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De Beers v Atos

De Beers UK Ltd (formerly Diamond Trading Co Ltd) v Atos Origin IT Services UK Ltd [2010] EWHC 3276 (TCC)

Summary

The High Court (Mr Justice Edwards-Stuart) gave judgment in December 2010 in respect of a dispute between De Beers UK Limited ("De Beers") and Atos Origin IT Services UK Limited ("Atos"). Whilst the judgment does not establish any new legal principles, it does address some of the key issues relating to the scope, management and termination of IT contracts.

 Facts

In around May 2006 De Beers entered into an agreement with the Government of the Republic of Botswana to transfer a large part of its operations to Botswana.  This required the development and supply of a new software system to upgrade De Beers' outdated legacy systems and to support its diamond supply chain management ("the Project").

Following a successful tender bid for the Project by Atos in April 2007, De Beers and Atos agreed to enter into a preliminary contract in order to give Atos an opportunity to investigate and analyse De Beers' business requirements.  Once Atos had undertaken its investigative analysis, the parties entered into a fixed price contract ("the Contract") with a value of £2.9m for the delivery of the Project by June 2008.

Progress fell significantly behind schedule and in early 2008 Atos notified De Beers that it would not be able to deliver until mid-October 2008 at the earliest.  As a consequence, the parties were forced to vary the delivery schedule pursuant to the Contract by agreement.

In the meantime, Atos issued an interim invoice for a sum in excess of £320,000, which was due for payment in April 2008. De Beers refused to pay this invoice citing dissatisfaction with delays and with the quality of the work being done by Atos.

By a letter dated 21 May 2008, Atos in turn claimed that the progress of the Project had been delayed and obstructed by the lack of co-operation from De Beers and by significant increases to the scope of the work.  Atos threatened to suspend all further work unless De Beers agreed to renegotiate the terms of the Contract (including a request by Atos for a further £4m to reflect a "...fundamental change from the original contract terms in terms of scope...").  De Beers refused this request and work was suspended by Atos in June 2008 and never resumed.

De Beers subsequently brought a claim against Atos for £8.3 million, with Atos counter-claiming. Both parties claimed that the other was in repudiatory breach of contract which was accepted, terminating the Contract.

Judgment

The Court had to decide which party was entitled to treat the contract as repudiated and what damages could be recovered.

Repudiatory breach

The Court had to establish whether the withholding of payment by De Beers, or the suspension of work by Atos, constituted repudiation of the Contract.

The Court criticised the behaviour of both parties.  Nonetheless, it was established that, whilst De Beers was clearly in breach of the contract by withholding payment, this did not constitute a repudiatory breach. At the time De Beers was attempting to engage in commercial negotiations, and was even prepared to make an extra-contractual payment to Atos, to ensure that the Project did not fail.

In contrast, the Court held that Atos' behaviour had amounted to a clear repudiatory breach.  Although Atos did have a contractual right to suspend work until payment of the invoice by De Beers, the Court found that the demands made by Atos did not reflect its contractual entitlement.  By suspending work until De Beers would enter into a new commercial agreement, Atos was showing an intention to only complete the work on different terms, not upon the terms originally agreed in the Contract.  Accordingly, De Beers was entitled to treat the Contract as discharged and to claim for its losses.

Scope of work

Atos advanced various claims against De Beers for costs which it claimed were incurred due to the changes in scope to the Project.  Atos claimed that the Project changed both in terms of breadth (i.e. new functionality outside the initial scope) and depth (i.e. increased scale or complexity).  De Beers accepted that changes in breadth were chargeable under the Contract, but denied that Atos' claims in relation to changes in depth were similarly chargeable.

The Court held that if the change fell within an activity described in the Project specification at the time that the Contract was entered into, then that change was within scope.  Accordingly, changes in depth were within the scope of the Contract even if the complexity of the Project had significantly increased beyond what was anticipated. In reaching this judgment, the Court took into account that Atos had only captured De Beers' requirements at a high level when entering into the Contract, despite the period of investigation and analysis into De Beers business processes undertaken by Atos in April 2007.

De Beers' loss claim

The Court found the De Beers was able to recover some, but not all, of its losses claimed.

Whilst it was established that De Beers was entitled to recover the cost of upgrading its legacy systems until a replacement system could be found, the bigger question for the Court to decide was whether De Beers could recover its costs in relation to the procurement of a replacement system by another supplier.

It was held that as there had been a substantial non-delivery by Atos, De Beers should be entitled to recover the cost of purchasing a replacement system elsewhere, even if it did not actually intend to do so.  This accords with the basic principle that an award of damages should put the Claimant in the same position as it would have been in had the contract been performed.

In order to establish De Beers' 'loss of bargain', the Court gave credit for sums which De Beers would have had to pay if the Contract had been performed in full (being the balance of the Contract price, credit for increases in the scope of work, and any other sums that might have been agreed had the Contract been performed in full).  This left De Beers with an award of £1.4m. 

Commentary

At the core of this dispute was the lack of understanding by Atos of the complexity of De Beers' particular business processes.  Although Atos had the benefit of a period of investigation and analysis of De Beers' organisation prior to entering into the Contract, it had still agreed a rigid fixed price contract with an inappropriate change control process, which was unable to deal with the evolution of scope during the period of the Project. 

Whilst it may have been difficult for Atos' sales team to bid for the work in any other way during a competitive tender, it is clear that the fixed price model was not appropriate in these circumstances.  Atos should have considered a model which took into account the potential changes in scope to ensure that the contract had the flexibility to deal with the inevitable changes (e.g. a hybrid model of a fixed price and time and materials contract may have been more appropriate).

Moreover, the Contract was not clear that either party was able to terminate other than for material breach.  It is possible that had the parties had an alternative right of termination, with appropriate costs consequences, the parties might have spent more time negotiating, rather than solely focussing on repudiatory breach.    

Lessons Learned

This case shows how important it is for parties in the initial stages of a large IT project to be realistic and have clear intentions when negotiating an IT contract.  Suppliers and customers should ensure that their contract contains a detailed scope of work and implementation plan, along with an appropriate change control process for dealing with any scope and implementation changes. 

Once the project is underway, customers and suppliers need to exercise extreme caution during the contract period as some conduct (such as suspending work pending renegotiation of contract terms) can unintentionally give rise to a repudiatory breach entitling the other party to terminate.  It should be noted however that (as Atos discovered to its cost) repudiatory breach will not be inferred lightly by the Court.  The contract breaker must have clearly shown an intention to abandon and/or not otherwise perform the contract for such breach to be established. 

If the project should fail, suppliers should bear in mind that this case showed that one measure of damages for failing to complete a project is the cost of procuring a contract for services from another party, and there is no need for the customer to have entered into a replacement contract in order to establish its loss of bargain.