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Technology and Outsourcing Hot Spots Series: Introduction and Pre-Contractual Negotiations

Olswang partner Jonathan Choo
Olswang partner Jonathan Choo
Olswang associate Shaun Lee
Olswang associate Shaun Lee
In this knowledge partnership series, Olswang Singapore-based partner Jonathan Choo and associate Shaun Lee examine the legal issues related to outsourcing contracts and the pitfalls parties should be aware of even during the pre-contractual negotiations.

Information and Communications Technology (infocomms for short) is one of the emerging key industries powering India’s economic growth and development. Between 2004 and 2010, the sector has averaged at least 20% growth year-on-year and now accounts for over 5% of India's GDP.

But just as infocomms provides the backbone of most major systems across other sectors and industries, these companies are themselves looking to so-called managed services to outsource or otherwise automate non-core functions like IT support, accounts or even the maintenance of operations equipment. Whilst these initiatives tend to result in significant cost savings and better enable companies to focus on their core businesses, there are still some risks involved.

For example, in design and development projects, typical disputes that arise include delay claims and failure to meet technical specifications. In outsourcing/managed services contracts, common complaints include failure to meet service level agreements and pricing disputes. These issues highlight the importance of pre-project scoping and in particular the need to be explicit in setting out the details of the work involved. In this regard, boilerplate clauses of particular importance would include entire agreement clauses and appropriate limitation of liability.

Prior to the formation of a contract, representations are already being made at every stage from customer to vendor and vice versa, whether as to the scope of work or as to the capabilities of and resources available to the vendor/supplier. Problems arise when representations which are made (and which parties rely on), do not find their way into the final agreement.

There is an extensive range of representations which may be classified as misstatements. On one end of the spectrum, this involves representations that are negligently, even fraudulently made. On the other end, it might involve statements that the law does not consider to be representations at all i.e. opinion or mere advertising puff.

This Technology and Outsourcing Hot Spots series will focus on identifying and resolving some of the more common pitfalls and problem areas in typical contracts involving technology and outsourcing.

This post provides an overview of the extent of losses that a company may suffer as a result of (perceived) misrepresentations at the pre-contractual stage. Both customers and vendors should be aware that managing disputes starts at the contract drafting stage.

Subsequent posts in this series will address the following topics:

  • Governance and change issues including variation orders and clauses, price review mechanisms and the enforceability of an agreement to negotiate in good faith any further price changes.
  • Dispute resolution issues including the drafting of appropriate dispute resolution clauses and post-termination issues like post termination migration assistance.

The Costs of Failure and Litigation

There have been a string of prominent infocomms disputes where pre-contractual representations have resulted in substantial losses to the parties involved. In BSkyB Ltd & Anor v HP Enterprise Services UK Ltd & Anor [2010] EWHC 86 (TCC), the CRM project in issue was tendered to HP at the sum of about £47.6 million in August 2000 and was due for completion in 2001. The project was only eventually completed in a more limited version on 31 March 2006 and at a cost of £265 million to BSkyB.

BSkyB eventually sued for £709 million in damages alleging that a series of negligent and fraudulent misrepresentations had been made by one of the vendor's personnel. The trial itself took 10 months and the final decision ran to 450 pages. The court held that HP was guilty of making fraudulent and negligent misrepresentations to BSkyB during the tender and awarded BSkyB interim damages of £270 million. HP eventually settled at £318 million inclusive of legal costs.

Issues of pre-contractual negotiations and representations – entire agreement clauses

A party may not be able to rely on a pre-contractual representation which does not find its way into the contract. The entire agreement clause(s) in the agreement should make it clear to parties that their obligations are contained entirely within the written agreement. Courts will rarely, if ever, rewrite a contract and the onus is on the customer to ensure that its desired specification finds its way into the written agreement.

However, the English courts have explicitly held that an entire agreement clause must have clear explicitly wording before it can be relied upon as a defence to misrepresentations. In contrast, the Singapore High Court has been receptive to the argument but has not come to a decision on this issue.

In the Singapore case of PT Panasonic Gobel Indonesia v Stratech Systems Ltd, [2009] 1 SLR(R) 470, the dispute involved the failed migration by Stratech, a Singapore main board-listed IT and consultancy firm, of Panasonic’s legacy system to a ERM system. The total cost of the project was $2,766,000, but after numerous delays and having paid the full amount Panasonic did not have a working system. Panasonic was unable to prove that Stratech had made any misrepresentations. This was because the court considered that the representations relied on were so-called marketing puff which could not form the basis of a misrepresentation claim.

Limitation of Liability

Limitation of liability clauses are another important boilerplate clause used by vendors to limit their liability to the customer should issues arise. We have already discussed some of the issues relating to the use of limitation of liability clauses in a previous post. Limitation and exemption clauses are to be construed strictly – if a party seeks to exclude or limit his liability, he must do so in clear words.

It should also be noted that even in commercial transactions between two business entities, the Unfair Contract Terms Act (Cap. 396) could apply such that any limitation or exculpatory clause will be subject to the reasonableness test.

Importance of thinking about and managing disputes

The test for the meaning of any representation is objective. It requires the judge to determine what the reasonable person in the position of the representee would understand by the words used. Subjective matters are only relevant to the representee’s knowledge and reliance on those representations. Hence, from a disputes perspective, the benefit of specialist dispute resolution fora is significant. An understanding of the industry and of the manner in which such massive projects are “scoped“, tendered, awarded and generally done is critical. Judges/arbitrators who have technical or specialist backgrounds are better able to appreciate the nature of the disputes and the evidence led on what generally are highly complex contracts.

Managing and avoiding disputes starts when the contract is drafted. Disputes usually arise out of parties’ erroneous or unspoken expectations. The result manifests itself as objectives not found in the scope of work and/or subsequent feature and scope creep. This can be due to ignorance (because of a failure to carry out proper requirement analysis and scoping work) or because the vendor/supplier’s marketing side has oversold its goods (often to the chagrin of the technical team).

For more information, see our introductory post where we explore the growth of technology and outsourcing contracts. In the first part of our series, we delve into the overarching considerations that parties ought to keep in mind as they negotiate a contract and formalise the agreement that they have reached.

Jonathan Choo is a Partner and Head of Arbitration & Dispute Resolution at Olswang Asia LLP. Shaun Lee is an Associate; Arbitration & Dispute Resolution at Olswang Asia LLP.

Olswang Asia, based in Singapore, is a full service law firm particularly focused on advising businesses in the Technology, Media and Telecoms industries. For enquiries or further information, please email , or contact Olswang Asia at +65 6720 8278.

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