Drawing up contracts with suppliers has always been a tricky task. The process could become even more complicated if ICL loses its legal battle with South West Water (SWW) over a failed customer billing system. Evidence heard in the original case - which is now subject to an ongoing appeal by ICL - shows that all suppliers and customers in IT purchasing contracts have important lessons to learn. How it all started In September 1994, SWW and ICL signed a turnkey agreement and a project management and training agreement for just under £3.6 million. The agreements were for the supply and support of a system intended to rationalise SWW's customer service function. The system was scheduled to go live by 31 October 1995. ICL delivered the hardware in accordance with the agreements, which SWW duly paid for. But it became clear to ICL that it could not supply the software on time because of the disparity between the amount of work required and the amount of work it could deliver for the contract price. The utility was not made aware of the problem until October 1995 when ICL said it was unwilling to commit to any timescales other than an overall target of delivering a system to enable live billing in February 1997. On 28 November 1995, the agreements were varied. SWW agreed not to terminate the contract if ICL could deliver by 6 October 1996. This date slipped more than once. SWW terminated the contract on 5 March 1996 and began legal action. In July 1999, the Technology and Construction Court ruled that ICL's misrepresentation of a back-to-back contract with a third party, plus the delays to the project, entitled SWW to: - Terminate the contract - Have all its money back - Recover damages. The word 'damages' has far-reaching implications for suppliers failing to deliver, and should send a wave of fear over anyone involved in a delayed project. In this case, damages include all direct losses that flowed from ICL's failures, together with all consequential and indirect losses. SWW is still totting up its final bill, but one often-forgotten direct loss will be loss of working capital from the interruption to standard billings. Substantial claims could be made, but suppliers and customers have the power to prevent themselves and their next business-critical project from ending up in such a costly mess. Lessons to be learned There is no substitute for a properly negotiated contract which spells out the parties' rights and obligations. Customers should not avoid negotiations in the hope that they can argue that a supplier's exclusion and limitation terms are unreasonable and unenforceable. This case reinforces the need for constant communication. A major issue for suppliers is standard limitation and exclusion of liability clauses. Every supplier should review its standard wording. ICL had included: - A 90-day system warranty, which could not apply because no system was delivered and accepted - A limit of £1 million for physical loss or damage - A limit of £250,000 for all other losses - A limit of the contract value for rejection of the system, which again could not apply because no system was delivered. The two financial limits were standard wording. However, the judge ruled that these limits had to be tested for reasonableness. The amounts had to be contrasted with the contract price of more than £4 million plus ICL's resources for meeting liabilities. As a result, ICL had to accept unlimited liability towards SWW. Contracts should clearly define limitation and exclusion liabilities. Both parties should remember that: - Suppliers are always liable for direct losses. These are the losses that flow directly from the cause of action, many of which may be consequential in the ordinary sense of the word. Limits to this liability are very important to suppliers - 'Consequential' losses are only indirect losses, and it is important to specify if these 'indirect and consequential' losses are to be excluded - As many suppliers find it difficult to include negotiations on standard clauses such as limitations and exclusions, they should ensure their clauses pass the test of reasonableness. Legal advice is needed to establish what this means. For example, suppliers should note a £250,000 limit for a contract worth more than £3 million may not be deemed reasonable. Conclusion This case will stand as a good precedent for some time and negotiators better take note. However, elements of the case may be reviewed in the appeal courts. Suppliers can rightly, in my view, look forward to a time when a negotiated contract is a negotiated contract even when some clauses remain unamended from the supplier's first draft. - Nigel Wildish is partner at the IT and online law group, Field Fisher Waterhouse Solicitors, London ([email protected]). A longer version of this article can be found at www.vnunet.com.
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