Problematic Big IT Projects: Can your contract force ‘good faith’ from your vendor? New court rulings suggest it can

By Allan Watton on

Problematic Big IT Projects 216 x 160If you are to believe the statistics published on problematic big IT projects – whether a commercial sector Enterprise Software implementation (ERP), a Local Authority Client Relationship System (CRM) or an NHS Trust dealing with a problematic Electronic Patient Records (EPR) implementation – one thing is common throughout: the likelihood of you achieving your business outcomes from these systems, in the time-scales and costs originally agreed, is less than 50%. In other words, this means that slightly more than 1 in 2 big IT projects don’t work as expected.

Problematic Big IT Projects – How Widespread Are They?

Flying high on the list of recently reported problematic big IT projects, we have to head across ‘the pond’ where the US Air Force abandoned the upgrade of its IT system for handling logistics, but only after it was realised that a further $1.1bn would need to be invested for it to become usable. And take Obamacare’s website problems: it can teach us a lot about large scale project management and execution, and how failings can lead the board to seek a prescription for medication!

Although much criticism has been directed at civil servants, problematic IT overruns are present in both the private and public sector. It’s just that the private sector is much better at hiding its problems; large blue-chip companies continue to operate failing IT systems because they are unwilling to write down the expense or they simply ‘brush it under the carpet’.

Fundamental to the success of any major procurement project is the importance of the vendor’s responsibilities. In this article we review how recent court rulings help clarify the responsibilities of specialist IT, managed services and outsourcing vendors and whether a contract can force ‘good faith’ from a vendor.

The Importance of Strategic Vendor Responsibilities

The paper we wrote recently on Strategic Vendor Responsibilities outlines two main points:

  1. That specialist vendors have a number of responsibilities to ensure they meet your requirements, that they are unable to contract out of in practical terms. Even if both you and your vendor have signed a contract that tries to exclude certain vendor responsibilities, the courts have demonstrated that they will not entertain vendors being able to rely on these exclusion clauses if such exclusions mean that the contract will not make practical sense, given their expert responsibilities.
  2. That the vendors will retain those expert responsibilities until the client inadvertently removes those responsibilities away from the vendor. This is done by the client ‘intervening’ in the problematic projects in the wrong way which can often give rise to the vendor being able to charge unexpected fees for the project, and delays creeping in to project completion and benefits realisation.

When potential clients ask us to get involved with problematic big IT projects, they often have a sense that the vendor should have behaved in a more ‘partnership’ manner, co-operated more effectively and warned them as to what types of behaviours (between the vendor and the client) would assist or detract from reaching their key objectives… a fit for purpose system, benefits realisation and a strong on-going working relationship between the client and its vendor.

New Court Rulings to the Rescue…?

There have been a number of court rulings (as detailed in the aforementioned white paper) that help to clarify the responsibilities of specialist IT, managed services and outsourcing vendors.

Hot on the heels of these rulings have been a further two that can help clients in their relationships with large specialist vendors in a more general sense. But one needs to be mindful: there are some conflicting aspects of these judgments, so great care needs to be taken when implementing any of the ‘lessons learned’ from these rulings.

‘Good Faith’ in Contracts

‘Good faith’ in contracts. What is it, how does it work and why does it matter when you have a big IT implementation that isn’t working?

Quite simply – combined with other lessons learned from other court rulings, the clarification of Good Faith is critical.

Often disputes and misunderstandings arise in complex projects, such as ERP and EPR implementations when one side misinterprets one or more major aspects of what the project will deliver for them. Clients expect vendors to act in ‘good faith’ and act in the client’s interests when misunderstandings occur; and then feel the vendor is being disingenuous when out comes a chargeable change variation for requirements that have been misunderstood by the vendor.

One must be clear that there is a difference between ‘expert responsibilities’ and ‘good faith’ in IT and outsourcing contracts. In the former, these responsibilities are implied into contracts where a vendor represents itself as an expert in its field. As stated earlier, a vendor cannot practically ‘contract out of’ these responsibilities if it behaves as an expert.

However, two recent court rulings have come along despite the fact that good faith is not usually implied into contracts under English law. In these cases, good faith working between the parties has been, (a) expressly enshrined in the written contract between the parties, and (b) the governance in operating the behaviours of both parties in delivering the systems/services under the contract has evidenced ‘good faith’. The former (a written obligation in the contract) without the latter (behaviours of both parties) means you will be unable to rely on good faith as a general principle in the contract, just because your contract terms state it.

The cases are:

  • Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust [2012] EWHC 781 (QB)
  • Yam Seng Pte v International Trade Corporation Ltd [2013] EWHC 111 (QB).

It is important to note that, in general terms, English law, in respect of the key principles of ‘good faith’, is not in line with other jurisdictions. Unlike other courts, the English courts have been reluctant to impose a general and wide duty of good faith in commercial contracts; they will often take a very narrow view of such responsibilities. Please Note: Although expressly written good faith contract terms are usually enforceable providing one or more parties are behaving in a good faith manner, English courts are renowned to withhold any ‘widening’ of their interpretation in the areas to cover by good faith.

Lessons to be Learned

The main take-aways from both of these cases are:

1. Ideally, don’t rely on ‘good faith’ as an implied contractual right. The courts have trouble trying to ‘widen’ what the responsibility of good faith should and should not apply to. Why? Because judges, solicitors and barristers are not ‘operational’ people who deliver your operational services, so to put it simply, these issues and where they apply are a bit ‘hit and miss’ according to the judge you get on the day.

What to do; the written contract should include specific provisions for acting in good faith, but most importantly, your operating governance of the relationship should demonstrate that at least one of you is genuinely behaving in a good faith manner. In that way, you have more chance of, (a) making the relationship actually work, (b) if matters do fail, you’ll at least have the evidence that you tried your best, in practical terms, to help get things working, and (c) you are more likely to be judged as acting in good faith and, therefore, more likely to have this taken into account when someone is considering whether good faith is part of your deliverables within the contract.

2. If the good faith behaviours of both sides are in question, then you are better to rely on the vendor’s expert responsibilities. Whilst there are very similar parallels between what most people view as good faith and an expert vendor’s responsibility to have a ‘duty to warn’ (these are often confused in terms of application), there is far more and less conflicting case law supporting the expert responsibilities of specialist vendors, than there is for good faith contracting.

What to do; ensure you have a pre-project methodology that encapsulates how to contract for the vendor’s advice (expert responsibilities) that can be translated into your operating governance. This will avoid most material misunderstandings during the implementation of the project.

In Summary

So in conclusion, whilst there are general principles being applied in terms of expert responsibilities in most court judgments, do bear in mind the following:

  • Despite these cases, if you do find yourself in a dispute or misunderstanding with your IT, managed services or outsourcing vendor, I would be very wary of trying to argue a point that a general duty of good faith applies under English law just at the current time. Judge’s opinions are divided on this principle.
  • The above said, these cases do suggest that the courts are moving in a direction, that subject to certain specifics within your written contracts and how good faith behaviours are operating between both parties, then you may well have something to argue if you feel your vendor is not acting in your reasonable interests.
  • If you do wish to improve your chances of being able to rely on a general principle of good faith between you and your vendor, then, (a) ensure you compile a due diligence process that enables good faith to work practically in your relationship, (b) set out these operating processes expressly within the written contract terms, and (c) make sure you not only operate but also monitor/measure your ‘behaviour’ so that good faith operates as part of your day-to-day delivery mechanism.

If you follow the above guidelines, it will be unlikely issues will escalate to the point where you need to rely on these contract terms in any event.

Photo credit: Shutterstock