New Zealand: Lessons from De Beers' IT contract meltdown

Brief Counsel

The acrimonious collapse of the contract between De Beers UK and Atos Origin IT Services to upgrade De Beers' diamond supply chain management software systems provides some useful lessons for New Zealand businesses in how to manage contractual relationships.

This Brief Counsel focuses on those aspects of the UK judgment which have a general relevance beyond the particulars of the case and beyond the IT sector.

De Beers v Atos IT Services

After winning the De Beers (DB) tender, Atos entered a six week preliminary Initiation and Analysis Phase (IAP) to familiarise itself with DB's unique business requirements before committing to a fixed price contract in November 2007. Requirements Definition Documents were to be developed specifying the functions to be provided and the high level design for the project. But the IAP did not go well.

The meetings with DB were unstructured affairs in which the DB side often disagreed among themselves about exactly what was wanted. Further, the Atos team's conduct of this stage did not impress DB, setting up a poor dynamic for the working relationship.

Despite these difficulties, Atos decided to plough on and "make assumptions" about what the work would entail. In doing this, Atos took the risk that those assumptions might prove wrong.

Things did not go well under the main contract either. It quickly became evident that Atos had under-estimated the complexity and intricacy of the job, and the scope of the project kept expanding as new process requirements were introduced. These problems were exacerbated by the limited or non-availability of key DB staff and by the lack or late provision of information from DB.

As a result, the project fell steadily further and further behind schedule until things came to a head in March 2008 when:

  • Atos advised DB that it would not be able to meet the contract delivery date and would need to "fundamentally revisit" its design, build and test plans, and
  • DB refused to pay an Atos invoice citing dissatisfaction with the delays and the quality of the service being provided.

Some efforts were made to renegotiate the contract over the next few weeks but they were unsuccessful and, on 6 June, Atos suspended all work. DB then sued Atos for damages.

The contract

Atos had a limitation clause stating that the supplier would not incur liability, and that delivery dates would be extended by a reasonable period, if delay was caused by:

  • any act or omission by the customer, its servants or agents, or
  • any cause beyond the supplier's control.

The supplier would also be able to charge for any losses or extra costs incurred due to:

  • the scope of the project being increased
  • the project plan being lengthened by reason of such a delay, and
  • failure by the customer to comply with its obligations under the agreement.

46 change requests were still outstanding when the dispute came to court so had to be addressed as part of the proceedings. As a result, the decision contains some interesting commentary on which changes should be accommodated within a fixed contract price and which require a fresh negotiation.

There are two types of change that may increase the scope of work in a project:

  • changes in breadth, where new functionalities are introduced, and
  • changes in depth, sometimes referred to as "scope creep", which add scale and complexity to work falling within the agreed requirements, but do not introduce new functionality.

The decision

The court found that there had been a clear change in breadth when the project was expanded to include the "splitting" phase of the diamond sorting process and this had been dealt with through a Change Request, under which DB had accepted that Atos was entitled to claim additional costs.

But most of the other changes had arisen from Atos's initial under-estimation of the project's size, and the Court found that DB - having acted reasonably in agreeing to the IAP - was thereafter entitled to leave Atos to assess the risk for itself:

In my judgment, Atos went into this contract with its eyes at least half open, in the sense that it knew or should have known that it had not acquired a good grasp of the detail of DB's diamond sorting and aggregating processes and that consequently a great deal of work remained to be done in the way of gathering the detailed requirements, with consequent implications for the development of the design – both in terms of time and resources".

The contract required DB, among other things, promptly to provide Atos with complete and accurate data relevant to the project and to ensure that the staff assigned to the project had the appropriate skills and experience.

However, although the Court accepted that there was "plenty of evidence" to show that DB had been remiss on both these counts, it found that DB had not repudiated the contract and that Atos had not properly invoked the breach provisions.

  • At no stage before the letter of 21 May 2008 threatening suspension had Atos put any complaint in writing about breaches of contract, let alone under the clause dealing with termination and material breach.
  • While Atos had complained a number of times during the life of the project that the detailed process requirements were far more extensive and complicated than it had envisaged, it had done this in pursuit of claims in respect to changes to the scope of the work rather than as a claim for breach of contract.

Atos was entitled to suspend work until the invoice was paid but it did not invoke this provision. In the Court's view, Atos did not pursue this option because "if the work was suspended for any longer than one week it would become very difficult to put the project back into motion" without incurring further delay and significant cost.

Instead, Atos threatened that it would suspend all work unless DB:

  • waived all claims against Atos in relation to Atos's missed deadlines
  • renegotiated the contract, and
  • paid the outstanding bill.

The Court ruled that these demands did not reflect Atos's contractual entitlement. It was not undertaking to perform the contract but to renegotiate it, and that amounted to repudiation:

"There is a very significant difference between being willing to complete a project, and being willing to fulfil a contract. Atos may have been prepared to do the former, on its own terms, but that was itself inconsistent with a willingness to do the latter".

The damages award

The Judge found that Atos breached the contract deliberately "and that amounted to both wilful and deliberate default".

After the contract was terminated, DB updated its legacy systems and obtained a quote from another provider for a new system. But at the time of the trial, there was "not a single piece of evidence" to suggest that DB planned to resurrect the project in the near future.

Despite this, the Judge awarded DB the cost of building a replacement system and the in-house costs incurred by DB's IT staff to modify and support its existing system.

Take-outs for contract management

Although DB is a unique business, and this uniqueness contributed in no small part to the project difficulties, there are lessons of general application to be drawn from the contract melt-down.

  • Scope the project thoroughly before agreeing to a fixed price and do not proceed to implementation until the scoping exercise is completed to both parties' satisfaction. None of the Atos analysts ever visited a DB site and DB later acknowledged internally that it should have offered them a diamond industry familiarisation course.
  • Commit sufficient resources to the contract, including staff with appropriate seniority and skills. Neither Atos nor DB did this. Atos was forced to beef up its project team again and again as the project slipped further and further behind and key DB personnel were often not available, probably reflecting a lack of direction from senior management.
  • Ensure the contract contains appropriate provisions to address proposed changes to the scope of the project.
  • Understand which increases in scope will entitle you to additional payments. Depending on the terms of the contract, you may be paid only for those increases in scope which add new tasks, not those which simply add complexity and scale.
  • Ensure that you have appropriate termination provisions.
  • Be careful in exercising your right to suspend the contract. Ensure that the relevant trigger has been activated and follow to the letter any processes specified in the contract. Atos was undone because it over-reached and tried to use the threat of suspension to re-open the contract negotiations.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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