Royal Devon and Exeter NHS Foundation Trust v Atos IT Services UK Ltd
A recent Supreme Court decision serves as a useful reminder about the importance of achieving clarity in IT contracts, particularly with large implementation projects which can be prone to teething problems.
- Where words used in a contract could give rise to competing interpretations, it is open to the court to prefer the interpretation that makes the most commercial sense.
- When assessing damages, any contractual benefit will be considered - whether pecuniary or not.
- The anticipated benefit does not have to represent profits, revenues or savings. Where the contractual benefit is non-pecuniary, the anticipated benefit is not a financial gain that could defray the costs incurred, it is a non-pecuniary benefit for which a claimant is prepared to incur such costs.
- A claim for wasted expenditure is based on a rebuttable presumption that the anticipated contractual benefit (in this case, the use of a functional EMR system) was worth at least the expenditure incurred.
In November 2011 the Claimant (the Trust) entered into a contract with the Defendant (ATOS) for the provision of an electronic medical record (EMR) system and associated services (the Contract). The Contract value was circa £5,000,000.
In September 2014 the Trust invoked the contractual dispute resolution process as a result of ongoing issues with the EMR system and in April 2016 the Trust served ATOS with a notice to terminate the Contract.
The Trust's case was that the EMR system didn't perform to its specification, that ATOS failed to remedy various defects and the contractual completion dates and/or milestones for implementation were not met.
- £7.9 million in damages for wasted expenditure due to the EMR system‘s failure to function in accordance with its specification; and
- that the limitation of liability provision was unenforceable for ambiguity or uncertainty.
The Defendant's case was that such damages for wasted expenditure are excluded by the Contract, as lost profits, business, anticipated savings or indirect or consequential loss or damage. The Defendant further contended that any damages would be subject to the cap on liability under the Contract.
Issue 1 – Wasted Expenditure
The Trust submitted that the damages were recoverable for repudiatory breach by way of wasted expenditure incurred in reliance on the anticipated performance of the Contract. In a claim for breach of contract, damages should place a claimant in the position they would have been in, had the contract been successfully performed. In a commercial context, the value of such damages is often measured by reference to the additional amount of money a claimant would require to achieve the financial value of the contractual benefit expected by the claimant – such as lost profits, the cost of reinstatement etc. The Court referred to this as the "expectation basis".
However, it was held that it should not be assumed that a contractual benefit can only be measured by the expectation basis. In this case, the value of the EMR system would always have been non-pecuniary and therefore the Trust could make a claim by reference to expenditure incurred in reliance on its anticipated use of a functional EMR system (the "reliance basis"). For the Trust, this expenditure included internal staff costs, the cost of hardware and software, procurement and tendering costs and related infrastructure costs. The burden of proof was on ATOS to show that the expenditure would not have been recouped and would have been wasted in any event.
Issue 2 – Liability Cap
The Trust's argument (i.e. that the wording of the liability cap was ambiguous, could not be construed and should, therefore, be declared unenforceable) was dismissed. Although the Court agreed that the drafting was not entirely clear, the courts strive to give effect to all contractual terms agreed by the parties where possible and are reluctant to find a contractual provision void for uncertainty.
The Court looked at the intentions of the parties by reference to what a reasonable person, having all the background and knowledge available to the parties at the time would have understood the meaning to be. The relevant considerations include (i) the ordinary meaning of the words, (ii) other provisions in the contract, (iii) the purpose of the limitation of liability provision within the context of the contract, (iv) facts and circumstances known to the parties at the time and, (v) commercial common sense.
- the Contract did not exclude and is no bar to the claims made by the Trust for wasted expenditure on a reliance loss basis; and
- the limitation of liability provision in the contract was valid and enforceable.