being expressly written into a contract that both parties had signed, the Judge found that this term did not relieve the vendor from its on-going duty to warn the customer if it knew, or ought reasonably to have known about a potential (but relevant) problem with the customer’s project.
Unreasonable warranty time periods
In the Murphy case, Clause 14(i) was a warranty of good workmanship, materials and compliance with standards. Clause 14(ii) was different and was described by the judge as being ‘draconian in its effect’. It read as follows:
‘In the event that the goods or any part thereof are found to be defective owing to faulty workmanship or materials and not arising from the Customer’s default, neglect, mishandling or misuse, but not limited to any deviation from catalogues or recommended operating instructions applied by the Company for use with the goods, the Company will, at its option, refund the price paid for or replace or repair any goods forming the whole or any part of the goods supplied provided always that the Company is notified in writing within 7 days of the discovery of such defects and in the event not later than 28 days from the date of delivery.’
The judge objected to the proviso as it meant that 29 days after the date of the services being delivered, no claim could be made, no matter how defective the service. Even aside from the very limited timeframe, this did not take into account the fact that the service would not be commissioned immediately and so there would be even less time from the project commencement in which the warranty period operated. Reducing a six-year limitation period to 28 days was ‘plainly and obviously unfair and unreasonable’. It did not comply with UCTA (the Unfair Contract Terms Act) requirements of reasonableness and so would be struck out.
Exclusion of liability
Mr Justice Coulson also split up the liability clause to allow for any offending bits to be severed. Under the judge’s numbering system, Clause 15(ii) said:
‘Save as otherwise expressly provided in Clause 14 the Company shall not in any circumstances be under any liability whatsoever to the Customer whether in contract, tort or otherwise for any defect in, failure of or unsuitability for any purpose of the goods or for any loss (including but not limited to consequential loss, loss of profit, loss of goodwill or similar financial loss), damage, claim or any other liability howsoever or whensoever caused whether or not due to the negligence or default of the Company or its servants or agents or to faulty design, specification, workmanship or materials.’
This was deemed unreasonably wide and also fell foul of UCTA. It is thought the Judge may have perceived the scope to be unusually narrow, and that simply offering money back for a service that was a component of a much larger project was simply not enough as the consequential impact of bad advice was significantly greater than the cost of the service delivered. Either way, the whole of Clause 15 (ii) was dealt with in one long paragraph and it was all struck out.
Lessons to be learned
There are a few lessons to be learned from this case. Vendors or third party partners that represent themselves as specialists in their particular fields:
· Cannot make the assumption that they can contract out of the consequences of providing advice that is wrong and/or negligent to their clients
· Must not take the position that their ‘duty to warn’ ends once it has signed the contract and engaged in the provision of the solution or service. The vendor/partner must continue to discharge its ‘duty to warn’ for the period it is engaged in the project.
· Vendors/partners must be careful with imposing unreasonable time-limits, as they could turn what was an otherwise reasonable term of a project contract into one that is unenforceable.
Procurement managers, contract managers, programme and project managers must keep up to date on these key legal Judgments. Cases and Judgments do move on and can be challenged in the Court of Appeal, the House of Lords and the European Court of Justice, therefore, the position can often change.
BPG has a framework that helps signficantly improve the performance of both external partners and internal resources on outsourcing and technology agreements. This results in lower costs for outsourcing and technology projects in both new and existing agreements and the acceleration of business benefits.
Updated 24 February 2009.
Allan Watton is the Managing Director of Best Practice Group plc: Advisors for improving challenging projects, organisational change, outsourcing, procurement and project deployment.
T. 0845 345 0130
F. 0845 345 0131
M. 07785 236700
http://www.bestpracticegroup.com
BPG works in close collaboration with the public and private sectors in advising and supporting executives, their teams and trusted service delivery partners. Together we create business change strategies, procure services and form provider agreements enabling our clients to drive efficiency and value from the deployment of organisational change, outsourcing and technology projects.
Menu
Featured Client - Public
Mike Goodwin
Chief Executive
NE DERBYSHIRE DISTRICT COUNCIL
Chief Executive
NE DERBYSHIRE DISTRICT COUNCIL
"If you want to be excellent you have to mix with the best"
Featured Client - Private
Mark Rayner
CEO
Richmond Events
CEO
Richmond Events
"The end results were excellent and have delivered up considerable financial savings"