15 February 2011 | Peter Brudenall
A contract dispute between diamond trader De Beers and IT services provider Atos Origin should be a lesson to buyers and suppliers to support one another to avoid problems, says Peter Brudenall.
Atos Origin were contracted in November 2007 to deliver a supply chain management system to De Beers. It was a fixed-price, £2.9 million contract and the parties agreed they would use an iterative, "agile" method for developing the software, which requires both parties to work very closely together, sharing information and ideas, and testing each stage of development. De Beers needed the system by mid-2008.
In short, the contract did not progress well. Although it had been preceded by an initiation and analysis period, Atos had struggled to understand the complexity of De Beers’ requirements and progress fell behind schedule. This was not entirely Atos’ fault. When it came to court in December the judge made clear he thought the delays were caused at least in part by De Beers changing the scope of the project. But as a result of the delay, De Beers decided to withhold a key milestone payment.
In response Atos threatened to stop providing any services unless the contract was renegotiated to reflect the increased scope and that the outstanding payments were made. With De Beers unwilling to renegotiate or pay the money due, Atos’ project staff suspended work and handed in their security passes. No further work was performed by the supplier on the project.
Both parties claimed the other had repudiated the contract. That is, they both thought the other had, by their actions and stated intentions, breached the contract by indicating that they did not want to be bound by it. Repudiation entitles the innocent party to sue for damages.
Although the judge thought De Beers was not entitled to withhold payments, this fell far short of amounting to repudiation. However, the judge did find that Atos had wrongfully repudiated the contract by suspending work as, although they were willing to complete the project, they had made it clear this was conditional on the contract being renegotiated. In other words, they were only prepared to work on their own terms.
Atos did in fact have the right under the contract to suspend work for the failure by De Beers to pay. However, the manner in which the IT supplier had communicated its desire to suspend services unless the contract was renegotiated meant they were clearly unwilling to continue with the existing contract, and therefore they were not seeking to exercise their existing contractual rights.
The judge was highly critical of both parties' conduct. De Beers had failed to provide senior staff with sufficient time commitment to Atos and changed the scope of the project. Atos failed to appreciate the complexity of the project and did not appear to commit sufficient experienced staff to it. The process for developing the software was also highly dependent on De Beers being fully co-operative.
Lessons to be learnt
Although it often appears attractive to buyers to try to transfer the risk of understanding the complexities of the customer's business to the supplier, it is often incredibly difficult for the vendor to fulfil this requirement, and any failure to do so can result in major problems for both parties.
In this case, De Beers suspected from the beginning that Atos had underestimated its requirements and should have been more proactive in mitigating the risks of this gap in understanding. De Beers relied instead on what has become a frequent practice in IT and outsourcing contracts - letting the supplier fail even though the customer sees the failure coming, rather than trying to prevent such failure by providing greater support.
The case shows suppliers the importance of understanding the buyer’s business before committing to a contract. If the understanding of the business is less than ideal, vendors should consider whether they have the expertise to fulfil the contract and should consider avoiding a “fixed fee” model in such settings or committing to firm deadlines for delivery.
Moreover, detailed, enforceable, and actively managed obligations of support and co-operation from the customer are essential whenever project performance depends in part on customer personnel participation. In circumstances where the buyer is not providing support in accordance with the contract, this needs to be stated clearly and they must be reminded of their contractual obligations.
☛ Peter Brudenall is a partner in the commerce & technology practice at LG Legal