Crown Issues Legal Proceedings Against IBM

The Crown issued legal proceedings today against IBM NZ and IBM Corporation in relation to the INCIS contract, Finance Minister Sir William Birch announced today.

He said those proceedings come in the wake of IBM's decision to withdraw its staff from midday on 9 August from the development of INCIS Increment 2 and 3 software.

"In essence, the Crown's claim alleges that IBM repudiated the INCIS contract in the letter it wrote to the Crown on 9 August. It seeks confirmation on that ground that the agreement has been lawfully cancelled by the Crown," Sir William said.

"The Crown asks the High Court to determine the damages the Crown has suffered, and to award the amount of those damages to the Crown."

He said the Crown had been willing throughout, and still was, to negotiate with IBM. Ministers remained keen to see the matter resolved as soon and as fairly as possible.

"The Crown's position is nonetheless that IBM walked away from a binding legal contract. That is not what the Crown expects from a major multi-national corporation. The Crown's legal proceedings record our view of these events and that the Crown is entitled to substantial compensation for the damage consequent upon them," he said.

IBM "Guaranteed Performance"

The Crown statement of claim says IBM Corporation "unconditionally and irrevocably guaranteed" under the agreement "the due and punctual observance and performance" of "all the terms and conditions that IBM NZ was obliged to perform under the Agreement".

IBM agreed to provide Increment 1 in operational form by 30 November 1998. Police could not accept it until near 19 May 1999. As a result, the Crown incurred extra costs.

"IBM NZ has failed to perform its obligations...The Crown has suffered loss as a result of IBM NZ's non-performance. IBM Corporation is liable to the Crown for such loss" pursuant to the guarantee under the contract, the statement of claim says.

Minister Responds to Media Allegations

Sir William noted allegations that IBM's failure to deliver resulted from unreasonable demands by the Police for continual changes and additions to the system.

"The fact is, every significant contract in the fast-moving field of information technology involves large numbers of changes during development. That is absolutely the norm, not the exception. It is ordinarily provided for and accepted by both parties.

"This contract provided for change. Only variations agreed to by both parties became part of the contract. There is no requirement for IBM to supply variations not agreed by them, and the Crown has not sought or expected items which were not agreed by IBM."

Sir William also noted allegations that Police owed IBM $40m for work already done. "That suggestion is very seriously astray. Any amount outstanding on work completed by IBM is substantially less than the $40m referred to by some news media."

He said under the agreement, both parties undertook to use best endeavours to keep cost over-runs on the development cost of Increments 1, 2 and 3 inside a cost box of $20m.

"The contract obliged IBM*if cost rose beyond that as a result of specified conditions*to notify Police, triggering them to reduce the scope of work or the cost of other deliveries, to defer work, or alternatively notify acceptance of the increase," he said.

"On the other hand, if IBM did not follow that process-in other words, did not comply with the requirement for action to trigger a response by the Police-the agreement provided that increased costs would then fall back on IBM, not Police. IBM did not follow that process," he said.

Sir William noted claims that the Crown rejected reasonable and workable solutions offered by IBM. "The only such offer was so stripped down, it did not permit Police to move off Wanganui, and exposed the Crown to a risk of cost over-runs," he said.