Preventing IT contract disputes

Posted: 20/03/2012

An IT dispute can be disastrous for businesses. The disruption caused when systems are down can be immense and costs can spiral quickly as resources are diverted to handling the issue. In this article, which is also published in the latest issue of The Business Magazine, Nicole da Silva looks at areas where problems commonly arise:

Urgency - for good business reasons, the client needs to launch a new system as quickly as possible. This can result in the parties implementing the project without fully agreeing its scope, timetable or price.

Scope - although the scope of the project is generally defined in the contract, often it evolves as the project progresses ('scope creep'). Scope creep can be exacerbated if the client does not properly explain its requirements or fully understand the supplier's proposal.

Milestones - often IT contracts have 'milestones' which trigger payments. Disagreement over whether milestones have been reached can lead to disputes over payment.

Termination - many IT disputes arise from a party's attempt to terminate the contract. Usually, the contract will allow termination for 'material breach'. What constitutes a material breach is a frequent area of contention. Other disputes arise over obligations after termination or whether a party's actions are tantamount to a rejection of the contract.

How to avoid the most common pitfalls

The simple answer is clarity: 

• clearly define scope, milestones, when a party can terminate and the parties' duties, including after termination;
• clients should consider hiring a consultant to assist in defining work specifications and supervising performance, if in-house expertise is not available; 
• suppliers should not 'down tools' at the first onset of a dispute, to avoid inadvertently putting themselves in repudiatory breach;
• be conscious that the inherent nature of IT projects involves change, and build in flexibility where possible. Consider an overall price cap rather than a fixed price or a window within which go-live will take place. Also, take care to ensure that milestones set are realistic;
• as the client, try to ensure the contract is tailored to your specific needs. If IT providers have tendered for the work acting on their standard terms, compare those terms. Look out for exclusion clauses or clauses limiting liability. The lowest headline cost may not be the best solution; 
• think carefully about governing law and dispute resolution clauses. Alternatives to court action, such as mediation, arbitration or expert determination should be considered;
• ensure that you are in a good position to address a dispute, with a clear document retention policy. This includes documents which may be stored on employee-owned devices (BYOD). Such policies will help you deal with the disclosure process in litigation. 

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