The Catastrophe

Many will be aware of the State of Queensland’s recent attempt to implement a new payroll system for Queensland Health as part of its effort to rationalise government services. For that purpose, IBM was selected as the prime contractor in December 2007. In March 2010, the new payroll system went ‘live’, but proved to be a catastrophic failure leading to serious financial consequences for Queensland Health employees and also the State. Following this, the State required IBM to “show cause” as to why the contract should not be terminated.

The State and IBM tried to settle the dispute by signing a supplemental agreement by which the State agreed (the key elements are summarised) to:

• release IBM from all Claims (which had a broad definition of any action, claim, proceeding, etc);
• pursuant to statute, contract, tort;
• that the State had, has or might have had against IBM in respect of any obligation, act or omission prior to 1 September 2010 arising out of the statement of work (for the payroll solution);
• provided there were no further material defects in the payroll solution delivered by IBM or any unremedied breaches by IBM.

In December 2013, the State sued IBM for damages for breach of duty of care, and misleading or deceptive conduct. IBM reacted by applying for a declaration from the Supreme Court that under the supplemental agreement, IBM was released from the damages claim brought by the State .

The Outcome

The key question was whether the agreement was intended to release IBM from the matters that were in dispute between the parties.  The Court found that was the parties’ intention. The Court also held that the release was drafted so broadly as to release IBM from the damages claim brought by the State, including with respect to defects known or unknown to the State and any known problem in the ICT contracting services provided by IBM.

How we can assist

When settling a commercial dispute, be very careful that you agree to a release clause that accurately reflects the terms of settlement. Make sure you first identify what the dispute is about, and whether the release will prevent any claim arising out of the dispute from being made. If you wish to keep a window open for particular types of claim, the release clause should make this clear. If the release is contingent upon the payment of a settlement amount, this should also be made clear. If you wish to start legal proceedings to recover loss or damage, do not agree to a release.

The Mills Oakley Corporate Advisory team can help you when negotiating commercial disputes, and in drafting properly worded releases.