At the end of last year the High Court in England issued its judgement in De Beers UK Limited ("De Beers") v ATOS Origin IT Services UK Limited ("ATOS"). The case related to the termination of an IT contract. This termination had been brought about by the actions of the parties – the question being answered was whether it was the IT service provider (ATOS) who had terminated because of the way it had behaved or whether it was the customer (De Beers) who had terminated. The facts of this case serve as a stark reminder of the importance of effective contract management.
The dispute arose out of a fixed price contract for the development of a bespoke global software system for supply chain management. The contract also covered support for the system and was entered into between the parties in November 2007.
Unfortunately the project fell behind schedule. When ATOS told De Beers that it would not be able to deliver the software by the date required in the contract, discussions ensued and the parties arrived at an acceptable revised programme in April 2008. Whilst the revised programme was being negotiated ATOS issued an invoice to De Beers dated 3 March 2008. De Beers then refused to pay this on the basis that they were dissatisfied with delays and with the quality of work.
At the same time, senior management in ATOS became concerned about the substantial spiralling cost of the project. ATOS claimed that the progress of the work had been delayed by a lack of co-operation from De Beers staff and increases in changes to the scope of work to be performed. ATOS proceeded to present De Beers with an ultimatum - that either De Beers renegotiate the contract or ATOS would suspend all work. De Beers did not agree to a renegotiation of the contract and ATOS suspended all work. This work was never resumed.
In court both parties argued that the termination of the contract was a result of a repudiatory breach of the contract by the other – i.e. it was the other party’s actions that had caused the contract to terminate. The central question for the court was which of the parties was correct.
The court considered that the correct test to apply was whether, looking at all the circumstances objectively, the contract breaker had clearly shown an intention to abandon and refused to perform the contract.
On the facts, the court found that De Beers had not repudiated the contract as its conduct fell well short of a repudiatory breach. Whereas ATOS on the other hand had, by its conduct, shown a clear intention not to be bound by the contract and De Beers had accepted ATOS' repudiation. On the basis of this finding the court concluded that De Beers was entitled to recover some of the damages claimed.
In particular the judge concluded that ATOS had not exercised its right under the contract to suspend performance of the contract until the invoice of 3 March 2008 was paid. It had instead threatened to suspend the contract until essentially a new commercial agreement was reached and this was outwith ATOS’ contractual remedies.
The court ruled in favour of De Beers and found ATOS liable for net damages of just under $1.5 million. However, the court criticised both parties' behaviour as they shared responsibility for the delays and additional costs in the project (such as due to De Beers' change requests and its failure to finalise certain requirements).
Lessons to be learnt
This case shows how important it is for parties contracting on IT and other similar projects to have a clear contract that sets out the cost, scope and timeframe for the project and to have a contract which clearly sets out what is to happen in the event that the scope of the project changes. It is also important to document changes as they are agreed so that there is no doubt as to what terms the parties are working to.
In addition neither party to an agreement should try to take action against the other – for example threatening to withhold work or payment - unless there is a clear contractual basis for doing so. At the same time the customer should be aware that a failure to co-operate and assist a service provider may also constitute a breach of contract or at least entitle the service provider to damages.