Contract Dispute: Can this contract by rescinded?

You are the manager of a large data processing project. Your company, Systems Inc., worked very hard to obtain a contract with Big Bank to do their conversions from their recent acquisition, Small Bank. The bank met with several companies to discuss who would do the best work on the contract. During your meeting with Big Bank, you told them that you had 'never missed a conversion deadline'. At the time, your company had never missed a conversion deadline, but the company had only done three conversions. You also told them that your data processing systems were the fastest around. After months of negotiation, Big Bank signed the contract. The president of Big Bank said, 'We like fast, and you guys are fast. We choose you'.

You started work on the data conversion immediately (ahead of contract). According to the contract, your team was responsible for ensuring that the new bank's data were converted to Big Bank's data processing system. The contract involved six large conversions. The first involved converting Big Bank's savings accounts, the second its checking accounts, the third its investment portfolio, the fourth its credit card, the fifth its mortgage portfolios, and the six its large business loans. Your team completed four of the six conversions without a problem. The fifth task, the largest and most important, has encountered numerous problems. Some problems have been based on personnel issues on your part and other issues have been based on the bank's failure to provide you with necessary information. One issue resulted when the conversion was delayed for over one week. The data to be converted were formatted differently than the bank's previous specifications provided. For that reason, the data conversion fields needed to be changed. A provision in the contract required your company to receive four people's approval before making any changes to the conversion data fields, and one of those four people, Glenda Givealot, was out of the country doing missionary work in an area of the world that did not have cell phone reception. Another issue resulted when the conversion was supposed to occur. Because of the change in the timeline, the conversion schedule had to change. The weekend the conversion was rescheduled to occur, an ice storm struck the state where your data processing computers were housed. Your facility lost electricity for 3 days and the conversion was delayed again until power could be restored.

Big Bank President: The bank's president, who is a known hothead, was furious. He called you after power was restored and yelled, 'We are rescinding this contract!' He also threatened to take the case to court to seek damages.

Systems Inc. President: Your company president wants this situation resolved amicably. He also wants to maintain the contract with the bank, as he sees the potential for a large amount of business with the bank in the future if this contract proves successful. Corporate counsel believes that the bank just needs to be shown that they are out of compliance with the contract just as we are and that both parties are to "blame." He wants you to start negotiations with the bank to modify certain provisions of the contract to make expectations clearer.

1. Can Big Bank's president rescind the contract? Under what circumstances can a contract be rescinded by either party? What facts have to be alleged and proven and what is the result of a contract that is rescinded?

2. Big Bank's president also threatens legal action. What potential causes of action could you foresee him bringing in court? Would he be successful? What arguments could Systems Inc. raise in its defense? What are Big Bank's potential damages?

3. Review the facts provided and the sample contract. What provisions of the contract could you cite to support an argument that it is not in Big Banks best interest to rescind the contract? What facts could you cite to support an argument that Big Bank be responsible for some of these issues and/or not in compliance with the contract?

4. In this situation, amicable resolution of problems is greatly preferred by your company. Would this be true in all contract disputes? In what situations and why would you decide to move to litigation over amicable resolution?

5. There are three types of contract performance: complete, substantial, and material breach. Describe the differences (and similarities) among the three, and explain some of the legal ramifications for one.

6. What are the two most important concepts from this exercise that will help you in future contract negotiations?