The level of cooperation necessary between a customer and supplier to successfully develop and implement an ERP project is set out in Anglo Group Plc v Winther Browne & Co Ltd (2000) 72 ConLR 118, in which HHJ Toulmin QC held that the following terms are implied in a “standard” contract: (a) the purchaser communicates clearly their needs to the supplier; (b) the supplier discloses whether or not those needs can be met; (c) the supplier takes reasonable steps to ensure that the purchaser is trained to use the system; and (d) the purchaser devotes reasonable time to understanding how to operate the system.

The substantial cooperation necessary to implement ERP software makes it ripe for disputes. It is no wonder that C-suite executives nervously pore over their ERP contracts. This article discusses common pitfalls to watch out for.

Misrepresentation

ERP software is often heavily pitched by suppliers desirous of winning a project in a competitive market. Sometimes the suppliers may over-pitch and the software fails to meet the functionality promised. A supplier might later be prevented from bringing a claim for breach of licence if it had made pre-contractual representations as to the suitability of the software (see AFD Software v DCML Ltd [2015] EWHC 453 (Ch) and [2016] EWCA Civ 425). In order to limit claims against it in relation to over-pitching, a supplier should consider incorporating exclusion or limitation clauses in the contract.

A customer might, nevertheless, find that a claim in misrepresentation may be a way of overcoming exclusion or limitation clauses. In BSkyB Ltd v HP Enterprise Services UK Ltd [2010] EWHC 86 (TCC); 129 ConLR 147, the court found that a representation as to how long it would take to deliver a project was a fraudulent misrepresentation where it was false and made without reasonable grounds.

Excess Usage

ERP software is usually licensed, rather than sold outright. Suppliers typically define the parameters within which the licence can be used, such as the purpose for which the software can be used, the number of users or devices, or geographical restrictions. Where the scope is defined by numbers of users, this may be by reference to the maximum number of users permitted to use the software simultaneously (“concurrent” users) or by reference to the size of the user-base as a whole.^[1]

Disputes can arise if the supplier believes there has been excess usage, for example, the number of users exceeded what is stated on the licence. In SAP UK Ltd v Diageo Great Britain Ltd [2017] EWHC 189 (TCC), SAP granted a licence on a “named user” basis. A few years later, Diageo used a system that enabled its customers to place orders and manage their accounts directly through a call centre (“Connect”) and an app (“Gen2”). SAP claimed that Connect and Gen 2 used/accessed SAP’s ERP software and that Diageo owed additional licensing and maintenance fees in excess of £54million.

In a trial on liability, the English High Court ruled in favour of SAP. It held that Diageo’s customers, who were not named users of the software, used the ERP indirectly. SAP v Diageo has since become a leading authority on indirect usage.

It is of course advisable to robustly negotiate the most favourable terms rather than subsequently having to grapple for remedies in court. Customers should consider the scope of the licence with care and understand its limitations. They should attempt to avoid hidden costs by paying close attention to the definitions of “use”, “access”, “direct”, “indirect” and so on.

Customers and those advising them should consider what best reflects the actual or intended use of the software. Are there likely uses that will attract payments of increased licence fees to the supplier? Will such costs be absorbed by the customer or passed on to the end customer? Would it be sensible to negotiate a cap on the costs of additional licence usage? Since an ERP system is likely to be in place for several years, if not decades, it is crucial to give proper thought to the customer’s IT estate over the life-cycle of the licence.

Delay / defects

The implementation of an ERP project may well fall behind schedule or exceed budget. The customer may be unable to rely on the supplier missing the date for completion to terminate the contract where the customer has waived or varied the date, caused part of the delay or asked for additional functions. Nevertheless, where delay cannot be relied upon as grounds for terminating the contract, it may still amount to a breach of contract giving rise to a liability for damages.

The customer may have a claim in tort where no breach of contract claim is available. Section 13 of the Supply of Goods and Services Act 1982 confers on the supplier an obligation to exercise reasonable skill and care, subject to valid exclusion clauses in the agreement. Since the cause of action in tort accrues when loss is suffered (rather than when the breach of contract occurs), such a claim may helpfully have the effect of extending to a later date the expiry of the limitation period.

Finally, even when successfully implemented, it may be that the software is not fit for purpose. In these circumstances, the customer may be entitled to reject the supplied system outright and recover the full consideration where the system contains defects which deprive the customer of substantially the whole benefit that was intended. Where the whole system cannot be rejected, a claim may lie for the difference in value between that which was purchased and that which was delivered.

1. Bullen & Leake & Jacob’s Precedents of Pleadings (19^th edn), para 33-13. ↑