refusing to perform may repudiate the contract
DE BEERS v ATOS ORIGIN [2010]
This case shows the danger of refusing to perform a contract unless the other contracting party agrees to significant changes to the originally agreed contract. It illustrates how a complex software development contract can go wrong and how the supplier was held liable for damages for breach of the agreement by suspending work.
facts:
- A was very concerned about the cost of a fixed price software development project it was implementing, partly because of ‘scope creep’ and partly due to various causes for which the customer was allegedly responsible.
- A claimed the scope of the project had expanded beyond that contemplated by the original contract. A maintained that changes in both 'breadth' (adding new functionality) and 'depth' (adding scale or complexity) were chargeable. D accepted that changes in 'breadth' were chargeable but it disputed the claims relating to 'depth'.
- Although A had a contractual right to suspend work for non-payment, instead of utilising this right (because of non-payment of an invoice that was ultimately determined to be properly due), it wrote to D threatening to suspend work unless the parties reached agreement on major variations to the original contract. These variations included moving to a time and materials basis for charging and payment of an extra £4.6m for changes to the required functionality and in the complexity of the software.
- D was not prepared to negotiate on these terms and A suspended work. As a result, no useable software was actually delivered.
- D claimed that A had repudiated the contract (ie it had acted in a way which demonstrated that it did not intend to be bound by the original contract) by trying to force D to accept different terms and refusing to perform at all unless D accepted those terms. D wrote a letter informing A that it accepted this repudiation and terminated the contract.
- As a result of D’s purported termination of the agreement, A then claimed that it had been discharged from any further performance of the contract. D consequently claimed damages for the additional costs of a replacement system (the so-called ‘loss of bargain’), even though it did not intend to procure another system.
decision:
- Termination - In considering the law of repudiatory breach (ie a breach which deprives the innocent party of substantially the whole of the benefit of the contract), a number of cases were quoted and what is clear is that to amount to repudiation, a breach must go to the root of the contract.
- Demans or commercial proposals? - The demands made by A did not reflect its contractual entitlement and, in making those demands, it showed a clear intention not to be bound by the original contract but that it was prepared to complete the work on different terms. Therefore, as a result of its conduct, A repudiated the contract. That repudiation was accepted by D in its letter. As the Judge said “There is a very significant difference between being willing to complete a project, and being willing to fulfil a contract. Even if A was privately prepared to continue to perform the contract, that intention was never communicated to D; nor would a reasonable person in D's position have understood that to be the case”.
- Scope - The Court decided that if a change could fairly be said to fall within the 'activity' described in the version of the specification which existed at the time the contract was signed, the change was 'in-scope'. In other words, it held that changes of 'depth' were in scope, even if the complexity of the system increased beyond what had perhaps originally been contemplated.
- At the time it entered the contract A was aware that D’s requirements had only been captured/expressed at a relatively high level and that it was likely that a significant amount of information leading to further detailed requirements - but within the scope of the high level requirements - would emerge during the detailed analysis stage. This was an element of risk that should have been reflected by including an appropriate contingency when the fixed price for the contract was being negotiated.
- Damages - Regarding D’s claim for loss of bargain, it was established that one measure of damages for failing to complete a project is the cost of procuring a contract for the undelivered services from another party. There was no need for D to have actually entered into a replacement contract to prove its loss of bargain. It would have been reasonable for D to purchase the services elsewhere and it was sufficient that it still had a genuine need for them.
- However, the Judge also found that the parties shared responsibility for delays and additional costs in the project: failures and delays by D in finalising certain requirements; change requests from D that represented a genuine alteration in the scope of the wor and a failure to make key personnel sufficiently available. This significantly reduced the damages awarded to D, which originally claimed £8.68m but ultimately recovered only £1.4m.
points to note:
- Parties must be careful of their legal position when they refuse to supply services or fail to carry out their obligations. Otherwise they run the risk that such conduct is deemed to amount to a repudiation of the contract. This could have the opposite effect to that intended because it is likely to significantly strengthen the other party’s position.
- Although the Court’s findings regarding the scope of work were applied to the specific facts, the judgment demonstrates that a supplier who is negotiating a fixed price contract needs to ensure that it uses clear language if it intends to limit the scope of work to exclude changes which add scale or complexity to the original requirements. An alternative approach would have been to have further split the contract and only agreed a fixed price for the development of the system once the more detailed requirements had been fully ascertained.
- In another recent case, Eminence Property Developments v Heaney [2010], the Court of Appeal confirmed that principle, not precedent, should be the basis of the test for repudiatory breach. The legal test itself is simply stated: whether, looking at all the circumstances objectively from the perspective of a reasonable person in the position of an innocent party, the contract breaker has clearly shown an intention to abandon and altogether refuse to perform the contract. The Court emphasised that whether or not there has been a repudiatory breach is highly fact sensitive, and as such, comparison with other cases is of limited value.
- Where there is concurrent delay to completion caused by matters for which both the customer and supplier are responsible, the supplier is entitled to an extension of time but it cannot recover damages in respect of the loss caused by the delay.
- Failure to pay a milestone instalment - the Judge considered this to be a clear breach of contract but not a repudiatory breach. D was not demonstrating a general intention not to be bound by the terms of the contract. However, the judge thought that non-payment of this amount probably constituted a material breach of contract for the purposes of the express termination provision, so that A could have terminated if the breach persisted for 30 days after A had served a notice requiring D to remedy the breach and pay the money. A never served such a notice. This aspect has two lessons:
- consider your contractual rights carefully and the particular provisions that you are exercising;
- there is perhaps a suggestion that there is a significant difference between a repudiatory breach at common law and a material breach (the latter being the terminology used in most contractual termination provisions). The problem is that whilst cases such as this have helped to clarify what amounts to a repudiatory breach, the concept of ‘material breach’ is still very much an unknown quantity and the Courts often refer to ‘material breach’ and ‘repudiatory breach’ interchangeably.