A director's duties when negotiating IT contracts

Under Singapore law, directors have to employ reasonable diligence as part of their duty to the company. It can get tricky when negotiating IT contracts though, which may not be everyone's cup of tea.

As a current topic, I decided to analyze the duties of company directors when negotiating major IT contracts. Leaving issues of conflict of interest aside (as these are clearly a breach of a director's duties), I asked what duties of reasonable diligence are imposed on directors. My conclusion is taken from a mixture of news reports relating to the National Kidney Foundation (NKF) criminal case in 2007.

The NKF had signed a US$1.6 million IT contract with a vendor and made an initial advance payment. Further payments were made despite the vendor not meeting milestones. The vendor also made an additional claim of 9,000 man-hours because it claimed NKF had asked for changes. The NKF IT team thought 500 man-hours were valid. Two directors were sent to negotiate the termination and managed to reduce the extra man-hours to 5,300. All in, the vendor had charged S$2.6 million (US$2.1 million) and received S$1.3 million (US$1.1 million)

The judge held both directors liable for negligence as directors. They were fined S$5,000 (US$4,073) and barred from holding directorships. The judge said directors must exercise reasonable diligence and have a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's affairs in order to discharge their duties as directors. She decided that the directors failed to make appropriate inquiries, especially with NKF's IT project team. To her, both directors demonstrated limited understanding of IT and about NKF's rights under the contract.

Several defences were raised and dismissed: that the directors made commercial decision honestly for charity's benefit; the directors were unpaid volunteers; one director joined the negotiation late into the project; and that they had managed to negotiate 50 percent of the charges away.

Based on the NKF incident, key learning points for directors are:

(a)    Directors can be liable for failing in their duties to their companies/organizations. This can happen especially if there are ownership or organizational changes.

(b)    Being a volunteer does not absolve one from his duty.

(c)    Unfamiliarity with IT and legal issues should be addressed by getting the appropriate advice from in-house and external experts and asking the right questions. Departure from such advice must be carefully considered.

(d)    Getting a good deal may not be enough if a better deal should or could have been sought. When faced with tricky or unusual scenarios, more attention would be required. 

(e)    Responsibility is placed on all directors involved in the decisions, whether fully or partially.

The above illustrates the increasing expectations on directors and the severe consequences of not doing so. Similarly, equal care must be taken in negotiating and re-negotiating IT contracts.