It’s good to write: making sure your outsourcing contract is fit for purpose

Posted: 17/03/2016

In BT Cornwall Ltd v Cornwall Council and others, the High Court has ruled that Cornwall Council and others were entitled to terminate an outsourcing contract with BT Cornwall Limited (BTC) due to BTC’s failure to meet certain Key Performance Indicators (KPIs). The judgment provides some interesting practical pointers for those negotiating and drafting these complex documents and those considering terminating contracts. 

Background

In March 2013, Cornwall Council, Cornwall Partnership NHS Foundation Trust and Peninsula Community Health CIC (the defendants) entered into a written Service Delivery Agreement (the agreement) with BTC. The agreement was extensive; it affected the provision of health, transport, communications and public safety throughout Cornwall. It was valued at approximately £160 million. 

On 24 June 2015 the council wrote to BTC asserting that it had a right to terminate the agreement due to breaches in the performance of services by BTC. BTC sought an injunction to prevent termination. 

In August 2015 Mr Justice Teare ordered an expedited trial of two issues:

• Was BTC in breach of the agreement on 20 July 2015 such that the defendants were entitled to terminate; and
• Should BTC be granted an injunction to prevent termination? 

BTC did not deny that there were significant problems with its performance. A backlog of work accrued in 2014 and this backlog remained well into 2015. 

As a result of those failures to comply with KPIs, ‘service credits’ were deducted by the defendants from the monthly payments to BTC. So many service credits accrued that they amounted to a ‘material breach’ under clause 48.2.1.1. Clause 48.3.2 of the agreement provided that in such circumstances BTC would not (most unusually for a contract of this nature) be granted any remedy period and the defendants would be entitled to terminate forthwith. 

BTC argued inter alia that:

• The parties had reached a ‘KPI backlog agreement’ that  the accumulated KPI results would not be taken into account in assessing whether BTC was in material breach and the defendants could not rely on those breaches as giving it a contractual right to terminate as the agreement had thereby been varied.
• Alternatively, if the court did not find that a binding agreement in the form of the KPI backlog agreement had been reached, the facts gave rise to an estoppel or affirmation or waiver, so as to prevent the defendants from relying on those breaches of the KPIs as entitling them to terminate the contract. 

Judge’s decision

Following a seven-day trial in December 2015, Mr Justice Knowles ruled in favour of the defendants; and held that they were entitled to terminate the agreement forthwith. 

Drafting of the agreement

Knowles J made several comments about the “shortcomings in the drafting of the Agreement” (paragraph 83). 

The agreement was criticised for being “very hard to work with” because of its“impractical length” and for “the imprecision in some of its drafting” (paragraph 8). 

For example, KPI 5 (incident impact 1) was caveated by the words ‘baselining required’. The effect of this was that, before a material breach would arise, the ‘current actual performance level’ for that KPI would need to be known and the ‘target service level’ would need to have been agreed. Yet the agreement gave BTC the unfettered right to amend the target service level. Knowles J noted that it was “not easy to understand why the Agreement should […] make this type of provision” and that the “combination of provision carries a real risk of delay, and this is what happened” (paragraph 21). 

Variation: Had the agreement been varied by the ‘KPI backlog agreement’?

In February 2015, in addition to the oversight arrangements provided for in the agreement itself, BTC and the council established a senior level ‘executive forum.’ There was considerable argument as to whether this body had the authority to agree a legally binding amendment to the agreement in the form of the KPI backlog agreement. 

BTC asserted that Cornwall Council had expressly agreed at the executive forum that BTC should clear the backlog quickly and that the council accepted this would cause further KPI results which hit the breach trigger and so had agreed to a relaxation of the KPIs in the interim. 

Clause 21 of the agreement contained detailed provisions for amendment of the agreement. Knowles J commented that clause 21 made it more difficult for BTC to establish that an amendment achieved by another route, such as by the executive forum, was intended to be legally binding on the parties (paragraph 64); but, if, however, a KPI backlog agreement had been reached at a meeting of the executive forum, then it was possible that it would have been binding on the parties (paragraph 63). 

The judge decided that no agreement had been reached because there was “no mention of such an agreement in contemporaneous documents where one would expect to find it mentioned had it existed” (paragraph 56). Further, one of the parties to the agreement was not even present at the relevant meeting (paragraph 65). 

Waiver: Had the right to terminate been waived?

Under paragraph 7 of Schedule 13, the defendants had an express right ‘at their sole discretion’to waive KPI scores caused by service failures if they were satisfied that a suitable remedial plan to prevent service failures being repeated had been put in place. 

BTC presented evidence that a waiver of the KPI breaches “was implied[by the defendants] and everyone understood”that. BTC referred to the fact that paragraph 7 required no particular formality. Knowles J did not accept that that the defendants had exercised that right, nor that the defendants’ conduct implied such a waiver (paragraph 48); and paragraph 7 did not create anobligation on the defendants to exercise their right to grant a waiver (paragraph 47). 

Estoppel

BTC argued that, even if there was no binding KPI backlog agreement, the defendants’ requests for BTC to clear the backlog gave rise to a promissory estoppel by conduct which prevented the defendants from relying on breaches of KPIs in February, March and April 2015 to justify terminating for material breach. 

BTC argued that it was implied that these further expected breaches would not be used by the defendants to justify termination of the agreement. 

However, the judge decided that BTC was already contractually obliged to deal with the backlog and “was not entitled to expect or assume that it would be exempted from other consequences under the agreement simply because it was honouring its existing obligations” (paragraph 58). The defendants were also “entitled to have the backlog cleared and to retain all [its] rights to insist that the monthly results meet the standards required by the agreement”,even if they knew that the effect of doing so would be to have an adverse impact on the monthly results (paragraph 73). 

Affirmation

The defendants continued to work with BTC to clear the backlog, even after they became aware of KPI breaches in April and May 2015. A report by the council recommended that the defendants continue to work with BTC “to recover the performance position”rather than terminate the agreement. BTC argued that this amounted to affirmation of the contract that prevented the defendants from terminating on the basis that the council’s actions “were only consistent with there being a future for the agreement.” Knowles J disagreed,  commenting: “The fact that the Council was prepared to engage through the Executive Forum, and to work collaboratively with BTC is not to be held against it and did not signal that it would not take action in accordance with the provisions of the agreement” (paragraph 74).

The council notified BTC that it intended to terminate on 24 June 2015. Accordingly, there was no material delay justifying the view that the council had affirmed the contract.

Conclusion: It’s good to talk, but it is better to write – clearly

Drafting the agreement 

Knowles J’s comments highlight the necessity for commercial contracts, and particularly long term and high value outsourcing contracts, to contain clear performance requirements and precise termination clauses. 

It almost goes without saying that parties entering into complex commercial agreements must be clear about their rights and obligations. In this case, however, even though the court was critical of the imprecision in agreement, “the problems were more with BTC’s performance than with the agreement” (paragraph 50). 

Lawyers drafting complex commercial contracts between experienced parties may sometimes leave it to the parties to draft the schedules relating to KPIs and service level requirements. This judgment highlights the necessity for lawyers to review the entire contract to ensure that performance requirements and termination procedures are correctly connected to those KPIs and service level requirements and will work in practice, should a dispute arise. This is particularly important where a right to terminate may arise for failure to perform in accordance with the agreed service levels. 

Parties must also pay particular attention to termination procedures. The defendants in this case were able to rely on an express termination clause that did not require BTC to be granted any time in which to remedy the breaches. Service providers will want to avoid clauses that result in service level breaches giving rise to a right to immediate termination. All parties should consider carefully whether the termination clause contains clear steps and time lines that will be practical and fair for the parties to implement. 

Amending the agreement 

Commercial reality is such that even the best of contracts may need to be amended if circumstances change. Any variations should be drawn up and evidenced in accordance with any amendment provisions; as difficulties are far more likely to arise where the parties deviate from the terms of the contract and do not agree, in writing, that that is an agreed variation to the existing terms. It can be difficult to rely on conduct, which must be unambiguous to amount to an unequivocal representation that one party has decided to continue with an agreement. 

You don’t have to waive goodbye to your rights 

It will have been noted that the judge gave short shrift to BTC arguments on estoppel and waiver in the absence of any formal agreement or other written evidence of an agreement to this effect. Above all, this judgment emphasises that, while it is good to talk, it is much better to put it in writing. 

Parties are often nervous about trying to work with the other side to resolve problems in case that will be held against them if they subsequently seek to terminate the contract. This case is a welcome reminder that it is not always so. 

Although the defendants continued to work with BTC to try to resolve the problems after they became aware that BTC was in breach, they did not thereby affirm the contract or waive their contractual right to terminate. The fact that the council was prepared to engage with the executive forum and to work collaboratively with the service provider was not to be held against it and did not signal that it would refrain from taking action under the agreement, if it ultimately decided the position was not good enough. Knowles J recognised that dealing with the historic incidents would indeed cause a further dip in KPI performance but this was “for BTC to deal with, applying whatever resources it took” (paragraph 51). 

Any party who wishes to rely on a waiver would be well advised to obtain confirmation in writing that it has been granted. There are obvious risks in relying on unclear oral communications or even worse, the other party’s conduct as amounting to a waiver; and when the future of any commercial agreement is at stake it does not make sense to leave the position open to doubt. Accordingly, BTC should have ensured that there was a clear written agreement in place with the defendants, setting out the terms of any backlog agreement and its consequences, if it wanted to rely on such an agreement. Absent in such an agreement, BTC remained obliged to clear the backlog and to take the contractual consequences if that would result in further KPI breaches. If no written agreement could be reached, BTC should have put its understanding of the position in writing to the defendants. 

Each case is, of course, decided on its own facts and one of the difficulties for BTC was that, even if it had been able to clear the backlog (which it was not) other backlogs may have accumulated in the interim resulting in further breaches of the KPIs. BTC was caught between a rock and a very hard place; and due to the backlog which had accumulated, that rock had become of Sisyphean proportions.

This article was published in Procurement & Outsourcing Journal in March 2016.

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