Knowledge of sub-contractor attributed to the prime?
CIS v IBM (High Court) [2021]
Performance of a contract is often dependent upon multiple sub-contractors. Contracts typically provide that the acts and omissions of the sub-contractor are deemed to be those of the prime contractor who is liable to the customer or client accordingly. Effectively, for this purpose, they are treated as being part of a single entity. However, such clauses rarely, if ever, deal with the attribution of knowledge and, perhaps they should
Facts:
CIS entered into a contract with IBM for the implementation of a new IT solution to support their insurance business together with ongoing services and support for a ten-year term. IBM procured an insurance application as a major part of the solution from Innovation Group (IG) acting as its sub-contractor. It seems that IG were the cause of many of the problems faced by the project.
The Agreement provided that “where [IBM] subcontracts any of its obligations under this Agreement (a) [IBM] shall not be relieved of any of its liabilities or obligations under this Agreement by entering into any subcontract and [IBM] accepts liability for the acts and omissions of any Contractor or any of the Contractor's staff …”
IBM was obliged to “notify the Customer when it becomes aware of any development which may have a material impact on the Supplier’s ability to provide the Services effectively and in accordance with [the agreed timetable]”. The provisions imposed on IBM clear reporting obligations regarding progress of the project and any impediment that would prevent achievement of the key contractual milestone dates.
CIS alleged that IBM had failed to comply with this obligation. IBM argued that the Agreement did not attribute to IBM its sub-contractor’s knowledge for the purpose of IBM’s reporting obligations.
Decision:
IBM was not held to be fixed with its sub-contractor’s knowledge. The court decided that the clause in question set out above did not, expressly or implicitly, impute to IBM knowledge on the part of its sub-contractors. The reporting obligations set out in the Agreement were personal to IBM. The reporting obligations were limited to matters within IBM’s actual knowledge and did not extend to matters known only to IG.
Points to Note:
- We believe this is a somewhat strange finding (given that the contract expressly made IBM liable for acts and omissions of its sub-contractors as if they were its own) which presents significant risks to customers and one that should probably be fixed by some suitable drafting. The judge seemed to focus on the knowledge IBM would have had, had it, itself, tried to implement the software program in question rather than using a sub-contractor. That seems to us to be misplaced. The judge should, we believe, have focussed on the general principle. The judge also focussed on the drafting of the clause in question but did not address the issue raised by CIS, namely their assertion that IBM should be fixed with the knowledge of the sub-contractor by virtue of a common law principle.
- The CIS decision will be heavily debated primarily for aspects of the decision related to the impact of a contractual exclusion of loss of profit. However, if not appealed, the judge’s failure to find that prime contractors are fixed with the knowledge of their sub-contractors has the potential to be very significant indeed and is an aspect of the judgment that should certainly not be overlooked.