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Co-op Insurance wins £80.6m from IBM for failed IT project

From user testing until termination, 1,784 defects were recorded...

The Court of Appeal has told IBM to pay £80.6 million to Co-op Insurance in the latest win for the insurer in its long-running legal battle against the IT giant, following the failure of a major IT project in 2017.

The project’s failure may also have been a factor in the sale of Co-op Insurance, Lord Justice Coulson suggested in the Court of Appeal ruling. The Co-operative Group sold Co-op Insurance to Markerstudy for £185 million in December 2020, and the company is now known as Soteria Insurance Limited.

The judge’s ruling noted if the IT project had succeeded, Co-op Insurance would have seen increased profits, and might have been sold for a higher price, or not sold at all.

Both Co-op Insurance and IBM appealed the original February 2021 judgment, which awarded the insurance firm £12.9 million in February 2021. That judgment by Mrs Justice O’Farrell found Co-op Insurance had incurred wasted costs of £122.6 million on the failed IBM-led IT project, but exclusion clauses limiting liability dramatically limited what it could claim from IBM.

Co-op Insurance had commissioned IBM for a £50 million IT transformation project in 2015, named Project Cobalt, which would see IBM build the firm a new software platform for its insurance and underwriting business. In addition to the capital cost, Co-op Insurance would have paid IBM £125 million to manage the system over the next 10 years.

See also: Autonomy founder Mike Lynch faces extradition after court loss

The judgment and the appeal mostly centred on a single unpaid invoice for £2.9 million, and an exclusion clause in the Master Services Agreement. As both rulings make clear, IBM and Co-op knew the 18-month-old project was doomed to failure by July 2017, and manoeuvred accordingly to limit their exposure to the fall-out, choosing this as the battle-ground.

The appeals judgment overturns the original judge’s interpretation of the exclusion clause,  -- law firm Linklaters had described that initial interpretation as “somewhat surprising” and DLA Piper found it “quite puzzling”.

This opened the way to Co-op Insurance receiving a total of £80,574,168 from IBM – less than the £96 million Co-op Insurance believed it was entitled to, but substantially more than the £12.9 million originally awarded. IBM said it was “disappointed” in the judgment, and it intends to appeal to the Supreme Court.

Did IBM IT project failure force sale of Co-op Insurance?

While most of the appeal centred on the legal interpretation of contractual clauses, one of IBM’s arguments was to claim Co-op Insurance’s losses were not due to the failure of the IT project, but due to its change of strategy in seeking the sale of the business – referred to in the appeal as the “causation argument”.

Lord Justice Coulson rejected this out of hand, writing in his judgment: “I am in no doubt that IBM's belated causation argument is untenable.”

The judge noted the causation issue was barely raised during the original trial, and then only during oral arguments, and not referred to in the lengthy written submissions.

“Had it been pleaded, and had there been relevant evidence about it, and had the judge reached detailed conclusions on that evidence, the position might be different. In the absence of all those things, this argument is not open to IBM,” Lord Justice Coulson wrote.

In this context, he also noted how the IT project may have influenced the fate of Co-op Insurance: “Such evidence as there was indicated that, if the contract had been performed, [Co-op Insurance’s] profit would have increased by around £4 million a year, so [Co-op Insurance] might therefore have been retained, or sold for a much greater sum.”

Case sheds light on Co-op / IBM IT project

Aside from the legal judgments, one of the most interesting aspects of cases such as these is the internal perspective they give on major – and indeed problematic – IT projects. This project appears to have been exceptionally difficult.

Law firm Linklaters noted in its analysis of the original case: “As a measure of how far off beam the project went, from the start of the second phase of user acceptance testing in October 2016 until termination, 1,784 defects were recorded, of which 116 were severity one, 432 severity two, 1,052 were severity three and 184 were severity four. A single defect in either category one or two being sufficient to fail user acceptance testing.”

Co-op Insurance and IBM started work on the IT transformation project in 2015, with a substantial amount of work subcontracted to The Innovation Group, a provider of insurance-industry software. But with delays on both sides, and a clear under-estimation of the work required, the project quickly ran into problems.

With both parties resigned to the project’s failure, they expected a legal battle. Co-op Insurance chose the fight by declining to provide a purchase order number for a £2.9m invoice from IBM, then rejecting that invoice when IBM submitted it.

This case makes clear how risky attempting to terminate a contract for cause can be, and the vital importance of making exclusion clauses as clear as possible.

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