Where a supplier engages a sub-contractor to perform elements of a service, there may be terms in the main contract with the customer (the ‘prime contract’), which need to be captured in the sub-contract to ensure that certain terms are correctly “flowed down” to sub-contractors.

Two recent Scottish preliminary hearings in the case of Agilisys v CGI[1] provide useful guidance on ‘flowing down’ terms to sub-contractors. The hearings also provide a helpful reminder about how relief notices in IT services contracts should be managed.

Brief facts

In September 2015, Edinburgh City Council contracted CGI to undertake its digital transformation programme. CGI in turn engaged Agilisys under a sub-contract to perform certain aspects of the services. There were delays to the project and Agilisys terminated its sub-contract in March 2017 for repudiatory breach by CGI (whether it was justified in doing so is yet to be considered by the court).

Issue 1: Exclusion clauses

In its sub-contract with Agilisys, CGI flowed down the following exclusion clauses from the prime contract (almost verbatim), which it sought to rely on to avoid liability to Agilysis:

  • Clause 25.7.2 – “…, neither Party shall be liable to the other Party for:…any loss of profits… business opportunities…”
  • Clause 25.8 – “…, the Authority [CGI] shall under no circumstances be liable to the Supplier [Agilisys] for any loss of profits… business opportunities… associated with any PSP contract.”

Lord Bannatyne looked at Clause 25.8 first, observing that “it is in a literal and direct sense meaningless” because it is a direct lift from the prime contract, in which the reference to ‘PSP contract’ makes sense. The reference to ‘PSP contract’ appeared to serve no purpose in the sub-contract and he was persuaded that the language of the clause was a mistake or drafting error.

Turning to Clause 25.7.2, Lord Bannatyne considered that it did not make sense in the context of some of the terms of the sub-contract. A literal reading would exclude liability for claims for payment under the sub-contract. Such a result would be so extreme so as to suggest it was unintended, e.g. it could deprive Agilisys of a remedy for deliberate non-payment.

Issue 2: Relief for delays

At a subsequent preliminary hearing, the court considered whether Agilisys was entitled to relief from delay in certain circumstances where the delay was caused by CGI.

The sub-contract included a fairly typical relief clause under which Agilisys would be entitled to relief from performance where a material breach by CGI caused or was reasonably likely to cause non-performance by Agilisys. Between January and October of 2016, Agilisys issued a number of notices exercising its right to relief under this clause which CGI failed to adequately respond to.

CGI alleged that there were “a significant number of very serious, longstanding and repeated failures by Agilisys to meet their obligations” but failed to present any contemporaneous documentation to support this. The judge stated that, if CGI was actually hampered by Agilisys’ delays, he would have expected a consistent picture of such issues being raised with Agilisys in the contemporaneous documentation. Instead, CGI relied primarily on retrospective testimony from witnesses to support its case.

CGI explained the lack of contemporaneous evidence was a result of its “partnership approach” which meant it was interested in “moving ahead with contract” rather than attributing and documenting fault. Lord Bannatyne dismissed this as “wholly unconvincing” and found CGI’s witnesses to be unreliable. He concluded that, in the case of each relief notice, CGI had breached its responsibilities to Agilisys, resulting in delays, and Agilisys had not been in breach (or contributed to the breach) and was therefore entitled to relief pursuant to the contractual relief clause.

Practical points

Whilst both preliminary hearings were under Scottish law, and much turns on the specific facts of this case, it nevertheless re-iterates some important practical points that are relevant for sub-contracting:

  1. It is important to take care when flowing down terms from a prime contract. Prime contractors must ensure that only relevant terms (not necessarily all terms) are flowed down from the prime contract and that the flow down is drafted in a way that makes sense, literally and commercially, in the context of the relationship of the parties to the sub-contract.
  2. Where relief notices are issued, it would be prudent for the receiving party to keep well documented, contemporaneous evidence of its response and the steps it has taken (or will take) to address the issues set out in the relief notice. If it disputes the basis on which the other party is claiming relief, it should promptly and clearly explain this in writing to that party.
  3. For parties seeking to claim relief, relief notices should be issued promptly with accurate details of the acts and/or omissions of the prime contractor/customer. All communications in respect of the relief notice should be in writing (or a record made of any verbal communications).