Interesting Norwegian judgement on wrongful termination of IT contract

After a lengthy and comprehensive court case, the Oslo District Court ruled that the customer must pay 139 million NOK to the supplier for wrongful termination of the parties' contract as well as damages in the amount of 42 million NOK.

Circumstances of the case

The judgement is very well-written, detailed and well-considered and is useful reading for anyone working with IT projects – in particular on the customer side.

The circumstances of the case were the following:

In December 2013 a global IT supplier won a tender for the delivery of an IT system for the collection of road tolls in Norway on behalf of the Norwegian Public Roads Administration (Statens vegvesen – "SVV").

The contract was based on the Norwegian standard contract PS 2000. The project was to be carried out as an agile project according to a target price model, where the supplier had to configure and to a limited extent adjust the standard system.

In the summer of 2015, i.e. 18 months into the contract, SVV terminated the contract due to the supplier's alleged breach of a number of its contractual obligations, including obligations to plan and staff the project adequately and provide sufficient reporting.

SVV further believed that an actual as well as an anticipated delay had occurred as the supplier had exceeded some milestones by 174 and 90 days, respectively, and as the customer expected a further delay. On this basis SVV demanded compensation from the supplier in the amount of 243 million NOK. 

Upon termination, the supplier's estimate to complete the project was three times higher than at the beginning of the project. During the court case, SVV argued that this large increase was due to the supplier's deliberate underestimation of the project to win the tender ("lowballing") and that the supplier lacked relevant skills.

The supplier on the other hand argued that the customer's numerous demands for customer-specific adjustments to the offered standard solution and the customer's inability to prioritize and make decisions was the major reason for the problems in the project.

The court's ruling

The court ruled that even though the supplier to a certain degree underestimated the scope of the project, SVV was mainly responsible for the failure of the project. 

The court found that the lack of progress was due to SVV prioritizing quality - in the form of customer-specific adjustments - over time. Although the goal was to mainly use standard functionality, SVV did not sufficiently limit the requests for customization. As a result, the supplier had to carry out comprehensive and time-consuming adjustments of the standard solution. The project thereby gradually transformed into a development project rather than a project for the delivery of a standard solution.

The delays were aggravated by SVV carrying out extensive follow-ups and inspections of the supplier's project implementation, which ultimately drained the supplier from resources.

Based on the facts, the court did not believe that the customer had a legitimate reason for terminating the contract, neither on the basis of actual or anticipated breach of contract, as the delay was mainly caused by SVV's many change requests and  a too wide interpretation of the requirements specification. In addition, the customer's focus was too much on control, testing and reporting rather than progress.

As a result, the court ruled that the supplier should have been granted extensions of deadlines which SVV wrongfully had rejected. The termination of the contract was therefore unjustified and the supplier consequently had the right to contra-terminate.

On this basis, the supplier was awarded 42 million in legal costs and 3 million in damages. The remaining amount of approx. 136,5 million NOK constituted remuneration for work performed by the supplier up until the contract was terminated.

Putting the ruling into perspective

First and foremost the judgement highlights the importance of a good and trusting cooperation between customer and supplier in an IT project, in particular where it is based on an agile method. In the specific project, mistrust between the parties emerged early in the process and was the main reason why the parties failed to find solutions to the challenges that are inevitable in any project of this size and complexity.

Furthermore, the judgement sheds light on the importance of finding the right balance in the "project triangle" (scope, cost, time) as well as the importance of customers being clear about this priority. Another important lesson is that the contract must support the chosen priority. 

In the specific project, the contract had a strong focus on keeping the time plan due to among other things an approaching end-of-life of the existing system. During the project, however, the customer attached (too) great importance to quality, testing and documentation.

In the judgement, the court states that SVV's prioritization of quality over time was inconsistent with the contract's focus on meeting the time plan, i.a. by way of heavy penalties for delay. 

According to the court, this paved the way for the conflict even before the project commenced.

In summary, the judgement highlights three main reasons for the project's failure: 

1) The customer did not face the consequences of choosing a standard solution

As the first main reason for the failure, the court points out that SVV did not face the consequences of having tendered and entered into a contract for the procurement of a standard system. Rather the customer required a large amount of customizations of the standard system during the project. 
According to the court, the customer had a "yes to both" attitude, i.e. the customer wanted a standard system while at the time insisting that its customer specific requirements were met.

2) The customer interpreted the requirements specification too far in its own favor

The second factor, which had a negative impact was that SVV in many cases interpreted the requirements specification unreasonably far in its own favor. SSV repeatedly insisted on adjustments and modifications to the solution arguing that these fell within the scope of the project ignoring the solution design that the supplier had offered. 

The customer further failed to take responsibility for the fact that the requirements specification in a number of areas proved not to cover the needs of the business.

3) The customer lacked the ability or will to take decisions during the project

The third major factor was that SVV failed to take the necessary decisions during the project. According to the court, this was due to lack of competences and an inadequate mandate for SVV's project organization.

The above highlighted issues are classic pitfalls in complex IT projects and the judgement emphasizes the importance of the customer's contributions in an IT project – in particular if based on an agile method.

In addition, the judgement is a reminder of the importance of customers being clear about how they prioritize the balance between price, time and quality - and that the contract and the customer's behavior in the project support this priority.

The Norwegian judgement is interesting in a Danish context as Norwegian and Danish contract law is very similar. Also, there are very few published rulings on IT projects in Denmark, since most Danish disputes - as opposed to Norway (and Sweden) – are referred to arbitration.

Another interesting point is that the Norwegian court gives the supplier full compensation for its legal costs amounting to 42 million NOK which is contrary to the tradition in Danish courts where only a small part of the winning party's legal costs are covered by the other party.

The judgement has been appealed by SVV.