How Not To Treat Your Software Developer: v. Industry Canada

The 2006 decision by the Ontario Court of Appeal in the case of Inc. v. Canada is instructive in how not to treat your software developer. The case involved a botched pilot project known as which was touted as a ground-breaking portal for communities across Canada, designed to make all information and services of federal ministries and agencies accessible on-line. This was in 2000, back when we all used the endearing term “Information Superhighway.” The project foundered for a number of reasons and ended in litigation between Industry Canada and one of its contractors, a software company known as Inc. It makes for a good case study, so here are a few of the lessons:

Lesson 1: Keep Track of the Cooks in the Kitchen
Sometimes you need to bring a number of technology providers together to get a project done. That’s business. However, make sure you know how many you really do need, and ensure there is a clear structure in place to deal with communication and governance. In the CivicLife case, the government engaged two contractors to work on the project: CivicLife and another software company called Technologies Inc. Smartsources was the junior partner, hired to provide some of the minor components of the portal. The parties did turn their minds to the issue of communication and cooperation: in the legal agreements the two contractors were obliged to cooperate and communicate with each other and the government had established a communication structure between itself and each contractor.

But at some point in the process, someone at Industry Canada decided that Smartsources should take the lead and develop its own portal. Problem is, no-one ever told CivicLife, who continued to toil away at the project wondering why their partners weren’t cooperating. If you decide that one contractor needs to be dropped, do it early and negotiate a resolution of the issue or a termination of that contractor. Secretly encouraging one contractor while stonewalling the other will only breed confusion, inefficiency and ultimately litigation. The court found that: “The misconduct was carried out in secret while all along Industry Canada was telling CivicLife the project was proceeding as agreed, and when CivicLife learned of the portal submitted by SmartSources, Industry Canada invented a false story to convince CivicLife that its position was not altered.”

Lesson 2: The Duty of “Good Faith”
The court was clear that Industry Canada breached its duty of good faith when dealing with CivicLife. What does that mean? Essentially, the government secretly encouraged Smartsources while stringing along CivicLife with no intention of making the relationship work. According to the court, they “acted in such a way as to undermine the very objectives of the contract.” The government’s lawyers (hey, they were doing their job) argued that it was not a specific term of the contracts that the government act in good faith. Okay, they were technically correct, there was nothing expressly imposing such an obligation in the text of the government’s contracts. But that didn’t stop the court from “reading in” or implying a duty of good faith in its dealings with CivicLife. You may have a duty to act in good faith even if there is no such obligation written in your contract.

Lesson 3: The Fine Print
Of course the fine print can always come back to haunt you. And there’s nothing like litigation to shine a light on it. Here are a few nuggets from this case:
• If you have a duty to use “best efforts” you must exercise your discretion reasonably and fairly.
• If you can do something in a contract in your “sole discretion” don’t think that means you can ride roughshod over the other party. When exercising your discretion, these words can mean acting reasonably, honestly and in good faith and with regard to how the other party’s interests are affected.
• An “entire agreement” clause will not stop the court from implying a term of the contract, such as a duty of good faith or the duty not to abuse a discretion.

Lesson 4: The Value of Good Evidence
Industry Canada never provided any evidence to explain whether it ever rejected or found fault with any of CivicLife’s deliverables. It could never explain why it decided to ask SmartSources to provide a stand-alone portal or why it did not proceed with the national launch of If they had the evidence, it would have come out. On the other side, CivicLife could show that it sent written correspondence to Industry Canada, and this documentation helped win the case. In the court’s words: “Even though Industry Canada knew CivicLife was in dire financial straits and needed to be told the truth as soon as possible, it deliberately chose not to respond to CivicLife’s many letters and kept silent to allow CivicLife to drown in useless and expensive attempts to keep the project alive.”

This case isn’t a cutting-edge Supreme Court of Canada judgement, but it neatly illustrates some of the practical business issues to watch for. You may as well take a few tips: CivicLife ended up in receivership.

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