Contract Dispute and Renegotiation Between

Contract dispute and renegotiation between SS and CS: Overview

Legal issues present

Span Systems (SS), a leader in banking software and the European bank Citizen-Schwarz AG (CS) entered into a six million dollar contract a year ago. The contract stipulated that SS would provide a new Java-based banking system software system for CS. However, the contract has failed in terms of the "performance on delivery" aspect of a legal contract. SS has not performed its stated role, as stipulated in the contact. Only 40% of the work on the system has been completed by the specified date. SS originally agreed to have completed 60%, so as not to be in breach of the contract. Additionally, the contract states that neither SS nor CS may cancel the agreement in whole or in part if more then 50% of the project been completed: but only 40% has been finished.

If the quality of the product has been judged deficient, then CS has the right to claim SS has not met performance guidelines. CS also has strong and legitimate reservations about the quality and the direction of the current project.

Avoid risks, minimize liabilities, and benefit from opportunities

This initial agreement seems foolish from the perspective of SS: given the SS breach in terms of timeliness, CS can terminate the agreement within seven days and possibly maintain possession of the code that SS has delivered thus far to date. This means that SS's intellectual property could fall in the hands of a competing software company contracted by CS or the current project could be integrated into a final program, completed by another firm. According to the case study on the breach: "this risk is possibly adjudicated by a clause that would not allow CS to maintain possession of the code, whole or in part, unless the project was completed and the program was implemented at CS." This amendment specifies a 30-day acceptance testing period that allows CS to accept the quality level of the software or reject it, in case problems with the code exist. "During the testing phase, CS will maintain and share records of data resulting from the SS system in order to ensure that the project scope and requirements have been met." Subsequent to the implementation, CS then retains possession of the software.

If the system, as created by SS is not implemented in any form, SS can argue that it may retain possession of the code. However, in a future, renegotiated contract the status of ownership must be more clearly defined, especially if the final project is still deemed unacceptable by CS. Furthermore, what constitutes acceptable quality of the final project must also be clarified.

The current failure to comply with the deadline thus could be used as an opportunity by SS to create a more favorable renegotiated contract defining its ownership of the code in question. The new contract could create more specific quality requirements for the software, a development which would benefit CS as well as SS. However, because of the failure of SS to perform, CS is seeking to negotiate a more favorable deal with an Indian firm and considering turning its back on SS. CS might reap the benefits of its original contract, in terms of the knowledge it gained from the code, without having to pay for the code, and develop a relationship with another firm in the developing world. However, this proposed new contract with the Indian firm will likely be even more costly in terms of time, given that CS will have to establish an entirely new relationship with the firm and in the financial industry 'time is money.' Thus CS does have an incentive to renegotiate the performance clauses of the contract with SS. Additionally, there is the fear of litigation. Although it is uncertain how SS would fare in a lawsuit to regain ownership of its code, litigation is a financial and intellectual drain upon any firm. A lawsuit would create bad publicity for the bank during a period when it needs to create a positive image for itself in the media.

Retaining a strong relationship with an IT business partner is beneficial for CS, given the ever-changing nature of technology. The changing demands of the project is one reason the company has had such as stressful relationship with SS, and presumably the new system will require updates and reform in the future. Fostering a bad relationship with a well-known technology company is hardly in the interest of CS if it needs to update its system again.

Specific measures managers may take to minimize legal risk or realize legal opportunities.

Clarity in wording is essential in the future agreement for both parties. From the perspective of SS, limiting its liability is of paramount important, given that under the current contract, regardless of how tenuous an argument, CS might be able to state that SS is liable for any financial damage caused by an overdue project, or for any technical complications that ensue from the final project. CS has already chafed over the quality of the code received, for which SS blames organizational and project requirement changes that hampered its ability to perform on time and at its usual quality standard. No system is perfect, hence the need to limit liability. Instead of pointing fingers, the demands of the proposed system must be stated in clear wording, and the expected performance capacity of the system must be numerically defined.

Evaluate alternatives to resolve problems identified in the simulation.

According to SS, the delay and the failure to perform on the timetable specified in the contract was unavoidable, because of a change in CS management, changes to system requirements, changes in project scope and organizational changes. Because litigation is always costly, and extricating itself from an agreement with SS may prove costly for CS, even if it ultimately emerges victorious, dispute resolution seems like the most feasible and attractive strategy for both firms. A renegotiated contract that specifies the quality requirements, with an adjusted timetable of completion and fee schedule to accommodate the costs of the delay for CS must be proposed.