Navigating Cross-Border IT Disputes: Insights And Outlook

By addressing jurisdictional challenges and implementing contract and claim management systems, parties can effectively manage disputes. Additionally, staying abreast of new EU regulations and prioritizing cyber security helps international companies mitigate risks and ensure successful IT collaborations.

In recent years, the landscape of cross-border IT disputes has evolved significantly, particularly with the rise of ERP-implementation projects involving Indian and Southeast Asian Outsourcing- and IT services providers and their customers in the EU. We have witnessed the complexities and challenges that arise when large scale contracts turn into disputes. This article aims to shed light on the key elements, pitfalls, and outlook of cross-border IT disputes, with a special focus on the influence of current and new EU regulations and international cyber security threats.

1 Key Elements of Cross-Border IT Disputes

Jurisdiction: One of the first things to be considered in an emerging cross-border IT dispute is determining the appropriate jurisdiction. Parties often pay little attention to jurisdiction clauses, also called “midnight clauses”, because they are discussed at the end of long-lasting contract negotiations. For most IT service provides, operating for clients in the EU, this will very likely be a foreign jurisdiction or a foreign seat, making it necessary to (1) include local legal assistance when negotiating a contract and (2) choose a representative who has sector knowledge, an understanding of the available dispute resolution mechanisms and understands the importance of a fair and discreet settlement.

Effective communication: Communication is always key in resolving disputes. However, in international IT disputes or international disputes in general, it is even more important to have a deep understanding of the economic and country specific circumstances (e.g., knowing the consequences a stakeholder of the counterparty might have to face when having to get approval for a settlement agreement can make a difference when approaching them with a settlement offer). This is again ensured by a trusted local counsel, who is in the best-case scenario not picked when it is already too late.

Enforcement of Judgements and Awards: Enforcing judgements and arbitral awards across borders can be challenging due to differing legal systems. It is important to consider the enforceability of potential judgements and awards ideally during the contract negotiation stage to avoid complications and surprises later. In any case, enforceability must be considered to realistically evaluate the risks of a dispute.

Contract Management:

• Contract negotiations: Cross-border IT contracts are often intricate, with numerous clauses, several annexes addressing various aspects of the project. Ensuring that the contract is comprehensive and clearly outlines the parties’ responsibilities, deliverables, and dispute resolution mechanisms is critical. Ambiguities in the contract can lead to misunderstandings and prolonged disputes. Therefore, it is crucial to involve and align the relevant stakeholders early in the project, starting with the request for proposals.
• Contract, license and claim management: Considering the large amount of technical and legal documents in complex IT projects, it is essential to have a clear understanding of the respective rights and obligations under the respective contract. This is particularly important for IT projects because the objectives are often not clear from the beginning and must be identified and implemented over the course of the initial contractual phases. However, the reality of IT projects is that several changes to the deliverables are often made after signature in the early (e.g., elaboration scoping) phases and without proper documentation. It is therefore highly advisable and helpful – not only in case of a dispute - to have a reliable document, contract, and claim management system in place, so that when a dispute arises, it is not only a matter of forensics and the availability of internal resources whether a sufficient claim or defence can be established.

2 Pitfalls in Cross-Border IT Disputes

Common Issues in ERP-implementation projects: ERP-implementation projects are complex and often encounter issues such as delays, cost overruns, and technical failures. Regularly, these issues are based on unclear contractual terms or missing documentation, which then lead to disputes between the parties.

Denial of Payment by EU Customers: We found that a recurring issue in cross-border IT disputes is the denial of payment by EU customers. This can stem from dissatisfaction with the overall project outcomes or perceived non-compliance with contractual terms. Addressing these concerns proactively through (1) clear contract language especially in the description of the deliverables, which is often overlooked by the involved legal experts, and second (2) clear communication and documentation throughout the live span of a contract can help mitigate such disputes. Including escalation procedures in contracts which do not serve as placeholders, but which have been thought through by both parties is an easy method of preventing the escalation of such projects.

Misalignment of Expectations and Deliverables: Misalignment between the expectations of the client and the deliverables provided by the IT service provider is a common pitfall. Ensuring that both parties have a shared and documented understanding of the project scope and deliverables from the outset can prevent disputes.

3 Future Outlook

Increasing Relevance of Cross-Border IT Disputes: As globalization might be on a halt in some sectors for political reasons, it continues to be even more relevant in international IT projects and outsourcing collaborations: the relevance of cross-border IT disputes is expected to grow, also since the classic distribution of weights has shifted. It is no longer guaranteed that a, e.g., Indian Outsourcing provider is reluctant to litigate against their French or German customers, who refuse payment, as the Indian Outsourcing provider is very likely larger, has a well-trained and experienced legal department and due to their size is no more dependent on individual customers. Companies must be prepared to navigate these disputes effectively to protect their interests.

Impact of New EU Regulations: The European Union has introduced several new regulations that will impact cross-border IT disputes. The AI Act regulates artificial intelligence systems, ensuring transparency and accountability, addressing also international software developers who place their products on the EU market. The Data Act focuses on data sharing and access, addressing the same companies, while IT Security regulations (e.g. NIS2 and DORA) enhance cybersecurity measures and thereby highly impact outsourcing agreements which include security services. These regulations shape and will continue to shape the legal landscape of IT disputes (making them even more complex and giving more incentives to settle at an early stage), necessitating compliance and adaptation by companies.

GDPR’s Role in IT Disputes: The General Data Protection Regulation (GDPR) has already had a significant impact on IT disputes, particularly concerning data protection and privacy. Companies must continue to ensure compliance with GDPR to avoid legal repercussions and build trust with clients.

4 Role of Cyber Security Threats

Importance of Cyber Security in IT Projects: Cyber security is a critical aspect of IT projects, especially in cross-border collaborations. Ensuring robust cyber security measures can prevent data breaches and protect sensitive information, thereby reducing the risk of disputes.

E.g., ERP-implementation projects are vulnerable to cyber security threats such as hacking, data theft, and ransomware attacks. These threats can disrupt project timelines and compromise data integrity, leading to disputes.

Strategies to Mitigate Cyber Security Risks: Implementing comprehensive cyber security strategies, including regular security audits, employee training, and advanced security technologies, can help mitigate cyber security risks. Proactive measures can safeguard IT projects and foster trust between parties. Again: a clear description of obligations in the contract is key to preventing liability.

5 Conclusion

Navigating cross-border IT disputes requires a nuanced understanding of the legal and technical aspects involved. By addressing jurisdictional challenges and implementing contract and claim management systems, parties can effectively manage disputes. Additionally, staying abreast of new EU regulations and prioritizing cyber security helps international companies mitigate risks and ensure successful IT collaborations. As the relevance of cross-border IT disputes continues to grow, companies must be prepared to adapt and navigate this evolving landscape.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.