Outsourcing gone wrong: key lessons from BT v Cornwall.

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In 2013 Cornwall Council (the “Council”) and the local Cornwall NHS trust (together, the “Defendants”) entered into a “strategic partnering” agreement with BT Cornwall (“BTC”).  The scope of the agreement was very wide ranging covering health, transport, communications and public safety.  The potential value of the agreement was close to £160 million.

In June 2015 the Defendants wrote to BTC stating that, due to BTC’s breach, the Defendants were entitled to terminate the Agreement.

BTC sought a declaration that it was not in breach and an injunction to prevent the Defendants from terminating.  In the High Court, the judge decided that BTC were in breach and were not entitled to an injunction.

Poor drafting

The judge was extremely critical of the agreement.  He described it as “very hard to work with, including by reason of its impractical length and the imprecission of some of its drafting.  It runs to several lever arch files without that length providing clarity in return.”  He was particularly critical of the governance and oversight arrangements and the way that critical clauses could be interpreted by each of the parties in different ways.

Customer failures

The judge noted that there had also been breaches by the customer, though ultimately these were not further discussed (because they were irrelevant to the issue as to whether BTC was in breach and the Defendants should be subject to an injunction).

KPI breaches

While the agreement was clearly deficient in a number of respects, material breach was defined in clear and unambiguous terms.   Unfortunately BTCs failure to resolve KPI issues meant that a material breach within this definition was easily established.  Further, the agreement specified that in these circumstances, BTC was not entitled to a period to remedy the failure. 

What is noticeable here is that the judge gave full effect to the contractual right to terminate.   He did not seek to determine if the right to trigger termination for the relevant breach flouted business common sense or some other standard.  Note also that the standard for material breach is considerably lower than the test for repudiatory breach (being deprived of substantially the entire benefit of the contract).  The case therefore supports the argument for having specific and tailored termination provisions to reflect the parties’ concerns.

Remediation agreement

BTC argued that it had used extensive efforts to remedy these defects and that it would not have done so but for an agreement between the parties to the effect that the Defendants would not seek to rely on past KPI breaches to terminate.  The judge gave short shrift to this argument, noting that there was no formal agreement or other written evidence of an agreement to this effect.  Clearly in the judge’s view, the parties should have evidenced any such understanding; the absence of any evidence suggested there was no agreement to this effect.

The key point here is that a supplier that seeks to rectify performance or incurs additional costs, should be clear as to the basis on which it does so.  BTC may have believed there was an informal agreement in place with the Defendants, but ultimately that was not enough in court.

Was there an affirmation of the breaches?

On 24th June, the Council notified BTC that it intended to terminate.  BT argued that there was affirmation (the last KPI breach was April) barring the Council from relying on breaches to terminate and that the Council’s behaviour was only consistent with the agreement having a future.

The judge rejected this. While the Council was prepared to work with BT to try to resolve the issues, this was not to be held against it.  There was no material delay justifying the view that the Council had affirmed the contract.

BT’s reaction

The judge may have been influenced by email evidence that senior employees of BTC were contemplating improper steps to avoid failures being categorised as service failures.  There was particular exhortation to ensure staff “use poetic licence [g]et the buggers out”, ie get BTC out of kpi failure.

Good faith

It is currently quite common for parties to use good faith obligations in a contract to defend or prosecute their case.  In this case, BT argued that the Council could only terminate the agreement if it did so in good faith.  This was in reliance of a clause that stated “[BTC] and the [Defendants] shall act in good faith and use reasonable endeavours to enable a continuing partnership dialogue throughout the Term”.  The judge was reluctant to see this as importing a general duty of good faith affecting other contractual obligations, deciding instead that it required good faith only in respect of “a continuing Partnership dialogue”.  In any case, the judge decided that the Council had acted at all times in good faith and with an absence of capriciousness