The City has to pay to stop the contract, even if the Smart Cities system doesn’t work
This is the second part of a two-part article analyzing the Smart Cities contract.
Key points in this article:
- The only time the City can terminate the contract without cost is if SiFi does not start construction with 180 days of the contractual start date (this date is undefined in the signed contract).
- After construction has started, the City can only exit the contract by buying the system – paying SiFi for its investment, expenses, plus 10%, even if the system does not work. Otherwise they have to allow SiFi to keep working.
- If the system goes down, SiFi gets 180 days to try to fix it.After that, the City can only exit the contract by buying the system – paying SiFi for its investment, expenses, plus 10%, even if the system does not work. Otherwise they have to allow SiFi to keep trying to fix the system.
One of the most important parts of any contract is the section that deals with breach and termination. Breach deals with what remedies are available if one the parties does not hold up their end. Termination deals with how parties to the can exit from the contract (normally because of a contractual breach). In the Smart Cities contract it is Section 7 – Breach; Rights and Remedies; Termination; Indemnification that contains this information and which we’ll analyze.
The Termination section starts out in a fairly standard way. In Section 7.1.1 the contract says that if SiFi is in breach of contract they have 120 days to “cure” (fix) the breach, after the City notifies them. The next Section [7.1.2] begins by saying the City can indeed terminate the contract for an uncured breach, but then adds three very important exceptions:
- Exception 1 [7.1.2 (ii)]: If SiFi does not start on time the contract gives them the 120 day cure period, plus another 60 days, to start. If they don’t start during this ½ year grace period, the City can terminate the contract and seek damages . There is no definition in the contract of what commencing construction means legally. Construction, however, is defined as “breaking ground” [1.]. SiFi could send a worker to stick a shovel in the ground and claim that this was “breaking ground” and meet the contract terms. Nothing in the contract prevents this.
- Exception 2 [7.1.2 (iii)]: This clause deals with what happened if SiFi doesn’t achieve Substantial Completion by something called Construction Completion Deadline (undefined in the contract). Remember, Substantial Completion means either that SiFi has delivered a working system or they have spent 4 years trying. Linking Substantial Completion to any kind of deadline is meaningless, because it is achieved after 4 years, regardless of whether the system works. Nevertheless, after the 4 years are up, the City can now initiate a termination. SiFi is given the 120 day cure period, plus another 60 days, to respond. If the City is dissatisfied with SiFi’s response, the City has two choices:
- It can purchase the system by paying for all of SiFi’s investment, expenses, plus 10%. Remember that there is no requirement that the system work.
- It can allow SiFi to continue to work on installation, even though 4½ years or more have potentially elapsed with no results.
- Exception 3 [7.1.2 (iv)]: This last exception assumes that the system may indeed work. It says that if at any time the system goes down for more than 120 days, and during that time SiFi can’t fix the system, they get another 60 days to fix it. At the end of this 180 days, if the City is dissatisfied with SiFi’s response, the City has similar options to Exception 2:
- It can purchase the system by paying for all of SiFi’s investment, expenses, plus 10%. Remember that the system may still not be working.
- It can allow SiFi to continue to work on the system.
Think about your reaction when your Internet connection goes down for more than a few minutes. This contract allows the system to be out of commission, without penalty, for 180 days. Taken together, these three exceptions effectively insulate SiFi from being held accountable. Commissioner Madigan has called this contract “carefully crafted”. Lawyers and business people who have reviewed the contract have either laughed or shaken their heads in disbelief. One reviewer said, “Yes, carefully crafted for SiFi”. Again, please read the signed contract yourself and see whether you can interpret it any other way.
You can find the first part of this two-part article here. We hope this analysis will motivate the City Council to review the contract and either terminate it before construction commences or, at least, revise it to strengthen protections for our City’s interests. This analysis stands in strong contrast to Commissioner Madigan’s complaisant, even surreal, perspective on the quality and benefits of the signed Smart Cities contract.