Termination of ERP-contract - comment on Eidsivating Court of appeal's decision in the dispute between Felleskjøpet and Infor

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Published 07 September 2021
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By Halvor Manshaus, Hugo Berg Otterlei and Inge Kristian Brodersen

Introduction

On 13 July 2021, Eidsivating Court of Appeal handed down a verdict in the appeal between the customer Felleskjøpet Agri SA ("FK") and the supplier Infor (Steinhausen) II GMBH ("Infor") (LE-2018-76187-3)1. Infor was acquitted of FK's claim for compensation and awarded compensation of more than 84 MNOK, as well as legal expenses for both the Court of Appeal and the District Court totaling approximately 50 MNOK. The Court of Appeal completely reversed the District Court's decision from 9 February 2018 (TNERO-2016-101703)2, in which the District Court concluded inter alia that Infor had exhibited gross negligence or intent and awarded FK 288 MNOK in damages with the addition of legal expenses.

Background

In 2013, Felleskjøpet started a process for acquiring a new business system (often referred to as "Enterprise Resource Planning" - "ERP") for its internal processes for finance and accounting, as well as other sales and trade related processes. After competition between several suppliers, Infor was eventually selected, and the contract was signed on 3 April 2014. The contract was based on one of the Norwegian governmental standard agreement templates for IT procurements, "SSA-T".

The project's scope of delivery was divided into three main systems and main phases: "Finance" in phase 1, "Trade" in phase 2, and "Tons" in phase 3. Each main phase had milestones for specific sub-phases. "Milestone 3" ("M3") for Finance and Trade, which concerned development and installation, is central to the dispute itself. According to the original progress plan, the M3 should have been approved on 27 February 2015 for Trade and 24 April 2015 for Finance. Both deadlines were moved to 17 April 2015 through an agreed change order. Infor then made delivery attempts that were not accepted by FK, and the deadlines were moved again through further change orders, this time to 30 June 2015. Again, FK did not accept the delivery by Infor. 

On 6 July 2015, FK notified Infor that the delay of the M3 meant a breach of the contract and that daily liquidated damages were incurred. Thereafter and until November 2015 there was a period of intensive correspondence between the parties, including re-planning activities. On 17 November 2015, Infor announced that project activities would be halted (paused) effective 20 November 2015. Two days later, FK wrote in a letter that halting the project amounted to a wilful breach that exposed Infor to unlimited liability, and FK demanded that Infor withdraw its decision to halt. On 2 December 2015, FK announced that it would consider terminating the contract if Infor did not resume work by 15 December.

On 10 December 2015, an all-day meeting was held between Infor and Felleskjøpet. We understand that Infor here informed FK that the M3 would be reached in 10-12 months. 

On 18 December 2015, FK sent a formal notice to Infor of FK's intent to terminate the contract for cause. The notice called for the halt to cease, as well as a request for confirmation from Infor on the fulfilment of specific obligations of the contract. Otherwise, according to FK, termination would occur automatically and without further declaration.

Infor sent a letter on 29 December 2015 in which Infor denied that there was a material breach on the part of Infor. Infor stated that FK was responsible for the delays. In addition, Infor stated that it intended to fulfil the contract, and that Infor had not required significant changes to the agreement. Infor proposed to resume discussions on rescheduling in early January 2016.

In a letter of 31 December 2015, FK accepted that Infor had confirmed in the letter of 29 December 2015 to stand by the agreement. On New Year's Eve 2015, FK proposed a postponement of the termination until 18 January 2016, this time conditional on the parties carrying out a two-week working period after which FK would decide whether or not to terminate. It was not stated in FK's letter of 31 December that FK assumed that Infor would resume all project activities during the proposed working period, and no new deadline was set for Infor to resume the project activities.

On 3 February 2016, FK sent a termination declaration to Infor, on the basis of both the pause in the project and the delay.

District court vs. court of appeal

Materially, it seems to be on four points in particular that the assessments from the Court of Appeal differ from the District Court's, namely (1) the so-called "July Agreement", (2) the pause in the project, (3) FK's procedure for terminating of the contract and (4) the issue of delay as basis for termination.

(1) "July Agreement":

Infor stated that in July 2015 that an agreement was reached that with FK that waived the liquidated damages. Following a review of submitted e-mail correspondence between the parties in the days subsequent to FK's notice of delay on 6 July 2015, the Court of Appeal concludes that on 17 July 2015 the parties agreed that (1) a new delivery date for M3 should be established, and that (2) the delivery date of 30 June 2015 no longer applied, and that (3) no liquidated damages were incurred.

This is in sharp contrast to the District Court's reasoning, in which it arrives at the following conclusion (p. 14): "The court finds after this that no "July agreement" was entered into that is of decisive importance for the assessment of Infor's breach." The District Court's position significantly informs its assessment of the issue of actual delay, see below.

(2) The pause in the project:

In the assessment of the Court of Appeal, exercising the pause in itself did not constitute a material breach by Infor. The court believes that there are circumstances in the case that imply a "stricter threshold for termination", and it refers to an expert witness who stated that pausing a project which is out of control is a "relatively common and recognised approach". The court further emphasizes that during the period of the pause, Infor performed re-planning work amounting to approximately 7,000 hours. On this basis, the court finds that Infor was not in violation of SSA-T section 12.3 which states that "The Contractor shall not suspend any performance as the result of breach of contract on the part of the Customer, unless the breach is material and the Customer has acknowledged the breach of contract in writing or the breach of contract has been established through one of the dispute resolution mechanisms in Chapter 16."

Secondly, the Court of Appeal also finds no evidence that Infor used the pause as a way of forcing FK into accepting new commercial terms, or that Infor would halt the project if FK would not pay more than what came with the contract. The Court of Appeal relies on written statements from Infor's lawyer that changing commercial terms was not a requirement to continue the project activities. The Court of Appeal also writes that such an action would be unwise from a strategic perspective – the project would be a reference project for Infor in the Nordic market.

In the view of the District Court, however, it is clear that the criteria in SSA-T section 12.3 were not met: "It is clear that the conditions for any retention on the part of Infor were not met, either materially due to material breach, or formal with written acknowledgment, and the court does not go into further detail, beyond noting that the provision strengthens the court's perception of Infor's breach and the severity thereto. The fact that Infor, in the event of a halt, misjudged its legal position with regard to the justification of the suspension, is something of which Infor itself must bear the risk. Based on the above, since Infor's breach was at least grossly negligent, the limitation of liability of the Agreement also lapses, cf. chapter 11 of the contract, section 11.5.6 last paragraph [...]"

 The District Court does not dwell on the reasons for Infor's request for the halt, stating that "regardless of [...] the reason for the project pause, the court finds that it did not have legal basis in the contract or in any other agreement or understanding between the parties."

(3) FK's procedure for terminating the contract:

In the opinion of the Court of Appeal, FK's termination was not in accordance with the contract on several points. SSA-T section 11.5.4 stipulates that "If there is a material breach of contract, the Customer may, after giving the Contractor written notice and a reasonable deadline for remedying the situation, terminate the Agreement, in full or in part, for breach with immediate effect."

FK's notice of termination of 18 December 2015 contained a statement that the termination would occur automatically and without further declaration if specified "conditions" were not fulfilled within the deadline. In the opinion of the Court of Appeal, that termination should occur automatically is not in accordance with the contractual provision: FK had to reassess whether the termination criteria were met after the deadline had expired.

FK's e-mail of 31 December 2015 proposed to postpone the termination until 18 January 2016, though conditional on the implementation of an intensive work period and an outcome that FK accepted. The Court of Appeal comments that since the point of the joint working period was precisely to consider the basis for the further process, FK should have made it clear if it expected Infor to immediately resume the project activities. The Court of Appeal therefore assumed that the requirement in the notice of termination of 18 December to resume the project activities was no longer effective, and that such a claim had to be notified again with a new deadline, in order to provide a basis for the termination of the contract. In other words, the Court of Appeal points out that including such "conditional requirements" are not in accordance with the contract. Nor would there have been a "material breach" if Infor had not met FK's requirement for the implementation of the intensive work period. The Court of Appeal concludes the review by stating that FK's termination on 3 February 2016 on the basis of the project pause was without merit.

As mentioned above, the Court of Appeal also concluded that even if the pause had been a valid reason for termination, FK would have to have issued a new notice of termination anyway, referring to the pause.

For its part, the District Court did not enter into a specific assessment of whether FK's approach to the termination was in accordance with SSA-T section 11.5.4.

(4) The question of delay as a basis for termination:

As for the question of whether there was an actual delay, the Court of Appeal points out that a set delivery date must be exceeded in order for actual delay to exist. As mentioned above, the court assumes that the parties agreed to postpone the delivery date of the M3 (cf. the "July Agreement"), but without determining any new delivery date. Thus, there was no actual delay with respect to the M3 that gave FK the right to terminate.

In addition, presupposing that there was an actual delay of M3 starting 30 June 2015, FK had maintained the contract after the maximum liquidated damages period had expired (approximately 8 October 2015), and had thus, in the opinion of the Court of Appeal, missed the chance to terminate due to the actual delay.

As regards the "anticipated" delay, the Court of Appeal said Infor had announced a 10-12 month delay as early as on 10 December 2015, and that FK nevertheless demanded the recommencement of project activities. The Court of Appeal concluded that there was no anticipated delay as a basis for termination of the contract.

On this background, the Court of Appeal does not go into further detail on the question of whether actual and anticipated delay were included in the termination basis.

The District Court on the other hand places little or no emphasis on the"July Agreement"and writes (p. 9) that "It is the delivery of Milestone 3, M3 that, at the court's discretion, is crucial in the discussion of delay. [...] It is uncontested that the delivery of the M3 was delayed. It is also clear that Felleskjøpet never accepted the delivery of the M3. [...] A new agreed delivery date was not agreed and a delivery of the M3 was never accepted." The District Court also states that (p. 7): "Based on a general interpretation of the wording of the termination declaration, the court finds, solely based on the termination declaration, that the termination was based on the project's overall delay, with the unilateral pause as a triggering factor."

Key take aways" from court of appeal ruling

The ruling illustrates that if a party is to terminate the contract, there must be a direct correlation between the termination notice and the subsequent termination declaration. If one declares termination on a basis that has not been notified, the termination may be rejected because the wrong procedure has been followed. In addition, automatic termination cannot be notified when referring to given terms or criteria. After the "reasonable deadline for remedying", it must be considered whether the breach is remedied as prescribed by SSA-T section 11.5.4.

As a customer, one must therefore also be careful to agree that a new delivery date shall be set, without at the same time clearly stating that the original delivery date applies until otherwise agreed in writing. If the customer fails to do so, a court may conclude that there is no longer a specified or formally set due date being basis for delay.

The ruling also shows that there are strict requirements for the procedure for a termination. The termination procedure in section 11.5.4 of the SSA-T must be followed. Not only shall a reasonable deadline be given to allow for remediation; a new and specific assessment must also be made as to whether the termination criteria exist at the end of this reasonable deadline.

Furthermore, the judgment illustrates that the threshold for termination has been raised in this type of contractual relationship, i.e. when the project has come a long way in the delivery process. The Court of Appeal justified the raised termination threshold by stating that (i) the delivery applied to a comprehensive IT system to be adapted to the customer's activities, (ii) in such deliveries it is not uncommon for delays to happen, and where there may also be a need for re-planning along the way, and (iii) Infor had also, over time, put considerable effort into the project. When the Court of Appeal points out that the delivery should be adapted to the customer's business, it is probably because such customized deliveries cannot be used by others. In other words, the supplier affected by the termination risks sitting with an unfinished and tailored delivery that cannot be used further.

The Court of Appeal also notes that if one assumes FK's view that the current delay started 30 June 2015, FK would have missed its opportunity to terminate the agreement by FK maintaining the agreement and allowing Infor to continue the work even after the expiration of the prescribed period for the liquidated damages and until the project pause was implemented on 20 November 2015.

The court points out that it could not have come as a surprise to FK when Infor announced in its presentation on 26 January 2016, following the implementation of the January meetings, that the expected delivery time for the M3 would be in ten months. A nearby conclusion is that any right of termination with reference to delay must be justified by the fact that the M3 is also delayed beyond the ten to twelve months. At the very least, this prompted FK during this period to clarify any views on the expected delivery date. We perceive that this is the reason why the Court of Appeal concluded that such postponement of the M3 could not provide a basis for termination due to an anticipated delay.

In relation to the question of whether the pause constituted a material breach of the contract, the Court of Appeal assumed that FK's evaluation of the process and deliveries from Infor in the two-week working period prior to the termination did not provide a basis for the termination of the agreement, and in any circumstances not without Infor being given notice of issues that, in the opinion of FK, constitute material breach, and with a reasonable deadline for remediation.

In other similar cases, it will probably be the case that if a supplier presents a new operational progress plan, and the customer chooses to continue the project on that basis, the right of termination with reference to delay of the contractually agreed progress plan will be cut off until there is a delay also in relation to the new operational progress plan, unless the customer takes care to include an explicit reservation to the contrary. Similarly, other legal sanctions will typically be intact provided that the customer clearly maintains that following the new operational progress plan is not an admission to extend the deadlines in the contractually agreed progress plan.

 

[1] Lovdata: https://lovdata.no/LESIV/avgjorelse/le-2018-76187-3
[2] Lovdata PRO: https://lovdata.no/pro/TRSIV/avgjorelse/tnero-2016-101703