Businesses beware of breach of contract

10th January 2014
Hiscox

Categories:

  • Executive insight
  • Through our work with businesses of all shapes and sizes, we see common trends emerging in terms of the issues that they face. Breach of contract is just one example of a growing business challenge, and it is one that tech businesses in particular face. From our UK claims data alone for instance, we’ve seen the incidence of breach of contract claims rise between 2011, when it accounted for 49% of all technology claims, and 2012, when it accounted for 62%.

    One recent example involved a British IT consultancy insured by Hiscox that was hired by a major US-based business to develop and implement a new IT platform. The consultancy agreed a contract for their client based on a project milestone principle, with work to be completed in stages before commissioning the next phase.

    As the IT consultancy approached one of the project milestones, the trigger for a large fee payment, the client unexpectedly pulled the plug, sending both a termination letter and serving proceedings. The client claimed that numerous bugs and defects in the consultancy’s work amounted to a breach of contract and a loss of confidence in their work, putting in a claim of $18.5m in damages.

    We believed the IT consultancy was not at fault and that any issues were normal for a project of this nature. The claim simply appeared to be an attempt to avoid paying outstanding fees. The IT consultancy issued a counter-claim and we worked with both parties to resolve the claim. Following mediation, there was still a gap between the amounts both sides were willing to accept, so Hiscox paid the difference owed to the IT consultancy, as well as the legal costs. This helped the company end their relationship with their former client without suffering significant financial loss.

    Such claims can be seen as a legacy of the recession, but that doesn’t take away the importance of being adequately protected with professional indemnity insurance.

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