Sears, CSC fighting over IT contract termination fees

The outsourcer claims it's owed $96M; Sears alleges breach of contract

By Carol Sliwa

May 23, 2005 12:00 PM ET

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Computerworld - Sears, Roebuck and Co. ended its 10-year, $1.6 billion IT outsourcing agreement with Computer Sciences Corp. after just 11 months. But the companies now face arbitration on a prickly dispute over the grounds of the cancellation and whether Sears has to pay termination fees to CSC.
At stake, according to motions that CSC filed April 25 with the U.S. Court of Appeals in Chicago, is roughly $96 million in termination fees. CSC claims that is the amount Sears should have to pay to end the contract.
Sears said in a May 11 filing with the U.S. Securities and Exchange Commission that it had cause to pull out of the contract, citing CSC's "failure to perform certain of its obligations." The retailer added that it expects to incur no "material" penalties as a result of the termination.
But in its own SEC filing last week, CSC countered that Sears' attempt to end the contract for cause was "contrived to avoid or reduce" the termination fees that the outsourcing vendor says it is owed.
CSC argued in its motions filed with the Court of Appeals -- from which it unsuccessfully sought an injunction to stop Sears' move to cancel the contract for cause -- that Sears terminated the agreement "for convenience due to change of control" as a result of the retailer's merger with Kmart Holding Corp. The merger, which formed a new parent company called Sears Holdings Corp., was announced in November and completed on March 24.
If Sears and Kmart had completed their merger and canceled the contract by March 2, the fee for a convenience termination would have been about $58 million, El Segundo, Calif.-based CSC said. It noted that the fee increased to $96 million if the termination notice came within 90 days of June 1, the one-year anniversary of the contract signing date.


Sears and CSC will continue to work together, despite legal wrangling.

According to CSC, during a Feb. 18 conference call, Sears' CIO at that time, Gerald Kelly Jr., read from a script, asking CSC to cap the charges at $58 million for a termination for convenience initiated prior to May 31. "If CSC does not choose this path, we will be forced to consider declaring a material breach under the agreement," Kelly was quoted as saying. In its motions, CSC said it "refused to submit itself to Sears' extortion tactics."
In documents filed in court by Sears, though, the Hoffman Estates, Ill.-based retailer said it had notified CSC of 65 individual breaches of the agreement

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