Digital Transformation – why good contract governance is essential?
For lawyers, negotiations for a technology services contract often focus on a small number of key clauses. Liability and termination provisions and warranties and indemnities, for example, are (rightly) near the top of most key issues lists. Provisions that are more operational (such as governance, customer dependencies and change control process descriptions) are often pushed to the back of the queue. They’re not always given the attention they merit and are sometimes considered almost as an afterthought at the end of a long negotiation process.
A recent Scottish case, Agilisys Limited v CGI IT UK Limited (2018 CSOH 112), has highlighted the importance of some of these less heralded sections of a technology services contract and examined how a supplier might successfully apply for relief on the back of customer failures. Although this is a judgment of a Scottish court, the principles considered will be relevant to contracts governed by English law.
The facts of the case
In 2015, CGI IT UK Limited entered into a contract with City of Edinburgh Council (CEC) under which CGI agreed to provide various digital transformation services to CEC. CGI, in turn, delegated certain of its duties to Agilisys Limited under a separate subcontract. Agilisys had agreed to replace three legacy finance, procurement, reporting and human resources systems with one consolidated enterprise resource planning system and to implement an online platform to allow citizens to perform digital transactions.
The subcontract stated that Agilisys would notify CGI if CGI had caused delays, so that Agilisys could be granted relief from its obligations. Between January and October 2016, Agilisys issued a number of relief notices and alleged that CGI did not adequately respond. Agilisys therefore rescinded the subcontract in March 2017. CGI disputed Agilisys’ right to rescind the contract and purported to terminate the contract itself for material breach.
As part of its claim, CGI alleged that a number of key milestones (such as the provision of a data migration strategy) had not been achieved by Agilisys by the relevant milestone dates, despite CGI having agreed at the time that they had been met. CGI’s claim was rejected by the court. Given the material nature of the milestones, the court reasoned that it was unlikely that milestone failure would have been treated lightly at the time. The court doubted the reliability of CGI’s witnesses. Surely, if there was any question as to whether material milestones had been met, this would have been documented. However, no contemporaneous documentation existed.
CGI argued that the subcontract was viewed as a partnership and therefore they did not want to document fault during the process but focused instead on proceeding with the contract. However, the judge did not accept this and would have expected to see “documentation emanating from CGI clearly, repeatedly, consistently and with increasing force and urgency calling on Agilisys to deal with these issues”.
Practice point: A conciliatory attitude, reflecting a partnership, may affect the language used when issues are raised but it is important that issues are still raised and documented as they arise.
The subcontract set out numerous dependencies that needed to be fulfilled by CGI to enable Agilisys to be able to fulfil its own obligations. However, CGI sought to argue that Agilisys’ role extended to managing and taking contractual responsibility for the way in which CGI performed its roles and responsibilities and that Agilisys was responsible for a failure by CEC to do the things that CGI had agreed to procure that CEC would do. CGI appeared to see Agilisys’ project management role as “more or less a guarantee” from Agilisys that CGI would perform its dependencies and claimed that individuals were merely “body shopped” from CGI to Agilisys (i.e. provided for Agilisys to manage).
The court rejected CGI’s submission. CGI, and not Agilisys had the contractual relationship with CEC and there was no way that Agilisys could procure that CEC complied. CGI’s claim would “invert the careful division of responsibilities and the associated careful division of charges for the services”. CGI was, to state the obvious, in a subordinate position to CGI as a subcontractor.
The court also examined, and gave some weight to, the fee arrangements between the parties, which did not suggest that Agilisys was taking on the risk for CGI’s performance of its own dependencies. If CGI was simply providing bodies for Agilisys to manage then Agilisys would likely have taken a larger share of the profits and simply acquired bodies at a lower cost under a separate agreement. The parties would have needed to use very clear language if they intended to contradict what appeared to be the commercial reality of the situation.
To get a deal agreed, contracting parties often make compromises and accept positions that they might not ordinarily accept. Although, here, the court appeared to reach the correct decision, it is important to be very clear when agreeing in a contract to something that may otherwise appear to be “illogical”.
When drafting a fee schedule to a lengthy agreement, it is sometimes tempting to consider the schedule as separate to the remainder of the contract. Sometimes it is developed by commercial teams without regular input from lawyers. However, it is clearly important to ensure that fee provisions are properly understood by those negotiating the remainder of the contract and are considered properly in the context of the full contract.
The court also examined the governance mechanisms in the subcontract, to establish how the responsibilities of the parties had been divided. The governance process covered the pro-active management of risks attributed to each party, established various boards and set out the responsibility of the chairperson of each board. Agilisys was not the chairperson for any board. The court held that the governance arrangements in the subcontract reflected the “common sense position” that Agilisys was a “subcontractor and junior partner that was obliged to fit within CGI’s wider governance arrangements”. Agilisys “was to remain subject to CGI’s ultimate direction and control” and that CGI had agreed to take responsibility for its own actions and dependencies under the contract.
Practice point: The governance schedule to a technology services contract is often not given significant consideration. Frequently, a lawyer’s precedent is rolled out or a governance process is simply copied from a previous agreement. This judgment shows the importance of documenting governance processes reflecting operational reality and risk profiles. In practice, we find that properly thought through governance processes, which encourage collaboration and positive interaction between parties, can shape the success of a transformation process. If followed, they can steer day-to-day conduct and may prevent the need to ever look at other elements of the contract designed to attribute liability or allow termination.
Under the subcontract, the agreed implementation plan could only be amended using Agilisys’ change control procedure. During the course of the contract, Agilisys prepared more than one hundred additional project plans, to sit behind the implementation plan. However, only six were ever released to CGI and CGI refused to amend the implementation plan formally through the change control procedure, despite agreeing to relief. The court followed the principles laid down by the Supreme Court with respect to variation, and held that the implementation plan could not be varied without following the agreed contractual process. However, this did not stop the parties agreeing to adjust the available legal remedies by issuing relief notices.
Practice point: Where a contractual process has been agreed, stick to it. When drafting, consider how practical the process is in the first place. Too often change control processes follow the drafting lawyer’s template rather than reflect workable procedures that are considered by the parties, and can be readily implemented by the parties. Attention is often waning by the time these schedules are agreed, but they are important.
It is important to try to ensure all elements of your contracts are consistent with agreed allocations of risk and responsibility. This case is a useful reminder of the importance of agreeing appropriate contractual governance processes and then sticking to them (or formally amending them) and employing good governance practices to the day-to-day management of your contracts. It also highlights the value of explaining commercial objectives to the lawyers drafting and negotiating the contract, so that they are able to focus on appropriate provisions.
For more information please contact Chris Ingram on +44 (0)20 7427 6725 or at email@example.com.