A complex and high-value commercial dispute between a Co-operative Group insurance company and IBM UK Ltd has emphasised the importance of: (i) complying with the contractual terms when disputing an invoice; and, (ii) ensuring that a party has grounds for terminating a contract.
The case took place in the Technology and Construction Court and the trial lasted 32 days. Co-operative Group insurance company (CIS) sought damages for a breach of a managed services agreement for the provision of a new IT system. The project itself was substantial and the cost of delivering the new system was £50.2 million with a further £125.6 million for managing the system over the following 10 years.
- CIS failed to pay an invoice for approximately £3 million and accordingly IBM UK Ltd (IBM) served a notice of termination in relation to its agreement with CIS.
- CIS’ primary claim was for damages in relation to wasted costs arising from the assertion that IBM’s service of the notice of termination was a repudiatory breach of contract. CIS’ primary claim for wasted costs was for £128 million. In the alternative, CIS claimed that IBM was in breach of a warranty as to its performance of the agreement and that the agreed milestones were unachievable.
- CIS also alleged that it would not have entered into the agreement with IBM had it known that the IT system was not a proven product that could meet its requirements with a minimal amount of customisations.
The Court held that:
- Whilst the £3 million invoice was payable, its non-payment did not allow for IBM to terminate under the agreement, as it was disputed by CIS under an agreed contractual procedure.
- IBM was not in breach of warranty as it had taken all reasonable steps to determine the risks in relation to the project.
- IBM had adequately represented the extent of the development of the software required but was responsible for fundamental delays to the project. IBM Had failed to meet key milestones and provide accurate reports as to the reasoning of those delays.
- Accordingly, CIS’ primary claim for wasted costs failed but CIS was awarded £16 million for additional costs in relation to costs incurred as a result of delays in contractual milestones being met. The award of damages was reduced by around £3 million by setting off the unpaid invoice.
The case provides useful reminders regarding the potential pitfalls in relation to IT projects and generally that a party under contract should ensure that they are confident that they have abided by their obligations under the contract before considering their right to terminate for a breach committed by the other party.
We would recommend seeking legal advice before taking steps to terminate any high value or complex contract.
Posted on June 7, 2021