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IBM sentenced to pay 6.5 million as contractual damages

White & Case Technology Newsflash

In a recent and long-awaited decision, the Bordeaux Court of Appeal concluded a dispute concerning key issues for system integration projects and provided a reminder that the amendments to a contract should be accurate and specifically provide for the modification of the contractual duties of the initial agreement.

In 2004, IBM won a call to tender launched by MAIF in relation to the rebuilding of its Customer Relationship Manager (CRM) by integrating new software. On December 14, 2004, a contract was concluded between IBM and MAIF, pursuant to which IBM was to provide, for a fixed price of €7,302,822, software that was compliant with the scope determined by the parties and a strict schedule. These commitments were defined as an obligation of result, whose breach can only be justified by an external cause such as force majeure or the other party’s default. However, the project fell behind shortly afterwards.

As a consequence, IBM and MAIF concluded two protocols to remedy the situation by the end of 2005, including delaying the schedule and increasing the budget (to €11 million), but without altering the scope of the project. Eventually, IBM offered MAIF a new two-phase plan with a budget increased by over €7 million and a new postponement of the deadline. However, MAIF refused this proposal and requested that IBM fulfill its initial commitments. Upon MAIF’s request before the Nanterre Court of First Instance, an expert was appointed to assess the progress of the project. In parallel, IBM brought proceedings against MAIF for unpaid invoices.

In the first instance (Niort Court of First Instance, December 14, 2009), the Court ordered IBM to pay approximately €11 million to MAIF as a result of the invalidity of the agreement of December 14, 2004. This judgment was reversed on appeal (Poitiers Court of Appeal, November 25, 2011) which ordered MAIF to pay the unpaid invoices (€4 million) to IBM. However, the French Supreme Court (Court of Cassation, June 4, 2013) overruled this decision and referred the case back to the Bordeaux Court of Appeal for the settlement of damages.

On 29 January 2015, the Bordeaux Court of Appeal ordered IBM to pay €6.7 million to MAIF.

No wilful misrepresentation from IBM
MAIF’s main defense before the different courts was based on the invalidity of the agreements—both the contract of December 14, 2004 and the two protocols—because of IBM’s wilful misrepresentation. The Niort Court of First Instance applied this rationale considering IBM’s high level of IT services skills saying that IBM could not ignore the significant risk of failing to perform the project under the terms of the agreement, namely the agreed fixed price and schedule. By remaining silent on these expected risks, IBM was considered by the Court to have organized a willful misrepresentation.

However, the Poitiers Court of Appeal disagreed, as it found that due to having its own skilled IT department, MAIF could not argue that it was innocent. Nor could it ignore the difficulties and the risks of such a project, especially having had a previous failure with their previous service provider. Besides, as pointed out by the French Supreme Court and the Bordeaux Court of Appeal, since the fixed price was a condition imposed by MAIF, it could not claim to have been misled.

Novation requires the express and unambiguous will of the parties
The French Supreme Court’s rationale is based on article 1273 of the French Civil Code relating to novation, which provides that novation cannot be presumed but should be clearly demonstrated.

More particularly, the French Supreme Court considered that the postponement of the timetable and the increase of the price required the novation of the initial contractual obligations of the parties. Since IBM did not provide evidence of the parties’ will to do so, it was held that no novation could have taken place. It thus overruled the decision of the Poitiers Court of Appeal and referred the matter on the merits to the Bordeaux Court of Appeal.

In this respect, the first protocol provided that, in the absence of an amendment between the parties before November 15, 2005, this protocol would be null and void. As no amendment had been concluded, the Bordeaux Court of Appeal ruled that the protocol must be regarded as null and void.

In the second protocol, the Court of Appeal noted that MAIF was only committed to study IBM’s new project in relation to the rebuilding of the CRM. MAIF had no obligation to accept IBM’s new project.

Accordingly, the Bordeaux Court of Appeal confirmed the ruling of the French Supreme Court. Both protocols were only preliminary documents with no mention specific enough to characterize the express and unambiguous will of the parties to novate the contract.

IBM remains bound by an obligation of result
As a result, MAIF and IBM were found to be bound solely by the provisions contained in the initial agreement of December 14, 2004, whereby IBM was committed by virtue of an obligation of result concerning the timetable and the price. IBM could only be exonerated by proving an external cause. Yet, the Court found that the failures of MAIF as claimed by IBM could not constitute a foreign cause. Accordingly, IBM had to be regarded as responsible for failing to perform the project under the terms of the contract. The Bordeaux Court of Appeal consequently ordered IBM to pay the amount of €6.7 million as contractual damages to MAIF. This amount includes, among other things, (i) €1.7 million already paid by MAIF to IBM for deliverables that can no longer be used and (ii) €5 million for the consequences of the late implementation of the project.


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