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Cornwall Council's early termination of IT contract lawful

Cornwall Council’s early termination of £160m 10-year IT contract with BT found to be lawful

BT Cornwall Limited (BTC) agreed to provide a variety of outsourced services to Cornwall Council (the Council) and other public bodies by a Services Delivery Agreement dated 27 March 2013 (the Agreement). The services provided under this long-term strategic outsourcing agreement included IT, human resources, ‘Telehealth’, ‘Telecare’ and document management, among others. 

Although the value of the Agreement was generally placed at around £160m over a 10-year period, on 21 December 2015 the Commercial Court held that the Council was permitted to terminate the Agreement within two years of commencement for substantial service level failures.

Background

BTC admitted substantial issues with its performance of the services during the course of 2014, which led to a backlog of unclosed incidents building up that was still not cleared by mid-2015. As a result, on 24 June 2015 the Council served written notice on BTC to terminate the Agreement with immediate effect. 

The Council asserted that it had a contractual right to terminate the Agreement because the substantial issues with BTC’s performance during 2014 amounted to a “Material Breach”, as defined in the Agreement.  BTC responded by suing the Council in the Commercial Court for an injunction to prevent early termination.  The parties made holding arrangements and the 7‑day trial took place in early December 2015.

There were different metrics in the Agreement for measuring Key Performance Indicators (KPIs).  The Council primarily argued that, during the relevant period, BTC was below KPI 1 six times and KPI 5 for three consecutive months, which it claimed for both metrics amounted to a Material Breach, giving the Council a contractual right to terminate the Agreement.

BTC’s primary argument was that before the Council could terminate for a Material Breach:

  • the Actual Performance Level for the KPIs must be known;
  • the KPIs must be baselined; and
  • Target Service Levels must be agreed. 

BTC argued that this was the process set out in the Agreement.  In the alternative, BTC argued that discussions held at the parties’ Executive Forum amounted to an agreement that KPIs would be below the breach level.  BTC also advanced further arguments that the Council’s willingness to try to work with BTC in early 2015 amounted to an affirmation, waiver or estoppel.   

Decision

How the contractual termination rights under the Agreement should be interpreted, and whether they had arisen, were the central questions to be decided by Mr Justice Knowles.  Interpretation was not straightforward, however, as the Agreement stretched to several lever arch files in length and contained a number of drafting inconsistencies. 

The judge held that the more literal interpretation of the contractual provisions concerning KPI 1 should prevail, which meant that KPI 1 did not require baselining (as KPI 5 did) before a contractual right to terminate for Material Breach arose.  On that basis, the service level failures of the KPIs amounted to a Material Breach that entitled the Council to terminate the Agreement. 

BTC’s arguments about waiver, affirmation and estoppel also failed, with the judge holding that: “The fact that the Council was prepared to engage through the Executive Forum, and to work collaboratively with BTC is not to be held against it and did not signal that it would not take action”. 

Comment

This decision is a useful reminder of a number of lessons to both suppliers and customers in long‑term IT outsourcing arrangements:

  • Clear drafting at the outset: the Agreement was heavily criticised, despite its importance to the parties, for the “imprecision in its drafting” and “its impractical length […] without that length providing clarity in return”.  It is in the interests of both the supplier and the customer to agree a high quality contract in a long-term outsourcing relationship and to ensure that it is internally consistent, especially where there are multiple contractual documents.  There must not be the potential for considerable interpretation or lack of clarity over the route to exercising a contractual termination right.  In addition, when it is not possible to agree KPIs at the outset, there must be a clear timetable with obligations for doing so during the contract.  Good contract management, with clear governance set out in the contract, is imperative.
  • Waiver, affirmation and estoppel: it was not held against the Council that, before it decided to terminate the Agreement, it first tried to engage with BTC for a reasonable period of time using the Executive Forum created by the Agreement.  Suppliers and customers are encouraged to use both contractual and non-contractual alternative dispute resolution procedures to try to resolve disputes without litigation. If a customer is concerned that it may be taking more than a reasonable time to reach a decision whether to terminate or not, it should consider reserving its rights while continuing to negotiate with the supplier.
  • Good faith: in this case, a final argument to attempt to avoid the termination was that the Council had failed to act in good faith, which required either extending a separate express term in relation to “a continuing Partnership dialogue” to cover the termination clause or finding that termination was in breach of an implied duty to act in good faith.  The judge found that the express good faith term was irrelevant to the termination clauses and, if there were an implied term, it would not have been breached: expecting BTC to comply with its contractual obligations did not show capriciousness or an absence of good faith.  This case is an important reminder that any express obligations to act in good faith will be interpreted narrowly and that relying on an implied term to prevent the exercise of a contractual termination right is unlikely to succeed
  • Effective management of a dispute: when a dispute cannot be avoided, there are some practical points to take from this case -
    • It is important to prepare the legal case to ensure that all arguments are backed up with documentary or witness evidence.  Where such evidence is not available, statements of case should be amended to ensure that the best arguments are pursued. 
    • Both parties were criticised because important senior individuals did not appear at court to give evidence.  Key witnesses in support of your case should be called, unless there is a justifiable reason why they are not able to give evidence.   
    • It was clear that there were some faults on the part of the Council, but the evidence of their failings was not recorded properly and available to BTC at trial.   It is therefore important that suppliers keep records of delays that have been caused by their customers in circumstances where the suppliers may be in breach of KPIs or in delay.

As a final reminder, good contract management should be encouraged from the outset.  Many of the problems described above might have been mitigated had advice been taken at an early stage.  It is unclear at what stage legal advice was sought, but the credibility of some of BTC’s senior executives was undoubtedly damaged by certain evidence.  For example, one senior executive suggested by email, in relation to new KPIs indicating breach, to “use some poetic license & [g]et the buggers out.”  It is all too common in cases such as this that the disclosure process uncovers damaging emails.

Taking legal advice as soon as an IT project starts to go wrong will enable you to not only understand the legal merits of your claim, but also help educate those on the ground about the sensitive management of a distressed project going forward.

For further information please contact Vicky Cooper and Nick Allan.

Case: BT Cornwall Ltd v Cornwall Council and others [2015] EWHC 3755 (Comm).