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‘Mind the exits’ – dealing with poorly performing ICT contracts

  • United Kingdom
  • Technology, Media and Telecoms - Technology

02-03-2016

The High Court has found a member of the BT Group to be in material breach of a major outsourcing agreement worth an estimated £260 million in BT Cornwall Limited v Cornwall Council, Cornwall Partnership NHS Foundation Trust and Peninsula Community Health CIC [2015] EWHC 3775 (Comm).

Following a seven-day trial in the Commercial Court, Mr Justice Knowles held that BT was in material breach of KPIs relating to outsourced ICT services and that BT Cornwall (“BT”) should not be granted an injunction preventing Cornwall Council, Cornwall Partnership NHS Foundation Trust and Peninsula Community Health CIC (referred to as the “Public Sector Partners”) from terminating the agreement just two years into its 10-year term.

What?

Background

The Public Sector Partners entered into a 10-year outsourcing agreement with BT Cornwall in 2013, under which BT took responsibility for the provision of a range of vital public services affecting health, transport, communications and public safety throughout Cornwall (the “Agreement”).

From its outset, BT struggled to meet certain KPIs which led to Cornwall Council (the “Council”) and BT establishing an “Executive Forum” in February 2015. The Executive Forum was attended by high level executives from both the Council and BT in an attempt to address BT’s performance failures and to clear the backlog of issues that had developed over previous months.

The attempts to address BT’s performance failings were unsuccessful and the Council served notice of its intention to terminate the Agreement in June 2015. BT did not accept that the Council and the other Public Sector Partners were entitled to terminate the Agreement as a result of its performance failures and sought an injunction preventing such a termination.

Following an interim hearing in August 2015, the Public Sector Partners agreed not to terminate the Agreement pending an expedited trial to determine whether BT was in material breach of the Agreement such that the Public Sector Partners were entitled to exercise their rights of termination.

Issues

During the trial, BT accepted that its performance in relation to certain outsourced ICT functions was inadequate and that a significant backlog of issues had developed by January 2015. BT also accepted that its monthly reports showed that it continued to be in breach of the relevant KPIs in March and April 2015. However, BT argued that it was not in material breach of the Agreement as a result of these performance failings because (i) the KPIs were unenforceable until a base-lining process in respect of those KPIs had been completed; (ii) the KPIs were unenforceable because they were not fit for purpose; or (iii) BT had made an error in its reported figures and, following a re-evaluation conducted by BT in the run-up to trial, the “correct” figures demonstrated that BT had hit all relevant KPIs and so was not in breach.

BT also argued that if it was held to be in material breach of the Agreement, the Public Sector Partners should not be entitled to exercise their right to terminate for the following reasons: (i) the Council had waived its right to terminate the Agreement during meetings of the Executive Forum; (ii) the Council was estopped from exercising its right to terminate on the basis that it had agreed not to exercise such rights if BT cleared the backlog of issues in “one fell swoop” (as opposed to over a longer period of time so as to ensure that BT managed to hit its “in-month” targets); (iii) the Council had affirmed the Agreement by failing to terminate “forthwith” when the right arose; and (iv) the Council’s decision to terminate breached alleged duties of good faith.

Outcome

The Court rejected these arguments and held that BT was in breach of contract and the Public Sector Partners were entitled to terminate the Agreement.

The Court held that the KPIs in question were enforceable without the need for any base-lining process to be completed. Additionally, the issue of whether or not the KPIs were fit for purpose was immaterial to the question of whether or not BT was obliged to comply with them. Interestingly, the Court accepted that in certain circumstances BT may have been entitled to rely on revised performance figures based on a reassessment of its past performance. However, the Court held that in this case: (i) BT would only be entitled to rely on revised figures if it could explain why the original figures were not, as required by the Agreement, “objective, fair and reasonable” and had not been submitted in good faith; and (ii) the original figures submitted by BT were to be preferred to the revised figures prepared in the run-up to trial.

For the above reasons, the Court held that BT’s performance failings did constitute a material breach of contract. In addition, the Court held that there was no agreement between the Council and BT (which amounted to a variation of the Agreement or otherwise) to the effect that the Council (or the other Public Sector Partners) would not exercise any right to terminate if BT cleared the backlog of issues in “one fell swoop”. The Court held that the backlog was a problem of BT’s own creation and it was contractually obliged to clear the backlog even if this resulted in it placing itself in material breach of contract. The Council was not prevented from relying on any breach of contract which materialised as a result of BT’s efforts to clear the backlog simply because it agreed that clearing the backlog quickly was the right thing to do.

The Court also accepted that the Council had not expressly or impliedly waived its right to rely on any breach by BT during any Executive Forum meetings. The surprise suggestion by a BT witness during the trial that the Council had openly acknowledged that it had granted BT a “KPI let” was dismissed by the judge as regrettable and untrue.

The Court was content that the Council had acted sufficiently quickly not to have lost its right to terminate. The fact that the Council had attempted to work with BT to resolve the performance issues (to no avail) before seeking to terminate the Agreement should not be held against the Council in this regard. It was also held that the decision to terminate the Agreement, and the timing of that decision, did not breach any obligations of good faith which may have existed in the relationship between BT and the Public Sector Partners.

So what?

This case highlights a number of important points in relation to the contract itself, but also ‘living the contract’, such as:

1. Clarity is king, especially in relation to key performance indicators and service levels. This includes having service levels and KPI baselines which are clear as to what they mean in practice, how they will be assessed, by whom and using which severity levels. It must be clear which data should be used in assessment of performance against KPIs and if there will be any right to retrospectively reopen the assessment of KPI performance.

2. A clear termination right linked to KPI performance can be a very powerful tool in ensuring both parties are clear on when the right to terminate arises. A termination right based upon clear and precise KPIs can be very black and white, making it difficult to argue against (as BT found out). When a party is only able to rely on “material breaches” of contract, with no objective definition of what constitutes a material breach, termination can become much more risky, with the terminating party potentially putting itself in repudiatory breach of contract and exposing itself to a significant claim for damages.

3. Governance and change control procedures should be adhered to in order to minimise the risk of a defaulting party arguing that obligations have been varied by either: (i) a variation to the main agreement; (ii) a collateral agreement; or (iii) any rights having been waived. Where undertakings or agreements are reached outside of any contractual governance structure, these should be clearly recorded and shared with all parties and consideration should be given to their status in respect of the contract and the parties’ other obligations. This includes whether steps should be taken to comply with the change control requirements set out in the agreement. The parties should take care not to prejudice any rights to terminate if they are unable to get the contract back on track.

4. Meeting notes, action plans and other contract management correspondence form the vital evidential narrative as to what has happened and who is at fault. Witness evidence tends to diminish in value as time passes and so a high level of care must be taken over contemporaneous document creation and content.

Eversheds acted for Peninsula Community Health CIC, the Second Defendant in this matter.

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