10 tips for protecting your legal rights when a project goes pear-shaped

Practical measures CIOs should take when an IT project first gets into trouble to preserve their organisations' rights when a project goes seriously wrong.

As reported in <I>CIO</I> online in June, the latest CHAOS Summary report from The Standish Group has shown an increase in IT project failure rates during the past two years. According to the report, less than a third of IT projects in that period were considered successful. The rest were either considered to be failures or “challenged” -- they finished late, over budget or with less than contracted specification. This reverses the previous trend of more projects being regarded as successful each year.

You want a working IT system, not a lawsuit, and your supplier wants a happy (and paying) customer, not its name splashed on the front page of the business papers

A number of reasons could be speculated for this, and the GFC could be playing a part. In particular, customers with very constrained IT budgets are now more likely to call a halt on a project which they perceive as unlikely to be successful, rather than persevering or resigning themselves to accepting a substandard result.

When a project does fail, the parties will usually consider what their legal options will be as a result of the failure. In our experience, customers often find that their rights at this stage are not as strong as they should be, due to mistakes they made in the course of the project. This often leads to the customer not getting the settlement they deserve.

There are some practical measures that can be taken when an IT project first gets into trouble, in order to preserve the customer's legal rights if the project does go seriously awry. Of course, it is always necessary to temper the measures taken to protect legal rights with the practical realities of trying to run an IT project through to successful completion. You want a working IT system, not a lawsuit, and your supplier wants a happy (and paying) customer, not its name splashed on the front page of the business papers as the guilty party behind another IT debacle. At times the desire to complete the project successfully may mean that it is not practical to take some of the steps below. However, the aim should be to ensure that the legal rights are identified and waived in full knowledge of the consequences, rather than simply being lost inadvertently.

1. Don't terminate the contract in haste

When a project is in trouble, a common reaction is simply to 'can the whole thing' and terminate the contract. To avoid a big problem getting even bigger, you need to pause before taking such a course. It is possible that the current problems with the project are just a hiccup and with a bit more time and possibly a change in a few key people, the project is able to get back on track. Even where this rose-coloured view is not justified, you still need to check that you do in fact have the right to terminate the contract at that time. If you terminate the contract without having the right to do so then you will be found to have breached the contract, and be liable to the supplier for the consequences. Suddenly you will find that you have shifted all the legal leverage from your side of the table across to the supplier.

Unfortunately, it is not always straightforward to determine whether you do have the right to terminate the contract. If you are terminating under a termination clause in the contract then you need to ensure that you fit within the literal terms of the clause and that you are exercising your rights under that clause for the purposes for which they were granted. If you are terminating outside the contract terms, at common law, then the task is even more difficult. Under current High Court authority, you need to analyse both the clause very carefully and also ensure that the breach is sufficiently serious to justify terminating under that clause. This can often be a very tricky exercise, and getting it wrong will be very expensive.

2. Exercise any termination rights that do arise promptly, or accept that they have been lost forever

Once a termination right has arisen under a contract, you need to exercise it quickly. At law, a termination right will be lost if the innocent party takes some action that is inconsistent with the exercise of that right. In consequence, if you let the contract stagger on for a while after a termination event has arisen then you are likely to have lost forever the right to terminate for that event.

It can often be tricky reconciling this tip with the previous tip. Ultimately it comes down to having good decision-making processes in place so that when a termination right does arise, the customer is able to decide quickly whether to exercise it or accept that it has been lost forever.

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