High Court awards substantial damages to customer in IT contract where the project was delayed and milestones were missed

The recent case of Topalsson v Rolls-Royce raises issues that are likely to be familiar to those who scope, procure and ultimately manage large IT services contracts including: delayed delivery, missed milestones, where the fault for the delay lie, the difficulties involved in identifying which document amounts to the contractual implementation or project plan, and when and on what ground to terminate.

The consequences of getting things wrong (on both the customer and supplier side) can be very serious. So what can we learn from this case?

Background

In 2019, Topalsson agreed to develop and supply to Rolls-Royce software for a new car configurator. The contract provided that Topalsson would “deliver the Deliverables… on time and in full by any applicable milestone or delivery date” and that “time shall be of the essence”. The contract incorporated a “high level project roadmap” which provided that Topalsson would achieve certain steps by certain quarters (eg. “web configurator” by partway through Q2 2020). In December 2019 (shortly after the contract was signed), the parties agreed a “plan” which set out the dates by which Topalsson would achieve certain steps (the first of those being in March and early April 2020). However, in March 2020, the parties agreed revised dates including new dates for certain “Technical Go Live” milestones.

In mid-April 2020, Rolls-Royce purported to terminate the contract on the basis that Topalsson had failed to meet the milestone dates set out in the plan agreed in December 2019. Topalsson rejected the termination notice and affirmed the contract. So Rolls-Royce tried again – in late April 2020, Rolls-Royce served a second termination notice this time relying on Topalsson’s failure to achieve the dates set out in the plan agreed in March 2020. In May 2020, Topalsson stopped all work on the project telling Rolls-Royce that Rolls-Royce’s attempt to terminate the contract was unlawful and amounted to a repudiatory breach of the contract which entitled Topalsson to treat the contract as at an end.

Topalsson then sued Rolls-Royce for repudiatory breach of the contract seeking €6 million in damages for lost profits or alternatively €2.5 million for work undertaken but not paid. Rolls-Royce counter-claimed seeking €20 million in damages for loss including wasted staff time and the cost of sourcing replacement software.

The Court’s decision

The Court determined that:

• The high level project roadmap in the contract did not contain any contractual milestones / delivery dates because the plan was labelled “high level” and “anticipated timeline” and did not include specific dates (days and months), and the contract referred to the dates in that plan as estimated dates which needed to be refined.
• Topalsson was under a contractual obligation to comply with the December plan, which was then superseded by the March plan.
• The contract was clear that time was of the essence regarding Topalsson’s obligation to deliver the service by the delivery dates. This meant the delivery dates were conditions. A breach of a condition is a repudiatory breach that entitles the other party to terminate the contract under common law.
• While “Technical Go Live” was not defined in the contract, parts of the contract were clear that Technical Go Live meant the solution had been delivered, installed, passed Systems Integration Testing and User Acceptance Testing, and be on the production environment that had gone live.
• Topalsson had failed to achieve Technical Go Live under the March Plan by the dates set out in that plan. Topalsson’s ability to meet the deadlines was not impeded by Rolls-Royce – in other words, the delay was not Rolls Royce’s fault.
• The first Termination Notice was invalid because it relied on the deadlines in the December Plan, which had been superseded by the March Plan.
• The second Termination Notice was made after the contract had been affirmed by Topalsson, and referred to the March Plan and entitled Rolls-Royce to terminate the contract (under the terms of the contract, or under common law for repudiatory breach).
• The Court held that Rolls-Royce was entitled to damages up to the contractual limit of €5 million plus interest for the loss caused by Topalsson’s repudiatory breach of the contract.

The full judgment (which was handed down in July 2023) can be found here.

What can we learn from this?

The judgment contains some valuable learning points for both customers and suppliers of software / IT contacts, which include:

• If you require the other party to be achieve milestones on time, ensure the dates are exact – ie. day, month and year.
• If the contract includes a process for agreeing a detailed implementation or project plan, ensure that plan is agreed early on, as there is a risk that a high level or outline plan (if included in the contract) may not have contractual force. Keep the plan under constant review and, if necessary, agree and properly document those changes via the contractual variation or change control process.
• Ensure terms, particularly regarding milestones, such as “go-live”, and “technical go-live” are clearly defined.
• Have full and frank conversation prior to entering into the contract, to ensure, whenever possible, both parties are confident and fully invested in the development method chosen (in this case, Topalsson alleged that Rolls-Royce’s decision to adopt a waterfall (and not an agile) method led to delay).
• Make sure that you rely on the correct grounds when exercising your rights to terminating the contract. If you rely on an incorrect ground, the other party can treat this as a repudiatory breach, terminate the contract, and claim damages from you. Further, it is very important to consider whether to rely on a contractual right and/or a common law right to terminate, as this may impact the measure of damages you can claim.
• Consider whether the contract includes a “time of the essence” clause, and whether that works in your favour.
• Ensure you are complying with your own obligations in order that you can rebut any attempt by the other party to blame you for any delay.

How we can help

Our specialist team of technology lawyers advise and support clients in a wide range of sectors on the procurement, delivery and management of ICT projects and systems both on the customer and supplier side, helping to avoid the sorts of issues that arose in this case.

If you have a project that is going wrong (or has already gone wrong), we can help with that too – our specialist technology disputes lawyers have substantial experience in disputes relating to IT architecture, hardware supply and maintenance, data centre and hosting agreements, software and licensing arrangements, telephony services, and IT consultancy, including issues around projects delays, missed milestones, missing functionality, and demands for additional charges.

For further information please contact Katie Harris, Solicitor or Wesley O’Brien, Senior Associate.