When a Contract Goes Bad


    InformationWeek’s Paul McDougall shares some juicy blog thoughts about Sears’ abrupt cancellation last week of its 2004 master services agreement with CSC. In an SEC filing, Sears cited CSC's "failure to perform certain of its obligations."

    Here’s what the Sears document states (I’ve boldface the pertinent text):

    Item 1.01 Termination of a Material Definitive Agreement

    The registrant's wholly-owned subsidiary, Sears, Roebuck and Co. (Sears), has terminated its Master Services Agreement (the Agreement) with Computer Sciences Corporation (CSC) effective May 11, 2005 for cause due to CSC's failure to perform certain of its obligations in accordance with the terms of the Agreement. Pursuant to the Agreement, which was entered into in June 2004 for a 10-year term, CSC has been providing information technology infrastructure support services, including desktops, servers, systems to support Sears-related websites, voice and data networks and decision support technology, to Sears and its subsidiaries. CSC is obligated to continue providing these services for an extended period following termination of the Agreement.

    The registrant does not expect to incur any material termination penalties as a result of termination of the Agreement for cause. However, CSC disputes Sears' assertion that grounds for termination for cause existed. In pending litigation in federal court, CSC previously sought an injunction prohibiting Sears from terminating the Agreement for cause. The court, without ruling on the merits of Sears' assertion, denied CSC's request for an injunction. In a pending arbitration proceeding, CSC also unsuccessfully sought an emergency hearing in an attempt to obtain an order prohibiting Sears from terminating the Agreement for cause, although there was not a ruling on the merits of Sears' assertion that grounds for termination for cause existed. CSC claims that, as a result of terminating the Agreement, Sears would be liable to CSC for compensatory damages and punitive damages of an unspecified amount. Sears believes it has properly terminated the Agreement for cause and intends to defend itself vigorously with respect to CSC's claims.

    In its own SEC filing, CSC states this (I’ve boldfaced the relevant text):

    In June 2004, the Registrant entered into an agreement to provide Sears, Roebuck and Co. ("Sears") with information technology infrastructure support services (the "Agreement"). The Agreement provides that it may be terminated prior to its tenth anniversary by Sears for various reasons, including (i) for "convenience" or upon certain mergers and acquisitions involving Sears, or (ii) under certain circumstances for "cause." The termination fee varies depending upon the type of termination and the date.

    On May 11, 2005, following its merger with K-Mart Holding Corporation, Sears notified the Registrant it was terminating the Agreement for "cause." The Registrant is convinced the termination for "cause" is invalid, contrived to avoid or reduce termination fees of tens of millions of dollars, and a breach of the Agreement for which Sears is liable for damages. Registrant believes it has demonstrated achievement of required services obligations in all material respects.

    At April 29, 2005, the Registrant had invested in net assets associated with the Agreement, including accounts receivable, prepaid expenses, net deferred outsourcing contract costs, software, property, plant and equipment, as well as other commitments. The Registrant will vigorously pursue recovery for its associated assets and commitments under this Agreement or pursuant to impending legal proceedings. While the Registrant expects full recovery of its investments associated with this Agreement, if unsuccessful, the Registrant may experience a charge, which could be material, associated with the impairment of these assets.

    In other words, CSC believes it’s being fired because of Sears’ merger with Kmart.

    Mr. McDougall points out that if Sears and CSC don’t reach agreement behind the scenes, much of the material related to their contractual relationship will be publicly available. We’ll do what we can track those documents down and make them available here.


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