New contract to limit liability for failed IT projects

Law firm Masons is working with users and suppliers to draw up a legally-robust standard IT contract that could help contractors to limit the damages they face after a computer project disaster.

The move comes after two High Court judgements effectively ruled as unreasonable and invalid "limited liability" clauses that seek to limit the amount of compensation a supplier has to pay if it loses a legal battle with a customer.

Masons, which has represented companies involved in major IT disputes, said the judgements could have an adverse effect on users as well as suppliers.

Richard Stephens, a partner at Masons, said users have a vested interest in limiting the liability of suppliers because huge damages could lead to a contractor going into liquidation. The user may then be unable to recover all of the compensation, damages and costs awarded by a court.

This is what happened earlier this year when an IT supplier Wang was ordered to pay more than £9m in damages after a judge said its performance had been "disastrous" when delivering new systems to plumbing goods company Pegler. Before paying, Wang went into voluntary liquidation (Computer Weekly, 27 April).

In a separate case, South West Water versus ICL, a judge refused to uphold the supplier's limited liability clauses. He ruled that the clauses were unreasonable under the Unfair Contract Terms Act 1977.

Masons believes that a new standard contract, which is drawn up as a collaborative venture with users and suppliers, can successfully limit liability if a dispute comes to court. This is because a supplier can argue that the contract was in effect a joint venture, not a deal in which a powerful contractor imposed its terms and conditions on a weaker customer.

Colin Palmer, director of the Impact Programme of major IT users, said he welcomed clarity in a standard contract, especially if it discouraged both sides from taking a dispute to court. However, for cases where legal action is unavoidable, realistic allowance must be made for the losses a user may suffer in an IT disaster, he added.