Law Times

Page 10 May 15, 2017 • Law TiMes www.lawtimesnews.com Applies to subcontract agreements in the IT sector Ruling on outsourcing important for practitioners BY MICHAEL MCKIERNAN For Law Times T echnology lawyers say a recent court judgment on an information technology outsourc- ing project is a gold mine for practitioners who advise parties to subcontract agreements in the sector. In Atos v Sapient, Sapient re- cruited Atos, then known as Sie- mens Canada Limited, to per- form certain services under its $50-million software contract with utility company Enbridge Gas Distribution. Siemens ultimately won a judgment worth $5.5 million af- ter Ontario Superior Court Jus- tice Laurence Pattillo found Sa- pient wrongfully terminated the subcontract, although the judge also concluded that both sides had breached the agreement. Lawyers for the parties de- clined comment since the deci- sion has been appealed, with a hearing expected at the Court of Appeal for Ontario this fall. But they are outliers among mem- bers of the IT bar, which has been set abuzz by the judgment. Peter Ruby, a litigation part- ner at Goodmans LLP in Toron- to, says that while the terms and clauses in the contract at issue feature routinely in outsourcing agreements, judicial interpreta- tions of them are much harder to come by, thanks to the nature of the IT field. "This is an industry that moves very fast, so parties don't often have the patience for the commercial litigation process, which does not move quickly at all," Ruby says. "Particularly when you're dealing with com- puter software, it's relatively rare to see these cases go all the way to trial." When there are disputes, he says, businesses operating in the technology sector also tend to avoid full-blown litigation for fear of burning bridges with ma- jor customers or gaining a repu- tation as a troublesome partner in projects. Arbitration is a pop- ular alternative for its quicker timelines and the privacy of the proceedings, Ruby adds. "There are rulings when dis- putes end up at arbitration, but the only ones who know what happened are those of us who deal with those cases," he says. The roots of the dispute lie in Enbridge's 2006 project to con- solidate its many legacy software systems into a single, centralized structure to handle the manage- ment of functions including fi- nances, billing, human resourc- es and inventory management, among others. Sapient, a long-time commer- cial partner of Enbridge's, won a bid to carry out the replacement of the old system, but it lacked experience with the specific en- terprise resource planning soft- ware the company had chosen to install. As a result, it subcon- tracted with Siemens to gain the benefit of its extensive previous knowledge of the product. The project began in 2007, but it quickly ran into difficul- ties. By the end of 2008, it was clear that the original go-live date of April 2009 would no longer be possible, with prog- ress trailing behind target in all areas. Sapient finally terminated the subcontract for cause in June 2009, alleging that Siemens' fail- ure to complete the data conver- sion portion of the agreement to industry standards constituted a "material breach." The subcontract did not define what was meant to be a material breach, so Pattillo did the job himself, interpreting it to mean, in the context of the agreement, "a non-trivial breach that affects or may affect Sapi- ent's ability to perform its obli- gations under the Prime Con- tract in a material respect." The judge went on to re- ject Sapient's claims that any of Siemens' conduct had risen to that level, noting that Sapient's prime contract required it to report any "material breach" to Enbridge in writing, but it had failed to do so. At trial, Sapient attempted to rely on a provision of the sub- contract that gave it discretion to terminate the subcontract for missed milestones that met par- ticular criteria. However, Pattillo found that Sapient failed to exer- cise its discretion in good faith, noting that it made no mention of the milestone in the termina- tion letter it delivered to Siemens. Relying on internal emails at Sapient, the judge went on to find that the company engineered the manner of the subcontract's termination to enable it to take over a portion of the work being done by Siemens. This would in turn improve its financial posi- tion under the prime contract with Enbridge, according to the judge, who found that Sapient's actions demonstrated an ab- sence of good faith. "This case highlights the im- portance of acting very carefully, and with a measure of good faith when going through and imple- menting these agreements," says Richard Corley, the leader of Goodmans' outsourcing group. "In my mind, the judgment seems to turn substantially on the court's determination about the lack of good faith." Ruby says lawyers should also take note of Pattillo's extensive references to Sapient's termina- tion letter in his decision. "It's a key step. The judge makes it very clear that when you're bringing a major contract like this to an end, how you do it FOCUS Peter Ruby says that when there are dis- putes, businesses operating in the tech- nology sector tend to avoid full-blown litigation. See Limitation, page 12 © 2017 Thomson Reuters Canada Limited 00238SJ-A87622-CE GET ALL YOUR CPD AT THE TORONTO LAWYERS ASSOCIATION MAY 16, 2017 Environmental Considerations in Real Estate and Business Transactions JUNE 1, 2017 True or False: Corporate Lawyers Need to be Securities Lawyers JUNE 7, 2017 What it Takes to Become a Judge tlaonline.ca | info@tlaonline.ca

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