Judgment was delivered in December 2010 in respect of a dispute between De Beers UK Limited ("De Beers") and Atos Origin IT Services UK Limited ("Atos"). The judgment is of interest to those involved in contracts for IT services because it addresses some of the key issues relating to the scope and management of IT contracts and termination. In particular, the judgment gives guidance about change control and the treatment of changes in "depth", as opposed to "breadth". It addresses the termination of contracts and the exercise of rights of suspension. It also deals with legal issues relating to damages for termination.

Background

The dispute 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. The project did not progress well and, by the time it was terminated in June 2008, no useable software had been delivered.

The termination of the Contract

Towards the end of the project, in May 2008, Atos was suffering problems with significant costs overruns and the prospect of further delay. Furthermore, as a result of the delay to the project timetable, De Beers was withholding payment of an invoice.

It was held that De Beers was not entitled to have withheld payment in this way and, indeed, that Atos had acquired a contractual right (under the terms of the Contract) to suspend work in order to secure payment.

However, it was also held that Atos did not use its right to suspend work in accordance with the contractual terms. Instead, Atos threatened to suspend work unless De Beers agreed to a variation of the Contract. The new terms which it sought were:

  • payment of an additional £4.6 million over and above the original Contract price;
  • that the remaining work on the project be performed on a time and materials basis;
  • that De Beers should waive any claims that it may have against Atos; and
  • that De Beers should make payment of the outstanding invoice.

The Judge concluded that Atos had not purported to exercise its rights under the Contract to suspend work until payment of the invoice. Instead, Atos had threatened to suspend work unless De Beers entered into a new commercial agreement. It was held that the demands made by Atos did not reflect its contractual entitlement and, in putting them forward, it was showing an intention to complete the work on different terms, not upon the terms originally agreed. Therefore, as a result of its conduct, Atos repudiated the Contract.

The Court also rejected submissions by Atos that it had been mistaken in its approach, including making a finding that Atos had actually intended to terminate the Contract all along.

It follows that a party who wishes to rely on a contractual right of suspension needs to be careful to ensure that it exercises its rights in accordance with the terms 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".

The Contract specified that the parties would follow an iterative methodology. In particular, the Contract provided that the system would be delivered in accordance with a list of specifications "as the same may be enhanced or clarified by the Detailed Design". The listed specifications did not bear any version numbers or dates.

It was held that although the Contract was referring to the versions of the specifications which existed at the time that the Contract was entered into, the parties were aware that the ultimate requirements were not frozen and would probably be different. The Court decided that, if a 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, the change was in scope. In other words, it was held that changes of "depth" were in scope, even if the complexity of the system increased beyond what had been contemplated.

Although the findings in respect of the scope of work are specific to the facts of this case, the judgment makes it clear that a supplier who is negotiating a fixed price contract needs to ensure that it uses clear language if it intends to limit the scope of work to exclude changes in "depth".

De Beers' loss claim

The main question that the Court had to consider was whether De Beers could recover damages for its loss of bargain, even if it did not intend to incur the costs of buying a replacement system.

De Beers relied on the basic principle that an award of damages should put the claimant in the same position as it would have been in if the contract had been performed. Under the Sale of Goods Act 1979 an innocent party is entitled to the cost of replacement goods, giving credit for the cost of the undelivered goods. De Beers also relied on the recent decision 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) in which a similar approach was used in a contract for the provision of services.

The Court considered the application of various construction law cases, including Ruxley Electronics -v- Forsyth [1996] 1 AC 344. This case relates to a claim for the cost of a replacement swimming pool, in which the swimming pool that had been built was perfectly usable and would not be replaced. In that case, it was held that the contractual objective had substantially been achieved and therefore the purchaser was not entitled to the costs of reinstatement or reconstruction.

By contrast, in this case, it was 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, unless it would be unreasonable to do so. "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". It was held that it would have been reasonable for De Beers to purchase the services elsewhere and that it still had a genuine need for them.

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.

In summary therefore, it was established that one measure of damages for failing to complete a project is the cost of procuring a contract for services from another party. There is no need for the customer to have entered into a replacement contract in order to establish its loss of bargain. This is consistent with the commercial law relating to the sale of goods, although it is a departure from construction law cases about whether it is reasonable to award the costs of replacement or reinstatement, if those costs will not be incurred.

A fuller discussion about this case by Anna Cook and Simon Croall QC can be found at www.scl.org