How and why ICT contracts can be terminated

Nichola Evans, Browne Jacobson

Towards the end of last year Cornwall County Council resisted a claim brought by BT Cornwall in the Commercial Court1. The claim concerned the provision of information and communications technology (ICT) services to the council and the question of whether the council could lawfully terminate the contract. The trial was heard by Mr Justice Knowles with the council successful in the claim.

Background

Following a procurement exercise, Cornwall County Council together with Cornwall Partnership NHS Foundation Trust and Peninsula Community Health CIC entered into a contract with BT Cornwall in March 2013.

The contract was of long duration and of high value, estimated at £160 million. It had extensive reach and covered many different services including health, transport, communications and public safety.

The council was unhappy about the delivery of services under the service delivery agreement and on 24 June 2015 wrote to BT Cornwall indicating that by reason of various breaches of the contract, the council was entitled to terminate the contract forthwith.

When the parties could not reach agreement on the issues, BT Cornwall issued proceedings in the Commercial Court and applied for an injunction to prevent Cornwall County Council from terminating the agreement.

The matter came before Mr Justice Teare in August 2015. He gave directions for there to be an expedited trial and that the following issue ought to be determined:

“Whether, assessed as at 20 July 2015, [BT Cornwall] was in breach of [the agreement] such that the defendants were entitled in all the circumstances to terminate the agreement forthwith, and whether [BT Cornwall] should be granted an injunction to restrain such termination.”

Cornwall County Council defended the case strongly and robustly. The trial commenced with a reading day on 30 November 2015 and the hearing began on 1 December 2015. Judgment was handed down on 21 December 2015.

The arguments

The main issue that was explored at trial related to the key performance indicators (KPIs) which were dealt with in Schedule 13, entitled ‘Price Performance Mechanism’. In particular, there was a focus on KPI 1. BT Cornwall’s monthly review reports show that between November 2014 and April 2015 service in relation to KPI 1 was below target service level six times, and below the breach trigger five times.

This level of failure would amount to a material breach under Clause 48.2.1.1 of the agreement, allowing termination without a remedy period.

It was accepted by the parties that there was a large backlog of incidents in early 2015. It was the council’s position that these were incidents which clearly needed to be taken into account and should form part of the calculation of whether or not BT Cornwall was in breach of the target service levels.

BT Cornwall argued that the figures for February, March and April 2015 in the monthly service reports “could not be used because KPI 1 was intended to be a measure of failure within a month by reference to a benchmark of what was achievable within that month. For these three months the figures were the subject of an express caveat to the effect that their level was due to a large backlog of failed incidents being cleared, so that (it was argued) they could not be said to represent the level of failure within a month.”

Mr Justice Knowles did not accept BT Cornwall’s arguments in this regard. He noted that the agreement recorded that a matter would be logged for breach purposes.

BT Cornwall also attempted to argue that the KPIs were not operative and needed to be agreed. Again, Mr Justice Knowles held in the council’s favour and found that even if the KPIs were not ‘fit for purpose’ they were still operative until changed using the appropriate change mechanism. He said:

“In my view, confirmed by my hearing what the witnesses had to say at trial, the items show: (a) that baselining work remained to be done for some of the KPI performance measures that were in the agreement; (b) that after that work had been done there would a joint review of the contract KPI/PI performance measures; and (c) that amendments to the agreement would be proposed in light of the joint review.

“In the events that happened the parties did not get to stages (b) or (c) before the council wrote to BT Cornwall on 24 June 2015 asserting that the defendants had a right to terminate the agreement forthwith.”

BT Cornwall put forward a further argument in relation to this and had served evidence of a re-assessment exercise they had carried out. A witness, Mr Mark Pate, gave evidence of the exercise carried out by a team of employees whereby incidents notified to the service desk were reassessed and, where it was felt appropriate, reclassified.

In terms of the exercise itself the judge said:

“If BT Cornwall was the one to instigate a correction it would first need to show (and in my judgment it did not do so) why the existing figures and calculations, which were its own work, were not objective, fair and reasonable or how it was that the assessment had not been conducted, and the report written, in good faith.”

The judge went on to look at the exercise which had been carried out by Mr Pate and concluded:

“Mr Pate gave evidence for BT Cornwall of work he had done on the figures in recent weeks. I was left unclear about Mr Pate’s methodology and unconvinced by his approach to ‘sampling’. As between his work and the figures derived contemporaneously from the monthly service reports, I preferred the latter.”

BT Cornwall had further arguments which it advanced in relation to the KPIs. It suggested that there was a waiver. Under the agreement the council had the right “at their sole discretion” to waive key performance indicator scores achieved due to service failures “if they are satisfied (acting reasonably) that a remedial plan to prevent the service failure being repeated is in place and being adhered to”.

Again, the judge was not convinced by the arguments advanced, saying:

“But the paragraph does require the exercise of the right it confers (or a successful contention that there was an obligation to exercise the right and that that obligation was not complied with). I heard no evidence at the trial that would cause me to conclude that the right had been exercised or should have been exercised.

“Mr Finlayson [the CEO of BT Cornwall] gave evidence that a waiver from Material Breach ‘was implied and everyone understood’. I do not accept that as an accurate statement of or conclusion on the facts. Nor is it enough in law.”

Next, BT Cornwall sought to convince the court that there was a KPI backlog agreement. They suggested that the parties knew that if BT Cornwall cleared the backlog it would place them in a breach position. The argument was put forward that it was understood that the breaches would not be taken into account by the council in determining if BT Cornwall was in material breach. The agreement, it was alleged, was not in writing.

The judge was not convinced, saying:

“Nothing was written to record the suggested ‘KPI backlog agreement’. In my view that is because there was no agreement and not because, as BT Cornwall argues, there was a general atmosphere of co-operation, and the parties were working fast to resolve problems … Having heard them give evidence, I do not accept Mr Kritikos’ or Mr Finlayson’s evidence where it suggests that agreement was reached in the form of the asserted KPI backlog agreement.”

The court then went on to consider whether the council should have terminated the contract earlier and whether there had been affirmation of the contract. The court noted the procedures which were adhered to by the council in reaching their decision and Mr Justice Knowles said:

“There was no material delay on the council’s part, and certainly neither its actions nor the passage of time are to be taken as an election not to terminate for material breach. The word ‘forthwith’ in Clause 48.1 addresses the point at which the council may act, and not the period within which it must act if it is going to.

“BT Cornwall argues that ‘the Executive Forum represented a major commitment for BT Cornwall, not only in terms of the executive input at the highest level, but also in terms of the huge resources and costs involved’, which it put at £4.3 million. This is no more than a reflection of how serious it had allowed things to become; it does not advance its argument that the council was not entitled to enforce the agreement in accordance with its terms.”

Finally, BT Cornwall suggested that the council had not acted in good faith. Again, the judge had little sympathy with BT Cornwall’s position, finding:

“BT Cornwall faced problems of its own making and did not provide to the defendants the service it had promised to the standard it had promised. The council worked with BT Cornwall to try to resolve things but ultimately decided the position was not good enough. There is no absence of good faith or presence of capriciousness in expecting BT Cornwall to clear the backlog at once and also to take the contractual consequences if that meant KPIs would be breached again. There was (as discussed above) no KPI backlog agreement, waiver, estoppel or affirmation. And unless and until different KPIs were agreed there is no absence of good faith or presence of capriciousness in expecting BT Cornwall to honour the existing agreed KPIs, ‘fit for purpose’ or not.”

In conclusion, Mr Justice Knowles refused to grant an injunction to BT Cornwall and found that “Assessed as at 20 July 2015, BT Cornwall was in breach of the agreement such that the defendants were entitled in all the circumstances to terminate the agreement forthwith.” The council’s evidence and witnesses were preferred.

Conclusion

Mr Justice Knowles clearly felt that the contractual terms were sufficiently certain and there had been no agreement by the parties to depart from the agreement whether by finding that the parties had reached a backlog agreement, that there had been a waiver or that there was a valid estoppel argument. While he did not make a finding as to whether BT Cornwall could retrospectively conduct a re-assessment exercise, he did take the view that BT Cornwall ought to have set out why the figures in the monthly reports could not be relied upon.

The judgment sets out very succinctly that if a party to an agreement seeks to argue that the agreement has been departed from, then there needs to be real, tangible evidence of that. In the absence of any such evidence the court will apply the strict contractual terms.


1 BT Cornwall Limited v Cornwall Council & Orss [2015] All ER (D) 228 (Dec), [2015] EWHC 3755 (Comm)

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