Court of Appeal awards Co-op Insurance £80.6m in damages in IBM case

The long-running case goes back to a failed contract to supply a new system in 2017

The English Court of Appeal in England has ordered IT giant IBM to pay £80.6m to Co-operative Insurance (CIS) over the collapse in 2017 of a contract with its insurance business.

IBM was hired in 2015 to develop Project Cobalt, of a new underwriting system at CIS General Insurance, which was at the time owned by the Co-op Group. The deal had a price tag of £50m for system development plus £125m for ten years of support.

But the project was dogged by failures, with underperformance from subcontractor Innovation Group, key deadlines missed and issues with coding.

In response, CIS declined to pay an invoice of £2.9m; IBM responded by terminating the contract, prompting the lawsuit from the Group for £128m in damages.

The Group sold CIS to Makerstudy in 2020 for £185m, but the case continued and in February 2021 a High Court judge found IBM responsible for “critical delays”. Mrs Justice O’Farrell ruled that the IT firm had improperly cancelled the contract and its client had incurred wasted costs of £122.6m.

But she said exclusion clauses limiting liability had restricted what the insurer could claim, and awarded £13m in compensation.

Both parties appealed and the Court of Appeal has now overturned Mrs Justice O’Farell’s ruling, awarding CIS £80.5m.

IBM said it was “disappointed” with the decision and plans to appeal to the United Kingdom’s Supreme Court.

The long-running case has been seen as an instructive one for organisations embarking on costly IT projects. Writing after Mrs Justice O’Farrell’s judgment last year, Lindsey Brown of Linklaters said it “highlights how messy and complicated they can become”.

And Anthony Collins Solicitors, writing a blog for Co-operatives UK last June, said the case is “a useful reminder of the importance of good project management. Many of the issues in this case could have been avoided if there was effective communication between the parties.”

It added: “If IBM had trusted a sub-contractor to provide the bulk of the services, then IBM should have been adequately monitoring the performance of its sub-contract and as soon as issues became apparent, this should have been brought to Co-op’s attention. This obligation should also be clear in the contract.

“Likewise, if the project was time sensitive, then clear milestones should not only have been stipulated in the contract, but also be made a key term of the contract. To avoid circumstances that were seen in this case, project managers from both sides should work collaboratively to create realistic milestones with room for adjustment in the event of delays.”

Effective contract management is also important factor, in terms of both negotiating and upholding its terms, the blog added.