Contractual disputes between IT users and suppliers are on the rise as IT budgets are squeezed and suppliers strive to boost profits. Earlier this year high-profile court cases between National Air Traffic Services and EDS, and United Assurance and Unisys were both settled out of court, but only after millions had been spent on legal fees.
Fortunately for IT directors, going to court is not the only option when a project falls apart because a supplier has underperformed. There are an increasing number of methods to resolve disputes. One of them, arbitration, is becoming increasingly popular, being a faster, cheaper and more discreet alternative to going to court.
"For a business, the main advantage [of arbitration] is the fact that it is private," says Gregory Hunt, mediator manager in the dispute resolution services division of the Chartered Institute of Arbitrators. "It is also quicker than going to court and more cost-effective."
The confidential nature of arbitration proceedings is one of the primary reasons for its increasing popularity. If a supplier has produced a defective system, they do not want that fact broadcast to the world at large, which can be the result of a court hearing. Likewise, the user may not want people to know they have a bought defective system. With arbitration, no one need even know of the existence of a dispute. Companies also protect themselves from having to reveal confidential and sensitive information in open court.
If the dispute concerns the implementation of an ongoing project it is in the best interest of both parties to have it resolved as soon as possible so that work can be resumed, without having to wait months for a court date. The speed of arbitration and the cost savings in having issues resolved more quickly are major benefits.
The Chartered Institute of Arbitrators is creating low-cost arbitration services specifically for IT users and suppliers. Working with the IT lobby group Eurim, E-centre and the Internet Service Providers Association, the institute is developing online dispute resolution services. It has taken the lead on Eurim's fair dealing workshop, which started life as Computer Weekly's anti-stiffing campaign.
Philip Virgo, strategic adviser to information management professional body the Institute for the Management of Information Systems, says IT arbitration services are a big growth area as end-users are demanding more comprehensive contracts and chasing a settlement when any project hits problems. "The IT industry is catching up with the rest of the world in terms of good practice. It is becoming more business-like."
Many IT customers are no longer willing to sign contracts that let suppliers off the hook should the work be faulty - they want watertight contracts that promise redress should anything go wrong. "Customers now look at a contract and they don't want ones with one-way get-out clauses. They want an agreed procedure for handling any problems that crop up," Virgo says.
He puts it down to the industry's decline in fortunes, which has acted as a sharp reminder for suppliers. "The complexity of projects and all the small print are now significant obstacles to sales of innovative software and services. The IT industry has to sell to meet business needs in a way that many people in IT had forgotten."
Suppliers which will not provide the safety net customers want should remember that there are plenty of other suppliers these days who might, Virgo warns.
How a project turns into a battle
IT adviser Michael Turner gives a fictional example of a contract dispute
A computer systems project emerged from its embryo phase into a full-blown development without the benefit of:
- A systematic evaluation, and risk assessment
- An informed decision about the feasibility of the project
- An effective definition of the contract deliverables, project timescales and project costs
- A contractual definition of the expected business benefits
- A contractual specification of functional requirements, at sufficient detail to assist the resolution of subsequent disputes over functionality.
The project was doomed to fail and drifted out of control for several years. The original arguments over the causes of the problems evolved in to full-blown litigation without the benefit of a systematic evaluation of the failure of the project or a conscious and informed decision about how to resolve the dispute, based on an independent assessment of the likely outcomes, timescales and costs.
The litigation was doomed to failure and it, too, drifted out of the parties' control for several years. At the end of the experience, the default resolution process had been far slower, taken far longer and cost infinitely more in both management time and money than had originally been anticipated. Both parties were dissatisfied with the lose-lose outcome.
It may be difficult for the parties engaged in a computer systems contract to recognise that a dispute exists but the point at which the project is first referred to lawyers for advice is when an independent assessment of the appropriate means of resolving the dispute should be considered. Experienced expert witnesses can be uniquely qualified to give independent advice on whether the project is salvageable and advise on the most important decision facing the dissatisfied customer - this is, "Do I want a working system and an ongoing relationship with this system supplier or do I want to abandon the project, exit the contract and try to get (some of) my money back?"
Six ways to solve your IT contract problems without recourse to the courts
Arbitration is a legally binding process, more powerful than a court judgement in international disputes because the arbiter's verdict has international authority. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards states that countries signed up to the legislation - and there are about 120 - are legally bound to comply. Both parties involved in the arbitration have to put their side to the arbiter and hand over any evidence. The arbiter assesses the information and decides on reparation. Arbiters are often prepared to travel and the Chartered Institute of Arbitrators is also looking at developing videoconferencing for international disputes.
- Alternative dispute resolution is a non-binding process that aims to get parties to consider the wider implications of the dispute and not just the legal position. The institute is looking at the application of alternative dispute resolution procedures to e-commerce and software and services contracts
- Negotiation is the most common form of dispute resolution with the parties attempting to settle disputes themselves
- In mediation an independent third-party is on board, but it is the parties involved who decide the settlement. Mediation is only legally binding once an agreement has been reached and a contract signed. Mediation is ideal when you want to maintain a business relationship. It is often used if there is more than one item in dispute. The mediator may help to resolve some of the issues while others go to arbitration. Mediation is successful in 80%-90% of cases, although it will only work if both parties are genuinely interested in finding a solution
- Conciliation is similar to mediation, except that the conciliator is able to propose a solution
- Early neutral evaluation is when a judge or some other independent person assesses a case and gives their opinion on the likely outcome of a trial - it is not binding
- Expert determination is one of the faster and more cost-effective ways to address technical disputes. The third party is usually an expert in IT and the expert's decision is legally binding.
The online solution
Recently, the Chartered Institute of Arbitrators has been developing online arbitration services as a quicker, simpler and cheaper way to resolve disputes. It starts with an Internet application form completed by one of the parties. The institute compiles the documentation and sends it on to the other party, who submits a defence and all the documentation is sent to the arbiter, who makes a decision.
The detached nature of online arbitration can be a drawback, as arbiters and mediators often rely on body language and behaviour to help them to assess the situation. But this need not be a problem with the more straightforward, strictly technical issues.
The institute plans to base its new IT services on the Computer Software Solicitors' arbitration scheme, which was created to clear up disputes between IT suppliers and law firms. Anyone signed up to the new scheme will have access to one of 75 IT arbitration specialists.
"People are beginning to want specialist technical arbiters," says one top arbiter. "You want a technically-qualified arbiter who knows the right questions to ask. It is particularly valuable as there is a growing use of expert evidence.
"You do not want to have to train a judge about IT. It is easier for a technically-qualified person who has worked with computers for 10 years to learn the rudiments of contract law and arbitration law than for a barrister who has been practising for 10 years to learn about IT."
ADR Group - specialises in alternative dispute resolution, www.adrgroup.co.uk
Cedr - Centre for Effective Dispute Resolution, www.cedr.co.uk
Chartered Institute of Arbitrators, www.arbitrators.org
City Disputes Panel - international dispute resolution centre, www.disputespanel.com
London Court of International Arbitration - international dispute resolution centre, www.Icia-arbitration.com/Icia