Secret health payroll legal advice revealed
- Payroll crisis timeline
- Contract dispute over 'defects'
- How the costs spiralled with many changes
- How to untangle the mess
- 'Unprecedented' release
- Index to secret documents
The former Bligh government feared suing IBM over the Queensland Health payroll woes, citing “poor or inadequate project record keeping” and the IT giant’s ability to highlight problems with the state’s management of the project.
Previously secret cabinet documents provide an insight into the dispute that escalated between IBM and the former Labor government after the new health payroll system was switched live in 2010 and failed to pay employees correctly. The debacle ended up costing hundreds of millions of dollars to fix.
The 18 lengthy documents – tabled in Parliament by Labor Opposition Leader Annastacia Palaszczuk on Wednesday following intense political pressure from the Newman government – will take time to examine.
However, one document, dated July 22, 2010, shows how the Bligh government’s Cabinet Budget Review Committee decided it would be best to try to negotiate a settlement with IBM amid ongoing problems with the new system several months after it went live.
The negotiation talks were to be limited to six weeks. Public Works and ICT Minister Robert Schwarten’s submission said the contract was signed on December 5, 2007, to deliver a replacement for Queensland Health’s old LATTICE payroll system.
The submission noted IBM “would vigorously defend any damages litigation brought by the State and would no doubt allege by way of defence that the State's contractual requirements were inadequate”.
The document outlined several ways in which the state government’s position in suing IBM would be weakened, including the likelihood the IT company would point to shortcomings in the state’s management of the troubled project.
“Whilst full investigations on this damages issue would take several months, it can be expected that the State would face several practical difficulties in pursuing this form of action against IBM including poor or inadequate project record keeping, and the effect of changing project personnel on the management of the project from the State perspective,” the document said.
“In addition, the Auditor-General's Report to Parliament No. 7 for 2010 provides significant detail on shortcomings in the State's governance and management of the project which would no doubt be sought to be relied upon by IBM by way of defence.
“IBM may also bring counter-claims against the State. In addition, IBM has access to a range of project and other documentation that it would use in its defence thereby further weakening the State's position.”
Litigation would also cost millions of dollars.
The document said the scope of the contract was a significant area of ongoing contractual dispute between IBM and the state government.
“The high-level nature of the State's original system requirements, the uncertainty of its original tender requirements and the fact that IBM's response was not appended to the contract Q 11, has meant that the State has not been able to successfully refute IBM's assertions on scope,” it said.
“Since implementation of the system, as delivered by IBM, a significant number of adverse issues have arisen in relation to the use and operation of the system, with a large number of system defects not being rectified by IBM within the required contract timeframes.
“Commencing 30 April 2010, several contract notices have been issued to IBM and responses received. On 29 June 2010, after due consideration of the latest response from IBM and legal opinions from Crown Law and Mallesons Stephen and Jaques, the State issued IBM with a Notice to Show Cause.
“A Notice to Show Cause is a necessary step should the State elect to terminate the contract.
“On 16 July 2010, IBM lodged a Notice of Dispute challenging the State's assertions of a material breach of contract.
“In accordance with the Significant Litigation Directions, the Attorney-General has been informed that this matter involves prospective significant litigation.”
Mr Schwarten’s submission set out two options. One was to pursue a negotiated settlement with IBM. The second was formal termination of the contract and then the possibility of doing nothing, negotiating and/or litigating.
He said an “orderly transition out of the contract” allowed the state the best opportunity to put in place alternative support arrangements to ensure the Queensland Health rostering and payroll solution was not exposed to unnecessary risk.
“The consequence of taking this course of action means the State giving up an undefined set of potential legal claims against IBM which in the case of a damages claim cannot be fully quantified at this time. This needs to be balanced against the option of litigation where IBM has access to all project documentation and the Auditor-General's Report to Parliament No. 7 of2010, which it will use to vigorously mount a legal defence.
“There is the potential for the State to proceed to terminate the contract and retain all outstanding monies for contract milestones and seek to offset these against the additional costs it has incurred in supporting and operating the system. If the system is ultimately found to be unworkable, the State could, in due course, also seek to recover significant damages from IBM by pursuing a legal claim against IBM based on breach of contract along with a deceptive and misleading conduct claim under section 52 of the Trade Practices Act 1974.
“However, it is highly likely that IBM would vigorously defend any damages litigation brought by the State and would no doubt allege by way of defence that the State's contractual requirements were inadequate. IBM may also bring counter-claims against the State including suing for unlawful termination.
“The past track record for these types of actions indicates that after a significant period of time, the parties tend to settle the claims given the size of the legal costs involved, the distracting effect of the litigation on their businesses, and the overall risks associated with conducting litigation of this nature.”
Mr Schwarten warned his colleagues about the need to tread carefully given the decisions would attract public attention.
“Regardless of which option is progressed, it is to be expected that any further decisions taken by the State may well be the subject of further review by the Auditor-General,” he wrote.
“Furthermore, any action taken by the State will inevitably be subject to public scrutiny and will therefore need to be defensible.”
The CBRC submission outlined how the cost of the health payroll system had spiralled as changes kept being made to the scope of the project.
“There have been 47 contract change requests executed under the contract,” the document said.
“Thirty-seven of the contract change requests relate to changes in scope. Cumulatively, this has increased both the cost and time required to deliver the replacement system. The remaining 10 change requests relate to contract administration matters and have had no impact on time or cost.”
The new system was switched on in March 2010. A contract milestone for system acceptance was set down for April 30, 2010, “conditional on the execution of three pay runs and all outstanding severity 1 and severity 2 defects being rectified, and other requirements being satisfied”.
“Since implementation, a number of issues have arisen in relation to the use and operation of the system. A large number of the defects identified prior to go-live have not been rectified by IBM within the required contract timeframes. This has meant that significant resources above what would be considered normal have been, and are still required, to ensure that the Queensland Health payroll is delivered each pay cycle, based on the manual workarounds in place.”
The massive problems after the system went live prompted the government to send a letter to IBM on April 23, 2010, complaining there had not yet been a successful pay run and the state was worried about the usability of the system.
The April 23 letter advised of the government’s “acute dissatisfaction” with the Queensland Health Workbrain/SAP payroll system delivered by IBM and said until the issues were resolved to the government's satisfaction, no payments of outstanding monies would be made.
“On Friday 30 April 2010, IBM issued a contract Delay Notice which stated that it would not be able to meet the System Acceptance Milestone date of 30 April 2010,” the CBRC submission said.
“IBM did not adequately explain the reason and cause for the delay, nor did it provide a satisfactory action plan for rectification, as required by the contract.”
This prompted the government to issue IBM with a remedy notice on May 12, 2010, demanding IBM rectify all outstanding matters within seven days and preserving the state's rights under the contract.
IBM insisted it was not in breach of the contract and proposed contract variations giving it a further extension of time until September 30, 2010, and a further reduction or elimination of certain acceptance criteria.
The government and IBM continued to issue each other with letters and they disagreed over whether the IT giant was in breach of the contract.
IBM argued the state caused the delays and cited the scathing report by the Auditor-General.
“Mallesons Stephen Jaques has provided advice that IBM is in material breach of the contract," the CBRC submission said.
"Crown Law has confirmed this view. However, the State is now using the system to produce the Queensland Health payroll each fortnight. In addition, the State is also requiring a number of system enhancements and modifications as a result of work arising from the Payroll Stabilisation Project.
“This will provide opportunity for IBM to mount a defence citing that the State has impeded IBM in fulfilling its contract obligations.”
The submission said: “There are now a number of competing system priorities including defect resolution as required by the contact, new requirements from the Payroll Stabilisation Project and the need to stabilise the payroll system as Queensland Health settles the number of users required, the quantity of ad hoc pay runs likely each week and processing volumes.
“This situation has the potential for both parties to claim that the other is not able to fulfil their respective obligations under the contract.
“These factors, combined with the general contractual uncertainty around the scope of the contract due to dealings with IBM after the contract was signed and the lack of significant criticism of IBM by the Auditor-General in his Report to Parliament No. 7 for 2010, mean that any action contemplated by the State will need to be carefully considered.
“In addition, IBM has access to a range of project and other documentation that it would use in its defence thereby further weakening the State's position.
“The most important outcome must be to ensure that the system is able to continue to deliver payroll services to Queensland Health.”
Other documents provide an insight into the subsequent steps taken by the former government.
Legal advice by Mallesons Stephen Jaques said a negotiated settlement would likely require the government to release IBM from future obligations and any past alleged breaches.
"Ultimately, the State is in a strong position contractually. Conversely, IBM is in a weak position. Agreeing to a settlement runs the risk that the State will give up significant existing legal rights against IBM."
In a letter on July 6, 2010, law firm Blake Dawson, acting for IBM, pointed to the Auditor-General’s report as evidence of state government shortcomings, including the inability of the state to articulate its business requirements throughout the project and poor governance.
“With regard to the last item, IBM notes that at all times IBM acted within the State's governance structures and while IBM concurs with the Auditor-General's findings concerning the inadequacy of these structures, IBM is not responsible for those structures or the consequences which flow from them,” Blake Dawson partner Tim Brookes wrote.
“IBM has consistently kept the State appropriately informed of the delays in achieving the Milestones and providing the deliverables by the agreed dates. IBM maintains that the delays have been caused by the State. In particular, the delays in achieving completion of this project have been caused by the significant changes in scope from that originally envisaged.”
Government-hired law firm Mallesons Stephen Jaques then provided new, confidential advice to the Bligh government.
It said more work needed to be done to determine the likely value of any claim against IBM and the prospects of success of each claim.
“We believe that it is worth doing such work, as (based on the information that we have) it is not unlikely that the State has a significant claim for damages against IBM,” the law firm wrote.
Mallesons Stephen Jaques said the contract with IBM “was enhanced to include additional provisions that may assist the State to recover a higher level of damages”.
“For example, in clause 2.5 of the Payroll Contract, IBM acknowledges that the services it provides are ‘mission critical’ for the State and that if the services are provided incorrectly, there may be a ‘severe adverse economic impact on the Customer and its employees’,” the advice said.
But the law firm also warned the state government it faced risks if it pursued IBM for damages, including that some documents, project minutes, emails and reports “may contain statements that, when read in hindsight, hurt the State’s position”.
The firm said changes in government personnel during the course of the project may harm the prospects of obtaining necessary witness statements, while different people working for the state “may have communicated conflicting instructions to IBM”.
Litigation would be “complex and costly”.
Another confidential CBRC document dated June 2, 2011, revealed the outcome of negotiations with IBM.
The document referred to a supplemental agreement and CBRC noted that “the State and IBM have agreed to withdraw all current contract notices and actions and that terms and conditions of the Agreement are to remain confidential”.
CBRC also noted “IBM has fulfilled all of its obligations under the Supplemental Agreement and has been authorised to raise invoices for payment”.
The deal was agreed on by Mr Schwarten and by the then deputy premier and health minister, Paul Lucas.
The document said IBM rectified a list of identified defects and functional deficiencies in the system for no additional contract payments.
From November 1, 2010, government body Corp Tech assumed responsibility for the running, support and maintenance of the Queensland Health rostering and payroll project.
Ms Palaszczuk told Parliament her decision to release the advice provided to the former state cabinet was “unprecedented” and followed “soul searching”.
The move follows months of intense political pressure, with Liberal National Party Health Minister Lawrence Springborg repeatedly demanding the documents be disclosed.
Ms Palaszczuk has previously granted Mr Springborg access to the legal advice but the Health Minister complained conditions meant he would not be able to take notes when inspecting the documents or discuss their contents with others.
The legal advice relates to the possibility of suing IT giant IBM over the introduction of the new health payroll system, which was activated in 2010 and led to thousands of employees being overpaid, underpaid or not paid at all.
The government has had to spend hundreds of millions of dollars to fix and stabilise the system.
On Wednesday afternoon, Ms Palaszczuk moved a motion in Parliament to table “various cabinet documents of the previous government relating to the IBM contract and health payroll”.
“This is an historic occasion in this House,” she said.
“As you would well be aware, Madam Speaker, and as would all members of this House, it is a longstanding convention in Queensland that current ministers may not have access to cabinet documents produced by a past government of a different political party. The reasons for this are self-evident.
“Protection of the conventions of this Parliament is a duty of all members of this House, and conventions which have been in place for centuries, adopted from the Imperial Parliament on the creation of this great state and this great state legislature, should not be lightly forsaken.”
Cabinet documents are typically subject to a 20-year secrecy rule under current legislation.
Ms Palaszczuk said allowing the release of the documents had been a difficult decision.
“The release of cabinet documents, and the departure from the conventions of Executive Government, are not things to be undertaken lightly, and it is not in anyone's interest that this be a regular occurrence,” she said.
“My actions on this occasion are a one-off, and I advise the House that it is only because of the extraordinary circumstances of this case that I have taken this action and I am highly unlikely to ever do so again.
“In addition to the documents tabled, there are four cabinet minutes that contain information about unrelated matters. I have asked for a redacted copy of those documents from the cabinet Secretary which haven't yet arrived. I therefore foreshadow, Madam Speaker, that I will be seeking leave to table those documents once I receive them.”
The documents are bulky and parliamentary staff have scanned the documents and posted them on the Queensland Parliament's website to allow public access.
Mr Springborg has argued the documents must be provided to allow the Newman government to consider whether it can sue IBM over the payroll rollout in an attempt to recoup taxpayer costs.
Deputy Premier Jeff Seeney said Ms Palaszczuk had been "dragged kicking and screaming" to release the health payroll documents. Mr Springborg said the Opposition Leader's action came more than 100 days after Parliament passed a motion requesting the release of the documents.
Prior to the release of the documents, an LNP-dominated parliamentary committee called on the Attorney-General Jarrod Bleijie to consider launching a royal commission-style inquiry into health payroll costs.
The Health and Community Services Committee said if a full inquiry was not launched, the committee could pursue its own inquiry using its powers “to obtain evidence from relevant people including former ministers, union officials, parties to contracts relevant to the Queensland Health payroll, former public servants, former consultants, and others”.
The LNP members of the committee stressed the need to obtain the legal advice and associated cabinet minutes and decisions, but Labor members dismissed the inquiry recommendations as “political stunts that will waste taxpayers’ money”.
Cabinet documents have previously been released to the public after 30 years. In 2008, then premier Anna Bligh announced changes to cut the waiting time to 20 years.
- Secret Cabinet Budget Review Committee Decision No. 3019 (Submission No. 3962) dated 22 July 2010
- Confidential Cabinet Budget Review Committee Decision No. 3231 (Submission No. 4166) dated 2 June 2011
- Confidential Cabinet Budget Review Committee Decision No. 3040 (Submission No. 3979) dated 26 August 2010
- Confidential Cabinet Budget Review Committee Decision No. 2989 (Submission No. 3931) dated 17 June 2010
- Confidential Committee Decision No. 3002 (Submission No. 3948) dated 8 July 2010
- Confidential Cabinet Budget Review Committee Decision No. 3090 (Submission No. 4036) dated 29 October 2010
- Secret Cabinet Budget Review Committee Decision No. 3108 (Submission No. 4064) dated 18 November 2010
- Confidential Cabinet Budget Review Committee Decision No. 3136 (Submission No. 4061) dated 6 December 2010
- Confidential Cabinet Budget Review Committee Decision No. 3204 (Submission No. 4155) dated 9 May 2011
- Confidential Cabinet Budget Review Committee Decision No. 3279 (Submission No. 4242) dated 29 August 2011
- Confidential Cabinet Budget Review Committee Decision No. 3313 dated 14 October 2011
- Secret Cabinet Budget Review Committee Decision No. 3388 (Submission No. 4325) dated 1 December 2011
- Secret Cabinet Budget Review Committee Decision No. 3393 (Submission No. 4332) dated 1 December 2011
- Confidential Cabinet Budget Review Committee Decision No. 3396 (Submission No. 4336) dated 1 December 2011
- Confidential Cabinet Decision No. 9337 dated 10 May 2010
- Secret Cabinet Decision No. 9639 (Submission No. 7698) dated 22 November 2010
- Confidential Cabinet Decision No. 9407 dated 7 June 2010
- Confidential Cabinet Decision No. 9904 dated 11 July 2011