In a judgment handed down at the end of December 2010 after a lengthy trial, the Technology and Construction Court (Edwards-Stuart J) has provided its latest pronouncement on a number of issues arising out of a failed project for the development and supply of a bespoke IT system to meet the particular needs of a customer with unique business requirements. De Beers UK Limited v Atos Origin IT Ltd [2010] EWHC 3276 is a decision based on its own very particular facts but it addresses three areas which may be of interest to practitioners in the IT sector.
· The circumstances when a supplier’s threat of suspension of work, and then subsequent actual suspension of work, will amount to a wrongful renunciation of a contract, justifying the termination of it by the customer.
· What type of works performed during the project are likely to be regarded as chargeable change requests under the change control procedure?
· What is the right measure of the customer’s loss when the system has not been delivered but the customer does not intend to purchase an alternative?
It is the third area which is of most interest in terms of clarifying the law, although the court’s rulings on the other issues provide an important insight into the current thinking on those topics.
The Facts and Dispute
The dispute between De Beers and Atos Origin arose out of a contract in November 2007 for the delivery of a bespoke supply chain management system. The contract was for a fixed price and the parties agreed to follow an ‘iterative’ development methodology to deliver the system by June 2008. Time was of the essence of the contract. Work commenced in June 2007, initially with a fact finding ‘Initiation and Analysis’ phase designed to permit Atos to understand the nature of De Beers’ business requirements and hence adequately to resource the project. It was also designed to permit the fixed price to be determined accurately.
The contract was signed after this process in November 2007. However, it was clear by mid-December that the project was behind schedule. By way of a remedial measure, it was agreed that Atos would use the period until 4 February 2008 to capture detailed requirements in order to make a single delivery of software in June 2008. In other words, the methodology changed from an iterative methodology (in which software is delivered in increments for user feedback and testing) to a ‘waterfall’ methodology.
By mid-February, it had become apparent to Atos that the requirements were much more detailed than it had envisaged and that the technical architecture would need to be reconsidered. Atos sought to persuade De Beers that delivery of the project should be delayed. It argued that there had been a huge increase in overall scope, however no formal claims under the contract were made at that stage. De Beers did not accept these arguments but, following negotiation, it was agreed that the software would be delivered in two phases, the first in mid August 2008 and the second by 27 October 2008.
Despite this agreement, by April 2008, Atos’ further investigations led to internal complaints that the business requirements were ‘significantly more complex and intricate …. than originally envisaged’ and complaints about a very significant costs overrun. On 21 May 2008, Atos wrote to De Beers and asserted that the reasons for the slippage in the timetable were due to various causes for which De Beers was responsible and threatened to suspend all work on the project unless a commercial agreement could be reached taking account of the extra work and delays. This demand was repeated on a number of occasions. This correspondence revealed that Atos wanted to:
· retain all existing payments
· be paid an outstanding milestone payment
· carry out all future work on a time and materials basis
· have a further six months to complete the work.
De Beers rejected these demands and, on 6 June 2008, Atos made good its threat and suspended work. In response to this, De Beers terminated the contract on 9 June 2008 on the basis of repudiatory breach by Atos.
The Issues
The three important questions in the case were as follows:
1. Did the suspension amount to a repudiation of the contract? Atos argued that the suspension could be justified under the contract given its allegations of delay, the failure of De Beers to make one milestone payment and the existence of a contractual right to suspend for failing to make a timely milestone payment.
2. Was Atos entitled to be paid for what it alleged to be additional work in circumstances where such work was necessary to achieve the contractual requirements but went well beyond what Atos had envisaged or allowed for in the fixed price?
3. Assuming De Beers won on the first issue, could it recover the additional costs of a replacement system as damages if it had no present intention to procure a replacement system?
Renunciation of the contract by Atos
It was held that, although De Beers should not have withheld payment of the milestone invoice and Atos had thereby acquired a limited right to suspend work until payment, this did not justify the suspension. The judge concluded that Atos had threatened to suspend work unless De Beers entered into a new commercial agreement. The demands from Atos did not reflect its contractual entitlement and, in putting them forward, it was showing an intention to complete the work only on different terms. Accordingly, Atos envinced a clear intention not to be bound by the contract and this was a repudiation of the contract.
Scope of work
Atos claimed that the scope of the project had expanded beyond that contemplated by the contract and that changes in both ‘breadth’ (adding new functionality) and ‘depth’ (adding scale or complexity) were chargeable. De Beers accepted that changes in breadth were chargeable but it disputed Atos’s claims relating to ‘depth’. It was held that, although the contract referred to specific requirements as captured at the date of the contract, the ultimate requirements were not frozen and the parties were aware as at the date of the contract that they would probably be different. The court decided that, if an alleged change could fairly be said to fall within the ‘activity’ described in the versions of the specification which existed at the time of the contract, that change was in scope. It followed that works which were alleged to be ‘changes’ of ‘depth’ were in scope.
Damages
De Beers sought to recover the additional costs of a replacement system from another supplier as damages. However, the court concluded that De Beers had not established that it would enter into a contract for a new system. Atos therefore argued that it would be wrong to award damages on the basis claimed as such an award would be unreasonable.
Edwards-Stuart J held that, because there had been a substantial non-delivery of the services, De Beers was entitled to recover the cost of purchasing the services elsewhere. He concluded ‘provided that it would be reasonable for a person in the position of De Beers to purchase those services elsewhere, it does not matter whether or not De Beers has an actual intention of doing so or has not made up its mind whether or not to do so’. However losses claimed by De Beers for its own internal costs for running a project to build a replacement system, were disallowed.
Discussion
Repudiation
It is now well established that the test for a renunciation of a contract is whether a party intimates:
‘. . an intention to abandon and altogether to refuse performance of the contract . . or evince an intention no longer to be bound by the contract . . .’ (Freeth v Burr (1874) LR 9 CP 208, 213, per Lord Coleridge CJ).
This statement was approved by the House of Lords in Federal Commerce & Navigation Co Ltd v Molena Alpha Inc [1979] AC 757. However, this test is often easier to state than to apply. It is for example vital that the conduct is taken in context and is unequivocal in character so that there can be no doubt that the terms have been effectively abandoned (see Eminence Property v Heaney [2010] EWCA 1168).
In the ordinary course where a party suspends work indefinitely it might be thought to be obvious that, in the absence of a contractual justification for such behaviour, they will be renouncing the contract. The complication in this case was that De Beers had failed to pay an invoice and this did entitle Atos to suspend until payment. It was argued that, on the facts of the case the payment in question would never have been forthcoming and accordingly there was no difference between the threatened suspension and the suspension which the contract entitled Atos to implement. But the judge rejected this argument because Atos had unilaterally asserted a right to suspend until a fresh commercial agreement was reached. Such a suspension was considerably wider than any suspension the contract justified and effectively required De Beers to agree to vary the contract on terms dictated by Atos if a suspension was to be avoided.
It is not difficult to see why such conduct was regarded as a repudiation in this case. The lesson for others is that parties must be vigilant to ensure that when they take action which would otherwise involve a withholding of services or a failure to carry out their obligations in order to improve their negotiating position, they must be ready to justify such actions by reference to their contractual rights. If they are unable to do so and their conduct is serious, a court may well find that such conduct amounts to a renunciation of the contract. The risk therefore is that such conduct will have the very opposite effect of that intended because it will substantially increase the bargaining position of the other party.
Scope of Works
The finding that alleged changes of ‘depth’ were in scope, if they could be said to fall within the ‘activity’ described in the versions of the specifications which existed at the time of the contract, was driven at least in part by the fact that in this case the initial specifications were of a very general character. This will often be the case in contracts for the supply of such systems and especially so where, as is common, the development methodology is iterative or agile as it will then be difficult as at the date of the contract to define the functionality required by the customer other than at a high level.
It follows that the court’s ruling on this issue may be of some general application. Where the parties have chosen an iterative development methodology, suppliers will have to be vigilant when estimating the work required and hence building up a bid to ensure they have either fully understood the detailed customers’ requirements or built into their figures a sufficient contingency to allow for additional complexity emerging after the fixed price has been agreed. As the judge found, despite the provision for an ‘Initiation and Analysis’ phase, Atos did neither and the court regarded Atos as having taken the contractual risk that additional work (beyond that which they had estimated) was required. However, it is also to be noted that De Beers’ business processes and requirements were both complex and unique, so that the difficulties which were encountered on this project may not recur to the same extent when the nature of the customers’ business is less complex or comparable with others so that estimating the likely complexities can be carried out with greater reliability.
On a related point, in respect of the terms which are implied in software projects relating to cooperation and the provision of information, the court commented that Atos embarked on the fixed price contract with its eyes ‘half open’ in that it knew (or should have known) that there was a risk that the requirements were more complex than it had estimated. Against this background, it was held that De Beers was reasonable in giving Atos a chance to establish the requirements and that, having notified Atos of its concerns relating to Atos’s grasp of those requirements, De Beers was entitled to leave Atos to assess the risks of entering into a fixed price contract for itself.
Damages
On the facts as found by the judge, a stark question arose – where a party has contracted to receive a system and that system has not been delivered due to the default of the supplier, is the customer entitled to be compensated by reference to the cost of acquiring a replacement system if that customer has no actual intention of incurring that cost? Different areas of contract law might suggest different answers to this question.
The law in relation to the sale of goods is well established and enshrined in statute (the Sale of Goods Act 1979). Damages for non delivery of goods is based upon the cost of replacement goods whether the buyer in fact goes out and buys those goods or not. However, it has been suggested in a series of construction cases that damages should be based upon the costs of a replacement only if it is reasonable to do so, and that it will not be reasonable if the employer will not in fact incur the costs of replacement or reinstatement. Decisions such as Ruxley Electronics –v- Forsyth [1996] 1 AC 344, Radford v Defroberville [1977] 1 WLR 1262, Linden Garden Estates v Linesta [1994] 1 AC 85 and Alfred McAlpine v Panatown [2001] 1 AC 518 are often cited in this context.
Accordingly, there was an apparent tension between these two approaches, despite the fact that they both related to the operation of contracts. Edwards-Stuart J was assisted by a recent decision of the High Court where this very issue was grappled with by Stadlen J. In
Gido Van Der Garde BV, Giedo Gisbertus Gerrit Vand Der Garde v Force India Formula One Team Limited (formerly Spyker F1 Team Limited (England)) [2010] EWHC 2373 (QB), all the above cases were considered and it was held that they did not amount to authority preventing the recovery of substantial damages assessed by reference to the cost of a replacement, even where the claimant did not in fact intend to acquire a replacement.
Edwards-Stuart J adopted the same reasoning and awarded De Beers damages to reflect its loss of bargain by reference to the costs of a replacement system. As a matter of principle we believe this must be right. If a party such as De Beers were denied such damages the court would be failing to put it in the position it would have been in if the contract had been performed and would be denying De Beers its loss of bargain. The position may be different where the supplier has substantially performed the contract and the complaint is with a minor failure to meet a specification (a case such as Ruxley). However where, like this, there has been non delivery altogether it is suggested no alternative measure of damages can properly compensate the claimant.
However, in order to establish De Beer’s loss of bargain, the court then proceeded to take account of the sums which De Beers would have had to pay if the contract had been performed in full, being the balance of the contract price and any other sums that might have been agreed if the project had been completed. In this project, no useable software had been delivered and there were disputes about the scope of work, change requests and rework. Therefore, the court had to perform the difficult hypothetical exercise of calculating the sums that would have been paid to Atos if the project had not been terminated, including making decisions about disputed items and their related costs.
Since any customer who is contemplating the termination of a contract will need to account for what it would cost the current supplier to complete the work, not only did De Beers have to give credit for the balance of the contract price but also the cost of change requests that were in prospect. For practical purposes, in situations where little or nothing has been delivered and the project is very late, this is a very difficult exercise and it would make it very hard for a customer to weigh up whether it has suffered a loss of bargain. Once the extra costs of completing a failing project are taken into account, the ‘lost bargain’ may be very much smaller than that which would be implied by simply obtaining a comparative quotation.
Simon Croall QC is at Quadrant Chambers. Anna Cook is a partner specialising in IT and dispute resolution at Wedlake Bell: acook@wedlakebell.com
Simon Croall QC and Wedlake Bell LLP acted for De Beers
