On February 19, 2021, the Technology and Construction Court in the United Kingdom (“Court”) released CIS General Insurance Limited v IBM United Kingdom Limited (“CISGIL v IBM”), in which the Court considers the failure of a high-value digital transformation project and the eventual termination of the project agreement. The 754 paragraph decision provides commentary on repudiatory breach, exclusion of liability for indirect damages, breach of warranty, and project delays, which provides a number of helpful points for consideration for technology lawyers. Large-scale IT cases are relatively rare, so this decision not only provides important lessons for drafting and negotiating technology contracts, but also unique insights into the potential pitfalls to be aware of in the implementation of large-scale digital transformation projects. For ease of reference, a chronology of events is included at the end of this article.
CIS General Insurance Limited (“CISGIL”), which was a wholly-owned subsidiary of the Co-operative Group Limited (the “Co-op Group”), is in the business of underwriting and distributing general insurance products. In 2014, following a re-organization of the Co-op Group, CISGIL decided to acquire a new IT solution for its business to replace the outdated and economically unsustainable IT infrastructure it shared with the Co-Op Group. On June 16, 2015, CISGIL entered into a contract with IBM United Kingdom Limited (“IBM”) for the supply of a new IT system for CISGIL’s insurance business, and the management of the system for a term of ten years. The contract comprised of a Master Services Agreement (the “MSA”), an Implementation Statement of Work (the “Implementation SOW”), and a Managed Service Statement of Work (the “Managed Service SOW”).
The value of the MSA was substantial. The cost of supply and implementation of the new system was £50.2 million. The cost of the management services to be provided over a period of ten years from the implementation of the system was estimated to be £125.6 million. In addition, CISGIL paid an initial £5.6 million to plan the implementation of the IT solution to meet CISGIL's requirements and to finalize the timeframe for delivery.
IBM engaged Innovation Group (“IG”) to supply software and services for the required insurance platform solution, which would leverage their proprietary software, “Insurer Suite”. The Insurer Suite was to be delivered using an agile approach and in two separate releases. The first release was scheduled to be delivered by the end of April 2016 (“Release 1”), and the second release was due by August 2016 (“Release 2”). The key requirement for IBM was to source and configure an “out of the box” general insurance solution to meet CISGIL’s requirements set out in the Implementation SOW, including some customization.
Delays occurred and the contractual dates for the go-live of Release 1 and Release 2 were not met. On March 24, 2017, IBM submitted an invoice for £2.9 million in respect of Application Gate 5, a milestone in the Implementation SOW (“AG5”). IBM’s position was that the AG5 invoice reflected payments due in respect of software licences and became payable in January 2017. CISGIL’s position was that payment was not due because AG5 had not been achieved and CISGIL had not authorized payment or issued a purchase order for the same. IBM served a notice of termination due to CISGIL’s failure to pay the AG5 invoice in July 2017. CISGIL considered IBM’s termination notice to be invalid and a repudiation of the MSA, which CISGIL accepted. In December 2017, CISGIL initiated legal proceedings against IBM for wasted expenditure and/or losses incurred as a result of IBM’s purported breaches. IBM counterclaimed for payment of the outstanding AG5 invoice.