01/09/2014 10:53 BST | Updated 01/11/2014 05:59 GMT

How Not to Terminate an IT Contract

The Government has delivered an object lesson in how not to terminate an IT contract. Last month the Home Secretary Theresa May wrote a letter to inform Parliament that an arbitration tribunal had ruled against the Government and awarded £224 million to Raytheon Systems Ltd in connection with the disputed termination of the e-Borders programme.

The Government had terminated the £750 million contract in 2010 on the grounds that Raytheon was allegedly in material default of its contractual obligations, a termination which Raytheon disputed as unlawful and led to a claim by the US company for over £500 million in arbitration proceedings.

According to the Home Secretary's letter the tribunal looked at the way the contract (for an electronic system to keep tabs on travellers leaving and entering Britain) had been managed by the UK Border Agency and found the processes used in reaching a decision to terminate and carrying out the termination itself were flawed. Or, as Raytheon's own press release put it:

"The Arbitration Tribunal found that the Home Office had unlawfully terminated RSL for default in 2010 and therefore had repudiated the eBorders contract."

The detailed findings of the tribunal remain confidential but the news of the award is a timely reminder to all IT buyers that care needs to be taken when terminating a contract to ensure that all relevant contractual processes and procedures have been followed. Failure to do so could itself amount to a breach entitling the supplier to terminate and claim damages.

Things to consider include the following:

  • Do the acts or omissions of the supplier amount to a material breach of the obligations under the contract?
  • If so has the supplier been given notice of the breach and the opportunity to remedy it in accordance with any contractually agreed procedures?
  • Has the supplier been given proper notice of termination as required by the contract?
  • Has the contract been terminated without undue delay?

As the Raytheon decision shows termination is not a step to be taken lightly and could have unforeseen and costly consequences, both in terms of financial and reputational damage.