Facts
Vertex Data Science ("Vertex"), is a UK based business process
outsourcing service provider. Powergen Retail Limited
("Powergen") is an electricity supply company.
In 2002 Powergen acquired TXU, another UK electricity utility
company. TXU had outsourced its customer relationship
management operations to Vertex earlier in 2002. In July 2003
Vertex and Powergen signed a new 9 year agreement which replaced
the agreement between TXU and Vertex. Shortly thereafter the
relationship between the parties became strained with Powergen
alleging various breaches of the agreement. After a further
period of renegotiation the parties agreed a new 7 year deal, in
the form of a Master Services Agreement ("MSA"), in April
2005. The value of the MSA to Vertex was estimated at around
£30m in the first year, and approximately £24m per annum in
subsequent years.
The new arrangements were no more successful and broke down
almost immediately. Powergen served a termination notice in
March 2006 alleging material and repudiatory breaches of the MSA.
Vertex denied being in breach and sought an interim injunction to
prevent Powergen both from terminating the MSA and otherwise
hindering Vertex's performance of the services. In seeking
the injunction Vertex argued that the loss it would suffer in the
event of termination, not least in terms of the damage to its
reputation, could not be adequately compensated in money.
Judgment
Whilst the judgment recites numerous alleged defects in Vertex's
performance (based on Powergen's account) the lawfulness of
Powergen's termination was not an issue for Mr Justice Tomlinson to
determine. However the various complaints raised on each side
served to demonstrate the extent to which the relationship between
the parties had deteriorated.
Powergen pointed to a number of issues which, of their type, are
not uncommon in any outsourcing dispute including:
- allegations that Vertex failed to carry out the services with
reasonable care and skill and/or in compliance with Good Industry
Practice;
- a disagreement over who was responsible for performance of a
particular service element. The MSA was silent on the
provision of certain debt recovery services. Vertex denied
that it had responsibility until such time as SLAs were agreed
(they were not set out in the MSA). Powergen argued that debt
recovery was an essential element of an "end to end" outsourced
service;
- allegations that Vertex adopted an obstructive approach to
Powergen-initiated change requests; and
- Powergen had obtained an apparently damning third party
consultancy report on Vertex's call centre operation
performance.
Vertex argued that Powergen had no genuine grounds for
complaint. Vertex asserted that Powergen had decided to adopt
a new customer services strategy, dealing with its customers
directly, and the complaints were nothing more than a pretext to
enable Powergen to terminate the MSA. Vertex further alleged
that Powergen had itself not complied with its obligations under
the MSA. To the extent that the services had not been
provided to the required standard then Powergen had contributed to
this thereby excusing Vertex from liability.
Importantly for the outcome to this application, Vertex alleged
that the following implied terms applied to the
MSA:
- that Powergen would provide all such cooperation as Vertex
reasonably required to enable it to carry out its obligations under
the MSA; and
- Vertex was not to be liable to Powergen and Powergen was not to
be entitled to terminate the MSA to the extent that any failure by
the Vertex to discharge its obligations under the MSA was
attributable to any failure by Powergen to comply with the above
implied duty of co-operation.
In determining whether to grant the injunction, Mr Justice
Tomlinson referred to the complexity and length of the MSA which
necessitated "extensive mutual cooperation if it is to
work". At the same time he acknowledged that in some
respects the MSA was not sufficiently detailed or was otherwise
incomplete in setting out the parties' respective
responsibilities.
Mr Justice Tomlinson determined that an injunction compelling
performance of a contract is inappropriate in circumstances where
apparently hostile parties would be required to work together to
perform the contract. He considered that it was
“unrealistic” to order the parties to cooperate in
circumstances where the parties’ relationship had broken
down. He also referred to the lack of clarity regarding the
existence of the implied terms upon which Vertex relied. He
stated that:
"In these circumstances I do
not consider that it is appropriate to grant injunctive relief
which will have the effect of compelling the parties to work
together. Nor do I consider that the terms of the contract
are sufficiently precisely defined to indicate to Powergen
precisely what is required of it if it is not to prevent or hinder
Vertex from performing its functions under the MSA."
Vertex's application therefore failed. As discussed below,
the dispute resolution clause in the MSA contains a provision
referring disputes to arbitration rather than litigation. As
a result the ultimate outcome of this dispute, including any
determination of the lawfulness of Powergen's termination, will not
be in the public domain.
Commentary
This is an outsourcing dispute which has played out, if only
partly, in the public arena. For that reason alone, it is
somewhat unusual. A significant proportion of outsourcing
arrangements are either terminated prematurely or renegotiated to
better align with the parties' expectations. However the common
thread running through all of these "failed" projects is that the
parties have resolved their differences privately, either by way of
informal discussions, the contractual dispute resolution procedure,
alternative dispute resolution or arbitration. The main
reasons for this are obvious - the supplier has a reputation to
maintain and the customer will not necessarily want to publicise
the white elephant which the outsourcing arrangement has
become. This case is thought to be the first reported
instance of an outsourcing dispute being litigated in the UK.
Perhaps even more surprising, and the second point of interest
about this case, is that injunctive proceedings were initiated by
Vertex. If Powergen's termination was unlawful
then Vertex would have an action for repudiatory breach and could,
subject to the contractual provisions, seek to recover any losses
flowing from the termination. Vertex's motivating factor for
seeking the injunction appears to have been to protect its
reputation by preventing what it considered to be an unjustified
termination for cause. In arguing its case Vertex stated that
termination of the MSA would have to be disclosed in tenders for
certain public sector contracts, which could place it at a
disadvantage in securing the work. The judge observed that
this concern was now perhaps misplaced as the damage was
effectively already done. Vertex argued that if an injunction
were granted it could continue to complete tender documents without
referencing the purported termination by Powergen. Mr Justice
Tomlinson found this a surprising suggestion particularly where
Vertex appeared to rely upon Powergen as a key reference
client.
An important question arising from this case is whether
injunctive relief would have been similarly denied if it been
Powergen seeking to prevent Vertex from terminating the MSA.
In those circumstances the detailed interdependencies upon which
any outsourcing arrangement is based would still exist and the
potential task for the court in observing the compliance with the
agreement of the party subject to the injunction would undoubtedly
be greater, as the suppler bears the vast majority of the
performance obligations. This issue has yet to be decided
however it is perhaps likely that, in weighing up where the balance
of convenience lies in an application for an injunction by a
customer, the courts may more readily grant the injunction
preserving the status quo until a determination of the overarching
dispute, particular where significant damage would otherwise be
caused to the customer's business.
A final noteworthy point in this case, particularly for contract
drafters, is that the MSA contained an arbitration clause which
expressly provided that certain powers, including the power to
order specific performance, make declarations, and grant
injunctions would not be available to the arbitrator. The clause
did however provide for the right to resort to the courts for
"relief in relation to a genuine dispute between the Parties
which is not capable of being referred to this Clause 19 [the
Arbitration clause] for resolution." Powergen argued that as
Vertex had agreed to submit disputes to arbitration, and agreed
that the arbitrator should have no power to grant injunctive
relief, it was attempting to evade its bargain by seeking both an
interim and a permanent injunction from the court. In
considering the operation of the clause Mr Justice Tomlinson
stated:
"the parties have not by
agreeing to subject their disputes to an arbitrator whom they have
expressly deprived of the power to order specific performance, make
declarations and grant injunctions, agreed also that those remedies
should simply be unavailable. I reach this conclusion with
reluctance and hesitation because it ascribes to the parties an
intention which I do not regard as entirely sensible. However the
parties must be the judges of what it was sensible for them to
agree, circumstanced as they were in 2005, not me."
This highlights the importance of ensuring that the dispute
resolution provisions in any contract, and certainly in one as
business critical as an outsourcing agreement, are carefully
drafted and not simply regarded as standard boilerplate terms.
