Manufacturing businesses are increasingly investing in digitalisation. Artificial intelligence, connected machinery, automated production systems and advanced software are changing how products are designed, manufactured and delivered.

The benefits are clear, from efficiency gains to better visibility across the supply chain. But as digital systems become more critical to production, a different question deserves attention:

• What happens when the technology does not work as expected?
• For manufacturers, a failed digitalisation project can quickly become much more than a technology problem. If a new system delays production, fails to integrate with existing equipment or does not deliver the functionality promised, the resulting losses can be significant.
• And when the parties disagree about what went wrong, the dispute can become particularly difficult to resolve.

When technology meets the factory floor

Digitalisation projects are rarely as simple as implementing a new piece of software.

Firstly, the technology is only half the battle. A digital system only works if the people on the factory floor understand why it matters, know how to use it and cannot sidestep it when old habits are dying hard . Training and communication are essential, but so are proper controls. If non-adopters can work around the system, the business may be left with fragmented processes, unreliable data and a dispute about whether the problem was the technology or the way it was used.

A new system may need to interact with people, existing machinery, software and production processes, often involving several different suppliers and technology providers. A problem with one part of that chain can have consequences across the wider manufacturing operation.

Consider a manufacturer implementing a new automated production system. The supplier says the system has been delivered as agreed. The manufacturer says it cannot achieve the required production levels because it does not integrate properly with existing machinery.

Who is responsible?

The answer may depend on the original requirements, the technical specifications, the testing process and the responsibilities allocated between the parties.

It may also require expert evidence to establish whether the problem lies with the new technology, the existing manufacturing environment or the way the two were integrated.

This is where digitalisation creates an interesting challenge for dispute resolution. The underlying dispute may be familiar, breach of contract, defective performance or delay, but establishing what actually happened can require a deeper understanding of both the technology and the manufacturing process.

The importance of getting the contract right

One of the most common difficulties in technology disputes is determining what the supplier was actually required to deliver.

Digitalisation projects often begin with ambitious objectives: increasing production capacity, reducing downtime or improving efficiency. But there can be a significant difference between agreeing to deliver a particular system and guaranteeing a particular commercial outcome.

Clear contractual requirements are therefore essential.

Manufacturers should consider whether their agreements properly address:

• Scope and functionality: what exactly is being delivered?
• Integration: who is responsible for ensuring new technology works with existing systems? For example, whether the systems integrator or the equipment manufacturer carries responsibility when a new line will not talk to a decade-old PLC.
• Testing and acceptance: how will the manufacturer determine whether the system has been successfully delivered?
• Changes: what happens when requirements evolve during implementation?
• Data and records: who controls the information needed to assess performance or investigate a failure? This matters in practice: a failure six months in can be hard to diagnose if the machine logs sit with the integrator, not the manufacturer.
• Liability: how are the risks of delay, system failure and business interruption allocated?

These issues can be particularly important where multiple suppliers are involved. If responsibility is divided across software providers, equipment manufacturers and systems integrators, it may not be immediately obvious where liability sits when something goes wrong.  The earlier those risks are considered, the easier they are to manage.

Digitalisation and the next generation of manufacturing disputes

The manufacturing disputes of the future are unlikely to be fundamentally different from those we see today. They will still concern familiar issues such as contractual obligations, defective performance, delay and loss.

What is changing is the complexity of the systems behind them.

As manufacturers become more dependent on connected technology, disputes are likely to involve increasing volumes of technical data, system records and expert evidence. Establishing causation may require an understanding of both the physical manufacturing process and the digital systems controlling or monitoring it.

Take a predictive maintenance system that fails to flag a fault before a production line goes down. Was the sensor data wrong, was the algorithm poorly trained, or did the manufacturer fail to act on an alert it received? Each answer points to a different party.

That makes early consideration of dispute risk increasingly important.

Manufacturers embarking on digitalisation projects should not only ask whether a technology can deliver the expected commercial benefits. They should also consider what happens if it does not, and whether their contractual arrangements provide a clear answer.

Digitalisation is transforming the manufacturing sector. For businesses investing in that transformation, making sure the legal and contractual framework keeps pace with the technology can be just as important as the technology itself.

The question is not simply what happens when digitalisation works. It is who bears the risk when it does not.

If you would like to discuss how digitalisation may affect your manufacturing business, including the contractual and dispute risks associated with implementing new technology, we’re here to help. Get in touch with Dorrien Peters at DorrienPeters@schofieldsweeney.co.uk.