Termination of outsourcing contract upheld
BT CORNWALL v CORNWALL COUNCIL [2015]
A Council’s action to terminate a long-term outsourcing contract with its supplier after only two years due to the supplier’s failure to meet key performance indicators has been upheld. The supplier’s attempt to get an injunction to prevent termination was unsuccessful.
Facts:
- In 2013 Cornwall Council (“C”) entered into a 10 year multi-million pound strategic partnering agreement with BT Cornwall (“BT”) to outsource various public services in Cornwall (“Agreement”).
- C had the right to: “terminate the Agreement forthwith” if BT was in Material Breach. “Material Breach” was defined as including, “an accrual and/or accumulation of Service Credits to a level stated in Schedule 13 (Price Performance Mechanism Schedule)”.
- There were substantial problems with BT’s performance. Nevertheless, it was accepted on both sides that the key performance indicators (“KPIs”) in the Agreement were “not fit for purpose” and a re-baselining process had been started.
- However, in 2015 before the parties got to the stage of agreeing revised KPIs, C informed BT that it was in Material Breach through the accrual of service credits to the required threshold and as such it had the right to terminate the Agreement.
- BT disagreed and argued that any termination for Material Breach in relation to KPIs must be made in good faith, relying on a provision in the Agreement that said, “[The parties] shall act in good faith and use reasonable endeavours to enable a continuing Partnership dialogue throughout the Term”. According to BT, this meant that C would not be allowed to terminate while it was in the process of trying to rectify the issues that had arisen.
- BT sought an injunction to prevent C’s termination.
Decision:
- It was decided that C was indeed entitled to terminate the Agreement as BT had failed to meet the agreed KPIs and was in Material Breach.
- The Court found that the express obligation to act in good faith was not a general duty affecting other contractual obligations and specifically did not apply to the distinct right to terminate the Agreement. Nor was there a more general implied duty of good faith. In any event, the Court was satisfied that C had acted in good faith and there was “an absence of capriciousness”.
- It confirmed that the express termination provision permitted C to terminate for Material Breach without having to give a remedy period.
- C had an express contractual right at its sole discretion to waive KPI breaches if it was, “satisfied (acting reasonably) that a remedial plan to prevent the Service Failure being repeated is in place and being adhered to”. BT said C had waived the breaches but the Court decided this was not the case - neither C’s actions nor the passage of time (about six weeks) amounted to confirmation of the contract or an election not to terminate for Material Breach. The wording, “entitled to terminate forthwith" was not a reference to the period within which action must be taken but was simply a reference to the termination taking effect straight away.
- Crucially, the original KPIs remained operative unless and until they were changed as part of the re-baselining process.
- The Court recognised the possibility that the senior level Executive Forum could in theory, despite formal change control provisions, bind the parties to a contract variation which is something to be wary of if this is not the intention.
Points to note:
- As part of the evidence submitted there were internal BT e-mails suggesting it was prepared, “to take inappropriate steps" which were undoubtedly unhelpful to BT’s case. All employees should be aware that e-mails might be presented to a Court and great care should be taken with what is written.
- The Court observed that the situation was not assisted by the fact that the Agreement was very hard to work with due to its “impractical length and the imprecision in some of its drafting”.
- The Courts will uphold express contractual obligations to exercise good faith but generally they will not apply them more widely than set out in the words used in the contractual provision in question. They may imply a general duty of good faith in certain so-called ‘relational’ contracts which require a high degree of co-operation based on mutual trust and confidence, but this is heavily dependent on the context of the contract in question and particularly, the identity and sophistication of the contracting parties (see Yam Seng v ITC [2013]). It would seem that this is very much the exception rather than the rule. Therefore, if contracting parties wish there to be a duty to act in good faith, it is best to include a clear provision in the agreement itself, setting out the exact scope of what such an obligation is intended to entail.