Termination of agreements

8 February 2016

BT Cornwall Limited (1) v Cornwall Council (2) Cornwall Partnership NHS Foundation Trust (3) Peninsula Community Health CIC [2015] EWHC 3755 (Comm)

Background

The parties entered into an agreement, under which services for the delivery of health, transport, communications and public safety services throughout Cornwall were to be provided by the claimant to the three defendants. It was a potentially long-term contract worth an estimated £160 million.

As a result of substantial performance issues, a backlog of work accrued in 2014 and had not cleared by 2015. Then in June 2015 Cornwall Council wrote to BT citing its right to terminate the agreement. BT sought an injunction to prevent this, and the court was asked to decide if the defendants were entitled to terminate the agreement.

Material breach of KPIs

The agreement contained a key performance indicator (KPI) scheme against which BT’s performance was measured. BT was found to have fallen below the targets several times in relation to two KPIs. Under the agreement, BT’s failures amounted to a material breach, which allowed the defendants to terminate the contract without needing to give BT the chance to remedy the breaches.

Under the terms of the agreement, one of the relevant KPIs needed to be ‘baselined’ so that the actual performance level for that KPI could be established and a target service level agreed by the parties. As this work was not completed prior to the council asserting its right of termination, the court was content to rely on monthly review reports prepared by BT, in accordance with the contract, as a starting point for assessing if there had been a material breach of contract.

No waiver

The agreement gave the defendants the right, at their sole discretion, to waive KPI scores achieved due to service failures. BT claimed that such a waiver by the defendants could be implied. The court, however, found on the facts that there was no such waiver, nor could there be said to have been an obligation on the defendants to exercise their right of waiver.

No side agreement

As a means to deal with the performance issues, BT proposed that it would clear the backlog of issues quickly, even if this would result in KPI results continuing to fall below breach level. BT contends that this approach was agreed by Cornwall Council, and that this was the basis of a side agreement between the parties; however, the court was not satisfied that there was sufficient evidence of such an agreement.

No estoppel

In February 2015, BT and Cornwall Council established an Executive Forum to discuss the performance failures. The council was aware of the KPI breaches of March and April 2015, in April and May 2015 respectively. On 24 June 2015 the council wrote to BT stating its right to terminate the contract, subject to authorisation by its members and discussions with the other defendants.

BT contended that the facts gave rise to an estoppel, so as to prevent the council from relying on KPI breaches in February, March and April as grounds for termination.

The court found that the council was in fact entitled to require that BT clear the backlog, even if it knew that the effect of doing so would be to have an adverse impact on the monthly KPI results. The fact that the council engaged with BT through the Executive Forum, attempting to work together to resolve issues, could not be held against it and did not signal that it would not take action in accordance with its rights under the agreement. BT was not entitled to assume that it would be exempted from such consequences under the contract as termination, simply because it was honouring its existing obligations to clear the backlog.

The court found no material delay on the council’s part, and pointed out that the clause which allowed the council to terminate the agreement forthwith by notice in writing if BT were in material breach, meant that the council could exercise its rights immediately, and at any time thereafter, upon material breach by BT.

Decision

The court held that BT was in breach of the agreement such that the defendants were entitled to terminate the agreement immediately, and BT was not granted an injunction.

Implications

  • The judge’s comments on the impractical length and imprecision of the agreement are a reminder of the importance of clarity over quantity when drafting complex agreements. In particular, the judge found it problematic that one of the KPIs required ‘baselining’ to establish an agreed target service level before it could apply, whereas another clause gave BT the discretion to amend its target service level.
  • A second lesson to be learned is that provisions dealing with service credit mechanisms need to be checked carefully (ideally by working through examples) prior to contract signature. Be wary of gaps which require further input or agreement later.
  • BT argued that the clause in the agreement which stated that the parties ‘shall act in good faith and use reasonable endeavours to enable a continuing partnership dialogue throughout the term’, meant that any termination by the defendants for material breach in relation to KPIs must be made in good faith. It further argued that there was a duty of good faith in common law. The judge found first, that the said clause was not applicable to the exercise of express contractual rights in the event of breach. Second, and in any case, the judge was satisfied that there was no absence of good faith or presence of capriciousness in the defendants’ expectation of BT to clear the backlog while implementing the contractual remedies available to them.
  • This approach is consistent with that taken in several recent cases, particularly, Portsmouth City Council v Ensign Highways Ltd [2015] EWHC 1969 (TCC), where it was held that a general duty of good faith set out in the contract did not apply to the service credit regime, and that the implied duty of good faith required the employer to ‘act honestly and on proper grounds and not in a manner that is arbitrary, irrational or capricious’ in calculating service credits. It was also found in that case that the employer had not breached the implied duty of good faith.
  • A general duty of good faith will not necessarily oblige a party to act in a specific manner, particularly in the exercise of express contractual rights. In relation to service credits, it is best to provide expressly for how these are to be calculated, and to set out how any termination rights arise, including any restrictions on the exercise of such rights.

For more information on any dispute resolution matter, please contact Juli Lau on 020 7405 4600 or email jlau@sharpepritchard.co.uk.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.

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