The Risk of Not ‘Reaching for the Contract’

June 12, 2018

David MacBrayne Limited v Atos IT Services
(UK) Limited
ScotsCS CSOH 32
is a recent dispute between an IT service provider and a
customer which demonstrates the importance of complying with the provisions of
a contract, and that the use of ‘commercial common sense’ arguments in the
interpretation of contractual obligations is not always successful.

The facts

The case,
heard before Lord Doherty in the Outer House of the Court of Session in
Scotland, concerned a dispute between David MacBrayne Limited, a ferry
operator, and Atos IT Services (UK) Limited, an IT service provider with whom
MacBrayne had entered into an agreement for the supply of a digital platform
for a ticketing and reservation system (the Agreement).

The Agreement
set out milestones which Atos were required to meet by specified dates. There
were significant delays in the project and the milestone timetable was varied.
After a later agreement between parties to suspend performance of obligations
under the Agreement, MacBrayne terminated the Agreement on the grounds of a
material breach. The material breach was, MacBrayne argued, first, that Atos
had failed to achieve a certain milestone by the relevant date and, second,
that Atos had failed to achieve three other milestones.

Atos, in
defence and in their counter-claim, challenged MacBrayne’s right to terminate
the Agreement on the basis that it had contributed to the failure to meet the
milestones. Atos argued that the termination was therefore wrongful and as such
was in itself a material breach of the Agreement.

The decision

of the Agreement

Obligations on MacBrayne in terms of a

Part of the
Agreement was subcontracted by Atos, with the consent of MacBrayne, to a third
party. Atos sought to argue that, as MacBrayne had agreed to this subcontract,
it was obliged to investigate the subcontracted services to ensure their

Lord Doherty
concluded that this was not the case. MacBrayne’s requirements under the
Agreement were output-based, and the subcontracting of some of the services did
not ultimately affect Atos’s obligation to meet these requirements. Atos was
still required to ensure that the overall package of services being delivered
satisfied MacBrayne’s output-based requirements.

Obligation of MacBrayne to provide detailed
specification of requirements

2.1.4 of Part 3 of the Schedule to the Agreement imposed an obligation on
MacBrayne to use all reasonable endeavours to provide such documentation, data
and/or information that Atos reasonably requested and which was necessary for
Atos to perform its obligations under the Agreement.

Atos sought to
argue that this paragraph, properly construed, obliged MacBrayne to provide
Atos with a detailed specification of their requirements in sufficient time for
Atos to comply with the obligations in the Agreement, and that, if this did not
expressly impose such an obligation, it should be implied. Atos further argued
that MacBrayne had breached this obligation.

This argument
did not persuade Lord Doherty, who decided that the language of para 2.1.4 was
indicative of a responsive obligation, rather than a requirement on the part of
MacBrayne to articulate the granularity of the services required to Atos. MacBrayne
was required to provide documentation or information which Atos reasonably
requested as necessary, but Atos was still primarily responsible for analysing
and capturing the requirements for the services. It was a matter for Atos how
it decided to deliver the outputs of MacBrayne.

Obligation of Atos to give notice of delays

The parties
had opposing arguments on the interpretation of clause 5 of the Agreement.
Clause 5 provided:

‘5.1 If, at any time, [Atos] becomes aware
that it will not (or is unlikely to) achieve any Milestone by the Milestone
Date it shall, as soon as reasonably practicable, notify [MacBrayne] of the
fact of the Delay and summarise the reasons for it

5.2 [Atos] shall, as soon as reasonably
practicable and in any event not later than ten (10) Working Days after the
initial notification under clause 5.1 give [MacBrayne] full details in writing

5.2.1 the reasons for the

5.2.2 the consequences of the Delay; and

5.2.3 if [Atos] claims that the Delay is
due to [a MacBrayne] Cause, the reason for making that claim.’

submitted that this obliged Atos to (1) notify MacBrayne if it became aware
that it would not achieve a milestone timeously, and (2) give MacBrayne full
written details of this position within 10 days, and Atos failed to do either
of these.

Atos argued
that these were merely procedural requirements upon which a claim for
compensation for a delay (as provided for at clause 7.4) was reliant and were
not relevant beyond that. Its position was that it had not provided notice
under this clause as it had attempted to adopt ‘a co-operative and facilitative
approach’, rather than ‘reaching for the contract’. Therefore, at no stage
prior to any of the milestone dates, had it given notice that the failure to
achieve the milestone was likely due to fault on the part of MacBrayne.
MacBrayne had never raised the issue of the need for such notices and both
parties were working collaboratively to progress the project, so Atos
reasonably believed that service of notices under clause 5 was not required.

However, Lord
Doherty applied an ordinary reading of these provisions and held MacBrayne’s
interpretation to be correct. He found that clause 5 applied in all cases where
Atos became aware of a likelihood of a failure to meet a milestone date,
regardless of the cause and whether it would give rise to a claim for
compensation under clause 7.4. In all such cases MacBrayne would have ‘an
obvious interest’ in obtaining the relevant notification and information so
that it could respond appropriately. Accordingly, Atos should have served
notices under this clause.

The result

Lord Doherty
held that Atos’ failure to achieve the milestones was a material breach which
was irremediable, and so MacBrayne was entitled to terminate the Agreement.

Lord Doherty
ordered payment of damages by Atos to MacBrayne, in respect of milestone
payments made by MacBrayne which were ultimately wasted expenditure once the
Agreement was terminated.

Lessons to be learned

There are three
lessons to be learned from this decision.

Firstly, if
services are subcontracted by a supplier, as is often the case in IT and
outsourcing contracts, it is important to note that this does not affect the
supplier’s obligation to meet the requirements of the customer, even if the
customer is aware of and agreed to the subcontract.

Secondly, a
general obligation on the customer to use all reasonable endeavours to provide
information or documentation to the supplier means that the customer is
required to use such endeavours to respond to requests from the supplier, but
does not affect the supplier’s primary obligation to meet the customer’s requirements
and decide how the requirements should be met.

Thirdly, and
most importantly, in his judgment, Lord Doherty summarised Atos’s approach to
the supply of services to MacBrayne as being: ‘Generally…to seek to accommodate
the pursuer’s requirements without “reaching for the contract”’. Essentially,
Atos sought to build a facilitative commercial relationship with MacBrayne and
so were weary of giving notice of delays which meant that milestones would not
be achieved. This is an issue often encountered by suppliers. In an ongoing,
professional relationship, it often seems more prudent to adopt a commercial
approach instead of ‘reaching for the contract’. However, this case highlights
the risks of such an approach, and the importance of complying with notice

Monica Connolly is an
Associate, and Eilidh Smith is a Trainee Solicitor, in the dispute resolution
and litigation department of Brodies LLP.