Termination for delay
Topalsson v Rolls-Royce Motors (High Court) [2023]
Issuing a termination notice without due cause can be extremely risky as that can itself amount to a repudiatory breach. This case considered what happens where a terminating party first issues an invalid termination notice followed by a valid termination notice.
Facts:
Rolls-Royce contracted with software developer Topalsson to develop a new digital visualisation tool allowing prospective customers to see realistic, computer generated images of customised Rolls-Royce cars before purchasing. It was known that Rolls-Royce wanted to use the new technology for the scheduled launch of a new model.
Under the Agreement, Topalsson was obliged to meet milestone dates contained in an agreed implementation plan. Clause 5.3.7 of the Agreement required Topalsson to “complete the Services and deliver the Deliverables on time and in full and by any applicable milestone date or delivery date; if delivery dates or milestones are not specified, within or by any reasonable delivery date or time period that is specified by Rolls-Royce.". Clause 5.8 stipulated that “time shall be of the essence in respect of any date for delivery specified in the Agreement”.
Clause 13.11 provided "If the Supplier fails to deliver Deliverables by the applicable delivery dates or milestone dates, Rolls-Royce shall have the right to terminate the Agreement with immediate effect by giving written notice to the Supplier”.
It soon became evident that the milestone dates could not be achieved. A revised plan was agreed with later delivery dates. Delays continued. Despite having agreed the revised plan, Rolls-Royce served a termination notice (the First Termination Notice) purporting to terminate at common law relying on Topalsson's failure to meet the original plan dates. This arguably meant that Rolls-Royce had itself committed a repudiatory breach but this was ultimately immaterial as Topalsson rejected the First Termination Notice and affirmed the Agreement.
Rolls-Royce then, very shortly thereafter, served a further notice (the Second Termination Notice), purporting to terminate the Agreement both: (i) for repudiatory breach, but this time for missing the revised deadlines; and (ii) under the Agreement.
Topalsson rejected the Second Termination Notice too, alleging that Rolls-Royce was itself in repudiatory breach in purporting to terminate. Topalsson purported to accept that repudiatory breach, bringing the Agreement to an end.
In terms of the timeline, the formal Commencement Date was 11th October 2019 but some preliminary work began as early as August. There were several distinct delivery dates that seem to have been agreed for different elements, namely 9th March 2020, 1st April 2020 and 23rd April 2020. The court found that the required Technical Go-Live of the element required for 9th March was achieved on 20th March 2020. The element required for 1st April was not achieved and was still outstanding on 23rd April 2020. The element required for 23rd April 2020 was not finished by that date. The Second [valid] Termination Notice was served on the 22nd April 2020.
It was mutually acknowledged that the Agreement contained a binding and effective limitation of liability clause in the following terms “"…the total liability of either Party to the other under this Agreement shall be limited in aggregate for all claims no matter how arising to the amount of €5m (five million euros).”
Decision:
The court found that the original dates were contractually binding on Topalsson. Topalsson itself had proposed the timeline to Rolls-Royce, it knew that the timeframes were commercially sensitive and that the software was needed in time for the planned launch, and the parties had agreed those dates.
Further, the court held that, properly construed, the express terms of the Agreement made time of the essence in respect of the original dates.
Topalsson had agreed to the revised dates in circumstances where it had already failed to meet the original dates and where Rolls-Royce had expressly stated that Topalsson meeting the revised plan dates was "a condition of our ongoing contractual relationship". Accordingly, the revised plan dates were binding on Topalsson and time was also of the essence in achieving them.
Had Topalsson met the revised contractual milestone dates?
By the time Rolls-Royce sent its Second Termination Notice, the ‘Technical Go-Live’ milestone dates for two deliverables had passed. There was, however, no express definition of "Technical Go-Live" in the Agreement. However, the court referred to aspects of the contractual test plan and came to the conclusion that ‘Technical Go-Live’ required the successful completion of systems integration and user acceptance testing. In determining what ‘success’ meant in this context, the court referred to the contract Test Plan which permitted a specified level of minor defects but no ‘Critical’ or ‘High’ defects as defined and no security defects or vulnerabilities. The court found that based on this measure, Topalsson had failed to achieve Technical Go-Live by the revised deadlines that had already passed, and was so far behind schedule that it would not have met the final deadline even if the Agreement had continued.
Was Topalsson responsible for failing to meet the March Plan milestones, or was it impeded by Rolls-Royce?
Topalsson argued that the delays were not its fault for a variety of reasons, one of which was ‘scope creep’. However, the court decided that it was significant that Topalsson had not used the contractual change control mechanism to address any changes in requirements.
The court emphasised that case law is clear that a contractual termination right such as the one in clause 13.11 could only be exercised in respect of a significant or substantial breach justifying termination. In contrast, under clause 5.8, the parties had agreed that time for delivery deadlines was "of the essence", i.e. a condition of the Agreement, any breach of which (irrespective of severity) would in principle amount to a repudiatory breach and justify termination. On the facts, the court found that Rolls-Royce had been entitled to rely on either avenue as Topalsson's delays were regarded as significant and "could not be described as a 'near miss'". The Second Termination Notice was accordingly valid.
In addition to missed milestones, Rolls-Royce argued that hosting their confidential information in the ‘cloud’ and using subcontractors without permission also justified termination. On analysis, these breaches were not held to be repudiatory. AWS cloud infrastructure was not inherently insecure and did not pose additional risk as compared with storing data on-site. Using subcontractors without consent had no impact on the progress of the IT solution and was regarded as, at worst, a technical breach.
The contract capped each party's liability at £5 million. Under the Agreement, the cap on liability is applicable to the total liability of either party to the other in aggregate for all claims no matter how arising. On a proper construction of the express terms agreed between the parties, the Court said that under the Agreement the accounting exercise to determine the net sum due to or from each party must be carried out first before the cap is applied.
The Court found that the Agreement required the following accounting exercise to be carried out in order:-
i) calculation of the sums due to Topalsson on termination;
ii) calculation of the sums due to Rolls-Royce on termination;
iii) calculation of the net sum due to Topalsson or Rolls-Royce;
iv) application of the cap on liability.
Topalsson sought to argue that the set-off exercise to establish the net sum due should be carried out after the application of the cap on liability. The effect of that would be that if Rolls-Royce established an entitlement to damages in excess of the cap of €5 million, that sum could then be reduced by any sums found to be due to Topalsson. The Court rejected that argument because it was said to be contrary to the express provisions of the Agreement.
The Court calculated that Topalsson was entitled to just under €800,000 for work completed as at termination. Rolls-Royce’s entitlement to damages was ascertained as (i) interim measures in mitigation of €2.4milion; (ii) estimated replacement costs of €5.4million; and (iii) wasted costs incurred in respect of the project of €160,000; a total of just under €8million.The net sum due to Rolls-Royce was therefore roughly £7 million. Applying the cap in this way limited the claim to £5 million. Had it been applied as Topalsson argued, liability would have been capped at just over £4million.
Points to Note:
- ‘Time of the essence’ clauses are comparatively rare but, as this case illustrates, their impact can be quite dramatic;
- The case demonstrates the dangers of terminating incorrectly. The outcome could have been dramatically different had Topalsson not elected to affirm after the First Termination Notice;
- The exclusion of set-off rights is worthwhile paying attention to;
- The way in which the limitation clause was applied in an instance of claim and counter-claim was extremely interesting and is something of a first.