When is a delay breach "irremediable" for the purposes of contractual termination?
Welcome to 'Insights from TCS v DBS' – a four-part series providing an in-depth look at the judgment handed down in Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) (17 May 2024).
In the first article of the series, we looked at the judicial focus on delay and notice provisions, conditions precedent, compliance and the importance of contractual language, and estoppel.
In this article, the second of this series, we look at the court's decision on partial termination and when a breach is capable of remedy under the contract.
For ease, we include the Introduction and Case Summary in each part of the series.
Introduction
The judgment handed down in Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) (17 May 2024) determined a significant and long-standing tech modernisation and business process outsourcing dispute. The ruling addresses a number of contractual themes common to IT disputes arising from delay. Reviewing the decision offers valuable insight into the meticulous analysis undertaken by the court to examine relevant sequences of events during the project, and to properly construe the agreement between the parties, particularly in relation to proving causation and loss.
Much of the judgment comprises analysis and determination specific to the agreement between the parties. There are however key parts offering valuable learning points for those working close to contracts for tech transformation projects, particularly where problems have arisen, or where litigation is threatened, imminent or underway. We explore here four key areas for learning from the judgment:
Case summary
DBS engaged TCS to supply the IT modernisation project in 2012. The project did not go well, beset by delays from an early stage.
TCS contended that the main causes of critical delay were the lack of availability of technical infrastructure and mismanagement of DBS' IT hosting provider. DBS argued that the cause of delay was TCS' delayed development and testing of the software.
TCS claimed just over £110 million in delay damages. DBS counterclaimed for delay as well as bringing claims for defects in the quality of the software in the sum of just under £109 million. TCS also claimed for underpayment of Volume Based Service Charges to the value of around £14 million.
Constable J. rejected almost all of TCS's claims for delay damages, but TCS was awarded £2.4 million for a particular period where the court found delays were caused by DBS's actions (see Part 2). DBS was awarded £4.6 million due to delays attributed to TCS. Most of DBS's other counterclaims were dismissed. For TCS, the overall outcome and award of £2.4 million represents a partial victory in their claims as it brought acknowledgement from court of some responsibility on the part of DBS for the delays.
Part two summary
DBS de-scoped one part of the new software (known as 'R1-D) from the project, asserting lawful partial termination under the agreement.
TCS argued that DBS's partial termination by DBS was in fact an unlawful repudiatory breach, albeit not accepted.
The court ultimately agreed with TCS. TCS was awarded £2.4 million for the wrongful de-scoping and associated delays. DBS had not adhered to the proper termination process.
Background
Clause 55.11 stated:
'Subject to the provisions of clause 56 (Remedial Plan Process), the AUTHORITY may, by one (1) month's prior written notice, require the Partial Termination of any part of the Services on the occurrence in relation to that part of a material Default by the CONTRACTOR, where the Default is not capable of remedy or, if the Default is capable of remedy, the Default has not been remedied in accordance with the Remedial Plan Process.'
Clause 56.2 stated:
'56.2.1 The AUTHORITY notifies the CONTRACTOR that it considers that the CONTRACTOR is in material Default and that it requires a Remedial Plan. The notice may specify the matters complained of in outline but must contain sufficient detail so that it is reasonably clear what the CONTRACTOR has to remedy.
56.2.2 The CONTRACTOR shall serve a draft Remedial Plan within 20 Working Days (or any other period agreed by the parties) even if the CONTRACTOR disputes that it is responsible for the matters complained of.
56.2.3 If the AUTHORITY considers that the draft Remedial Plan is insufficiently detailed to be properly evaluated or will take too long to complete or will not remedy the matters complained of then it may either agree a further time period for the development and agreement of the Remedial Plan or escalate any issues with the draft Remedial Plan using the Escalation Process.
56.2.4 If despite the measures taken under clause 56.2.3 a Remedial Plan cannot be agreed within 10 Working Days of the date of its submission then the AUTHORITY may elect to end the Remedial Plan Process at the end of the escalation period set out in the Dispute Resolution Procedure and serve a Termination Notice which will take effect unless the CONTRACTOR remedies the Default within a period specified in the Termination Notice which shall not be less than 30 days from the date on which the Termination Notice is sent to the CONTRACTOR ... .'
DBS sent two letters to TCS. The first set out grounds justifying the notice of partial termination. DBS stated that the grounds amounted to Material Defaults under the agreement and that it therefore required TCS to comply with a Remedial Plan process, following the contract (Although only one of the grounds was relevant to R1-D, and ultimately only that ground was relied on by DBS in its submissions on this at the hearing.)
The second (following a letter from DBS's lawyers) was short and reiterated DBS's position that a Remedial Plan was required. It stated, 'there is not sufficient time within the remaining Term of the Agreement for R1 Disclosure to be delivered, even if TCS had a credible plan for delivery.' One day after the second letter, DBS gave notice of partial termination.
TCS argued that the effect of the contractual regime was that DBS could not conclude R1-D Milestone delays were incapable of remedy before engaging the Remedial Plan Process, and that the failure to engage the Remedial Plan process of itself therefore meant that the notice of partial termination was unlawful.
Judgment
The judge determined that failure to meet the R1-D milestone was not necessarily of itself a material breach incapable of remedy. In considering whether a 'Default' is 'capable of remedy', he cited Lord Reid in Schuler AG v Wickman Machine Tool Sales [1974]:
"The question then is what is meant by the word 'remedy'. It could mean obviate or nullify the effect of a breach so that any damage already done is in some way made good. Or it could mean cure so that matters are put right for the future. I think that the latter is the more natural meaning."
In the context of delays, the judge cited HHJ Seymour in Peregrine Systems Limited v Steria Limited [2004]:
"It seems to me that the whole purpose of a provision in a contract by which a party contemplating the determination of the contract for breach on the part of the other party has to give a notice, if a breach is capable of remedy, is to give the party in default the chance to avoid the consequence of termination of the contract if, in substance, the other party can, at the point at which notice is given, be put in the position in which he would have been but for the breach. It is difficult to see how such a provision could be of any practical utility if the fact that the date for performance of a positive obligation had passed meant that the breach of that obligation was to be taken to be irremediable, even if it could be performed late. Until the last date for performance had passed there was no breach. It would be strange if in those circumstances, the moment there was a breach that breach was irremediable, however quickly thereafter the obligation could be performed. ..."
Sometimes a party will be able to determine that, objectively, a breach is incapable of remedy. However, in circumstances where, objectively, a breach may be capable of remedy, the judge considered that the contract, properly construed, required DBS to engage clause 56 (Remedial Plan Process), to which its right under clause 55 (partial termination) was expressly subject.
As DBS chose not to engage Clause 56 in respect of the relevant alleged material default, but, objectively, it may have been capable of remedy, it had not exercised its right to partial termination lawfully under the agreement.
Because of the possibility of accelerative measures, it was not right to assert that the breach was inevitably irremediable without invoking the Remedial Plan Process. Doing this would provide the defaulting party with, as required under the contract, a reasonable opportunity to demonstrate that the breach was capable of remedy.
The judge commented,
"The whole purpose of the Remedial Plan Process is to give the Contractor, within defined timescales, the opportunity to remedy a material Default which otherwise gives the Authority the right to remove that part of the work. The purpose of the regime would be defeated if, in relation to a material Default of which it is aware, the Authority could simply wait until, by reason of the effluxion of time, it is no longer capable of remedy, and then invoke Clause 55.11 and, by so doing, sidestep the obligations in Clause 56 to which Clause 55.11 is expressly subject."
The R1-D default was irremediable as at the date of the notice of partial termination because of preceding critical delays, which were not due to TCS.
The judge also commented that, on a proper construction of the contract, DBS was not permitted to wait until the default was irremediable to exercise its right under Clause 55.11 without operating Clause 56. His alternative interpretation of the facts was that by delaying the operation of clause 55.11, DBS benefited from its own breach. The judge decided a time limit by which DBS was required to invoke clause 55.11 in relation to the R1-D material default will be implied so as to prevent DBS from benefiting from its own breach.
The judge accepted TCS's argument that as at the date of the notice of partial termination, it was inevitable the agreement would be extended by at least 6 months. This was clear from evidence.DBS countered that this was legally irrelevant, and that the parties' legal rights and obligations must be assessed based on the contractual position as it existed at the time the contractual right was due to expire.On this, the judge said that the relevant question is whether DBS was entitled to assert as at the date they served notice that R1-D was incapable of being delivered in the contractual timeframe. The judge found the contractual expiry was in six months' time and that an extension was not just anticipated but inevitable. He commented,
"It would not be appropriate for the Court to shut its eye to the factual reality when considering, objectively, whether the (future looking) conclusion that TCS was incapable of delivering R1-D prior to the termination of the Agreement was justified as a matter of fact."
TCS did not accept the repudiatory conduct of DBS (which would have entitled them to bring the whole contract to an end) because it continued to comply with its other obligations.
TCS was entitled to accept that (in breach of contract) DBS had unilaterally decided to remove part of the scope of works, treating it, in effect, as an instruction with which it would comply, without prejudice to any damages it may have on account of the breach.
The judge decided that the non-delivery of R1-D following the wrongful partial termination was caused by the effective de-scoping and the admitted non-engagement by DBS after that in the delivery of R1-D.
Comment
Where the relationship between the parties has deteriorated to the extent that a customer is considering partial termination, the connection between the contractual provisions of the applicable clause must not be overlooked and each part must be followed. Here, the remedial process needed to have been exhausted and documented before the notice of partial termination was served so that the customer could reliably assert that the delay was incapable of remedy under the agreement. Because of the way the clause was constructed, whether the delay was capable of remedy needed to be fully considered, as well as whether every opportunity had been afforded to the other party under the contract to remedy the delay.
The judge took account of the fact that an extension of time to this part of the project was anticipated and indeed was inevitable, and this supported his decision that R1-D could have been delivered within agreed timeframes so the delay could therefore not be defined as incapable of remedy. Parties should keep in mind that evidence of all communications, such as meetings and discussions about time extensions, will be taken into account when a dispute is brought to court and compliance with the contract is judicially examined.
At the contract drafting stage, contractual terms covering termination rights and obligations must be clear. Here, a lot rode on deciding whether a default is 'capable of remedy' and how delay should be treated in light of that phrase.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
