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Important ruling on the “nuclear bomb” of IT contracts (based on previous Danish feature)

By February 24, 2022 No Comments
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In 2018, the Norwegian agricultural organisation Felleskjøpet AGRI was awarded NOK 288 million in damages against the IT supplier Infor (Steinhausen) II GmbH for a delayed IT system. In a bombshell ruling on 13 July 2021, the Court of Appeal overturned the District Court’s ruling and ordered the customer to pay NOK 84 million for wrongful termination and legal costs of approximately NOK 50 million.

A number of interesting learnings may be derived from the case – also in a Danish and indeed an international context.

Background

In April 2014 the parties agreed on the delivery of a standard ERP-system (Enterprise Resource Planning) to replace the customer’s self-developed solution called “FK-Meny”.

The contract was based on a Norwegian standard agreement (SSA-T) according to which the supplier would configure and to a limited extent customise the system for Felleskjøpet.

In February 2016, Felleskjøpet terminated the agreement, claiming among other things that Infor had breached its contractual obligations by downscaling its staffing of the project and that there had been both material actual and anticipated delay.

Conversely, the supplier argued that the delay was due to Felleskjøpet’s role in the project and that the management was unavailable during the process, leading to delays and failed delivery attempts. The supplier further argued that the downscaling did not constitute a refusal to deliver but merely was an expression of due care in the context of a replanning of the project.

The District Court’s decision in favour of the customer

In its 2018 judgment, the District Court (Tingretten) found that the termination of the contract was justified, that Infor had acted with gross negligence and that the agreed limitation of liability should therefore be set aside. Infor was consequently ordered to pay NOK 288 million (DKK 220 million) in damages to Felleskjøpet.

The Court of Appeal’ decision – a complete turnaround

Infor appealed the judgment to the Court of Appeal (Lagmannsretten), where extensive new information was presented and several new witnesses were called in. The case thus grew from 3,600 to 13,000 pages and the oral hearing lasted for 27 court days(!)

In its judgment, the Court of Appeal reached the exact opposite result, namely that Felleskjøpet had not been entitled to terminate the agreement. Felleskjøpet was therefore ordered to pay damages to Infor of NOK 84 million and cover the costs incurred in the two instances totalling approximately NOK 50 million.

The Court’s reasoning

First of all, the court ruled that Infor did not wrongfully halt the project but had only put it on a short and temporary pause in order to re-plan the project and thus get it “back on track”.

Secondly, the court found that there was no actual delay at the time Felleskjøpet chose to terminate the agreement, as the original delivery date had been postponed without the parties having agreed on a new time schedule.

Furthermore, the court considered that Felleskjøpet had not complied with its obligations to provide the supplier with a proper notice to remedy the deficiencies before terminating the agreement.

Bird & Bird’s comment

The case is decided under Norwegian law and a Norwegian standard agreement. Nevertheless, the judgment sets out some interesting principles and provides some lessons learned that are also relevant in a Danish and even an international context:

I. Downscaling or even a time-out in a troubled it-project does not necessarily constitute a breach if the downscaling/time-out is of a short-term and temporary nature with a view of getting the project back on track.

II. A terminating party may rely solely on the grounds for termination stated in the termination letter and may not subsequently “invent” other grounds for termination.

III. A customer’s termination may only take place if the customer complies with the agreed terms on termination, such as providing the agreed notice and giving the supplier the right to remedy which the supplier may be entitled to under the agreement.

IV. As a customer, you should avoid ending up in a situation where there is no applicable time plan. In this particular case, one of the reasons given by the court for the acquittal was that the parties agreed that the original time plan did not apply and that the parties should therefore agree on a new plan. Indeed, there can be no question of delay if no mutually agreed time plan exists(!)

V. The right of termination for breach is forfeited if it is not exercised immediately after the occurrence of a material breach. If the customer chooses to continue the project (without a clear reservation), it cannot subsequently terminate the contract on this ground.

VI. A wrongful termination does not necessarily constitute an intentional breach.

The judgment is particularly interesting as the District Court’s decision could be (and has been) interpreted as implying that any material delay in a long-term IT project implies that the supplier has acted with gross negligence. This “ghost” has been dispelled by the Court of Appeal’s judgment.
The judgment seems to be characterised by considerations of proportionality and fairness. It shows that it usually takes a lot before a customer may terminate a complex it-project for cause (the “nuclear bomb” of IT contract law). (See quote below). In this respect, the judgment seems to reflect a balanced and pragmatic approach.

Quote from the Court of Appeal’s decision (our translation):

In the Court of Appeal’s view, there are circumstances which indicate a stricter termination threshold in this case. The delivery concerned a comprehensive IT system that was to be developed to the customer’s business. In such deliveries, delays are not uncommon, and there may also be a need for re-planning along the way. Infor had also made considerable efforts in the project over a long period of time.

Moreover, Finally, the very different results in the two instances give food for thought in a Danish context, where IT disputes are usually settled by arbitration without the possibility of appeal, even if the court may have misunderstood the case or not been provided with all relevant information.