Case Law: Termination of IT contracts

The Technology and Construction Court has recently handed down 754 pages worth of judgment in the case of CIS General Insurance Limited v IBM United Kingdom Limited (2021), following just over a month-long hearing. The judgment addressed a number of topics that are useful to consider when drafting IT contracts.

BACKGROUND

IBM United Kingdom Limited (“IBM”) and CIS General Insurance Limited (“CIS”) had entered into a contract for the former to assist CIS to develop a new IT infrastructure in 2014 (the “Contract”). As with most digital transformation projects, the Contract between the parties contained various overriding objectives which the parties aimed to achieve.

THE COURT DATE

In July 2017, IBM terminated the contract on the basis that CIS failed to pay an invoice of £2,889,600 for licensing fees. In response to IBM’s termination, CIS initiated proceedings against IBM, alleging that IBM’s termination notice was invalid, and as such, had instead repudiated the contract. In addition, CIS justified its withholding of payment on the basis that IBM had not achieved a specific milestone as set out and agreed in the Contract. It is worth noting that prior to this event, the parties had already been engaged in various disputes, where each party’s solicitors were involved. CIS subsequently put forward a claim for damages of £128 million in wasted expenditure, alleging that this was caused by IBM’s repudiation. IBM nevertheless was adamant that it was entitled to terminate the contract as a result of CIS’s failure to pay and that the termination notice was therefore valid.

THE DECISION

The duration of the case reflected how complex the dispute was and the extensive judgement that was handed down detailed the various aspects of the case that affected the court’s ruling. Having carefully regarded the case at hand, the court held that:

  • whilst IBM was entitled to the payment that formed the basis of its termination of the contract, IBM had, in fact, repudiated the contract having failed to follow the contractual procedure of resolving a disputed invoice;
  • CIS had no legitimate basis to withhold payment as the contract did not explicitly state that payments were dependent on the achievement of milestones; and
  • whilst CIS is entitled to damages, the court awarded it the contractual liability cap of only £15.9 million to recover the additional costs incurred as a result of IBM’s breach of contract, in contrast to the £128 million that CIS had asked for.

PRACTICAL TAKE AWAY

It is evident that when interpreting IT contracts and the termination of such documents, the court relies heavily on the provisions within the agreement to interpret the intentions of the parties at the time of drafting the contract, not retrospectively. The main practical takeaways from this case can be summarised as follows:

  • where there is a dispute of an invoice, parties should follow the procedure set out in the contract fully to avoid breaching the contract before seeking to terminate the contract, which ideally should be a last resort;
  • examples of clauses to include in respect of invoice disputes include:
  • time limit to raise the dispute (e.g. within 14 days of the receipt of invoice);
  • what happens with the undisputed amount (e.g. to be paid independent of the ongoing dispute);
  • timeline to resolve the dispute; and
  • consequence of dispute not being resolved by the deadline provided within the contract;
  • when drafting the contract, parties should state their intentions explicitly, especially in relation to prices, termination, duration, for example, for anything that the contract is silent on will unlikely be interpreted by the court as such, unless it is reasonably obvious;
  • parties should carefully consider the amount they wish to expressly include as a liability cap in the context of the contract as a whole together with the services being provided and consequences likely to be incurred in the event of a breach, as if not dealt with cautiously this could substantially reduce the amount that one party can recover from the other in case of a dispute, especially where the project is worth a significant value.

While the case at hand concerns disputes on an IT contract, these practical tips should be applied in the drafting of any types of contracts to effectively protect parties’ interests.

To read the ruling please click here.

For more information, and any guidance or advice on IT contracts, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

 

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