The case concerned the termination of a large outsourcing agreement entered into between BT Cornwall and a collection of public sector partners led by Cornwall Council. The arrangement between the Council and BT, valued at £160m, saw BT take over many of the Council’s important health, transport, communications and public safety services. It quickly turned sour when BT persistently failed to meet the contractual KPIs.
BTC made several attempts to recover the situation but the Council eventually ran out of patience and took the bold step of terminating the agreement for BT’s breach. BT accepted there were problems with its performance but denied that this gave rise to a right for the Council to terminate. It sought an injunction to prevent the Council from bringing the agreement to an end this way.
What was the court’s decision?
The court preferred the Council’s position. It agreed that BT’s breach of the agreement was sufficient in all of the circumstances to allow the Council to terminate the agreement. The case raises a number of important issues that we outline below.
Implications of this decision
1. Crafting the drafting
Did the agreement provide the answer?
Mr Justice Knowles was pretty scathing of the agreement itself. In his opinion:
- The agreement was “very hard to work with”, due to its “impractical length and the imprecision in some of its drafting.”
- It was important that “everyone should know where they stand” as to what a written agreement means.
- Ultimately the public would be affected by the shortcomings in the drafting.
What can we learn?
One area of a contract like this that requires particular attention is the importance of including adequate termination assistance wording. These sort of provisions set out what each party’s obligations are in exiting the contract and who picks up the bill for this. We all know we should always aim to be clear, unambiguous, thorough and concise when drafting contracts. As the recent Supreme Court case in Arnold v Britton reminds us, the courts will adopt a literal approach when it comes to contract interpretation where there is no ambiguity. The task is to identify what the parties have agreed, rather than what the court thinks that they should have agreed.
2. 'Testing, Service Levels' v 'Service Level Testing'
What were the issues with the service levels?
Much of the criticism in the drafting was directed at the issues with the price performance mechanism contained in the contract, more regularly known as a service level agreement. One of the key issues the parties faced was as follows:
- The parties failed to set the target service levels for many of the measures that were important for the Council.
- Instead, they agreed that baselining should take place to determine what those service levels should be.
BT argued that this meant the entire set of key performance indicators (KPIs) were not valid. This argument was swiftly rejected by the Court, even though the Council seemed to accept that the initial service levels were not fit for purpose. Ultimately, the court agreed that BT’s failure to meet the agreed KPIs in itself amounted to a contractual automatic right for the Council to terminate under the termination clause. This allowed it a right to terminate without a remedy period.
What can we learn?
As lawyers, we might be tempted to leave the drafting of this important aspect of any deal to the technical and operational teams that will have more day-to-day experience of what is required. Given that a customer’s remedy for breach by a supplier is often linked (and occasionally limited) to service credits which are generated from a set of service levels, we need to be confident that the regime works. From the supplier-side, it is helpful to get to a position where only a complete (and on-going) catastrophic disruption to the customer would allow the customer to walk away from the deal. Anything short of this ideally should lead to the customer’s remedies being limited to (in this order):
- a correction plan;
- service credits;
- damages; and
- possibly step-in rights.
Clearly much will depend on the bargaining power, the nature of the relevant services and the duration of the deal.
3. Waiver goodbye if you don’t act fast
Had the right to terminate been waived?
The Council had a contractual right “at its sole discretion” to waive the KPI breaches. This was only if they were satisfied (acting reasonably) that a remedial plan to prevent the service failure being repeated was in place and being adhered to.
BT contended that the Council should be estopped from terminating because it had effectively waived its right to terminate. When considering whether the facts made out a case for estoppel or affirmation, the court noted as follows:
- there was no material delay on the Council’s part; and
- neither its actions nor the passage of time could be construed as an election not to terminate for Material Breach.
As a result, the court found nothing to dictate the right of waiver had been exercised or should have been exercised.
What can we learn?
Had the Council not been so quick to take action – be this to resolve the issues and move forward or to exercise a right to terminate – the outcome of the case could have been different, but delay itself is not necessarily the key factor. As we have seen in a number of cases (most notably Force India v Etihad from a few years ago), this sort of issue is determined very much on the facts of each case.
This aspect of the case reminds us that good contractual governance is key. In most cases, customers and suppliers are well advised to act quickly to reserve their contractual rights and preserve the available remedies. This is because failure to do so might mean that a supervening event removes these rights, such as a repudiatory breach by the terminating party itself or full resumption of performance on both sides.
4. It’s good to talk, but writing things down may be key
Was there a variation or new agreement?
BT argued that the agreement had effectively been amended by an implied “KPI Backlog Agreement”. It claimed that the Council knew and accepted that an additional focus by BT on rectifying the existing backlog of issues would lead to a relaxation of the KPIs in the interim. The court concluded that there was no variation to the existing agreement or new agreement and relied on the following factors:
- the lack of written evidence of this position; and
- the fact that one of the parties to the agreement was not present at the relevant meeting.
The court made clear that despite the agreement containing detailed change control provisions, this would not have prevented the possibility of the agreement being varied by a meeting of sufficiently senior representatives from both sides. This can be contrasted with some of the other written notices and internal e-mails that the court was prepared to rely on in deciding the case. In particular, one of BT’s directors had described the contract as “disastrous” and BT’s position as “precarious”. In other emails, that same director had referred to the “grave danger of breach” and encouraged his colleagues to “keep as many tickets out of the system as we can”.
What can we learn?
We should remain aware of the approach of the courts in reviewing internal e-mails and memos, as well as conversations, as part of its judicial analysis. Given technological developments in e-discovery and the disclosure of electronic documents, staff at all levels should aim to follow up after meetings with detailed notes of what has been agreed and any necessary next steps and instructions.
5. You’ve got to have (good) faith, (good) faith, (good) faith
Did the council breach the contractual duty of good faith?
The agreement contained a general obligation on each party to “act in good faith and use reasonable endeavours to enable a continuing Partnership dialogue throughout the term”. BT argued that this meant that the Council would not be permitted to terminate while BT were in the process of trying to rectify the issues that had arisen. The court stated on this point as follows:
- the good faith obligation went only to “a continuing Partnership dialogue”; and
- it would not limit the Council’s separate contractual rights to terminate for breach.
Was there an implied duty of good faith?
BT argued that there was also an implied duty of good faith. As recent case law has shown, this concept has yet to be formally recognised in all contexts by the courts. In this case, given the “absence of capriciousness” the court was satisfied that the Council had acted in good faith.
What can we learn?
This case presents another knock-back for those keen to see a general, implied duty of good faith applying to all contracts. For now at least, if you want to ensure your contracts are performed in good faith or that a party needs to act in good faith before it exercises its right to terminate, it is important to make this explicit in the contract. In particular, consider defining “good faith” to promote greater certainty and expressly linking this to the clauses that may cause you concern.