Outsourcing contracts: lessons to learn from BT Cornwall Ltd v Cornwall Council

What outsourcing contract lessons can be learnt from BT Cornwall Ltd v Cornwall Council?

On 21 December 2015 the High Court ruled in favour of Cornwall Council, and its public sector partners, in finding that they were entitled to terminate a £160m outsourcing contract with BT Cornwall Ltd (BTC), owing to BTC's breaches of contract. The agreement was for 10 years and covered services including health, transport, communications and public safety.

This case arose from substantial problems with BTC's performance in 2014, causing a backlog of work that had still not been cleared by well into 2015. The Council sought to terminate the agreement by reason of the breaches in June 2015, but BTC sought an injunction to prevent termination, resulting in a trial before Mr Justice Knowles in December 2015.

Many issues contributed to the dispute, including issues relating to the agreement itself:

• The judge commented that the agreement was very hard to work with "by reason of its impractical length, and the imprecision in some of its drafting" – for example parts of the agreement could be interpreted in a number of different ways;

• The Court criticised the provisions relating to Material Breach and how those provisions could be triggered, noting that this carried a real risk of delay, and that is what happened;

• There were issues relating to whether the KPIs were fit for purpose and ongoing actions (after the agreement was entered into) to review the performance measures and agree amendments.

One of BTC's key arguments (against material breach) was that there was a subsequent agreement between the parties that BTC should be allowed to clear a backlog of historic incidents and that, if that resulted in a further dip in performance (for example if that impacted on the Service Desk's ability to respond to new incidents) BTC should be protected from the consequences of that.

The judge did not accept that there was any such agreement between the parties:

"… [BTC] was already obliged to resolve the backlog. It was not entitled to protection from the consequences. On the evidence, BTC sought reassurance that clearing the backlog was "the right thing to do". It was the right thing to do, in the sense that doing it would honour BTC's obligations, albeit late. BTC 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."

The judge also said that the Council was entitled to express its wish that BTC clear the backlog even if it knew that the effect of doing so would be to have an adverse impact on the monthly results going forward. The Council had not waived its rights in doing so.

BTC further argued that any termination for material breach in relation to KPIs had to be made in good faith, however (in the circumstances of the case), the judge found that the good faith clause only related to "a continuing partnership dialogue" and had no bearing on the exercise by one party of its contractual rights.

In summary, the Court found against BTC in respect of all the above aspects:

"There is no absence of good faith or presence of capriciousness in expecting BTC to clear the backlog at once and also to take the contractual consequences if that meant KPIs would be breached again. There was.... no KPI Backlog Agreement, waiver, estoppel or affirmation. And unless and until different KPIs were agreed there is no absence of good faith or presence of capriciousness in expecting BTC to honour the existing agreed KPIs, ‘fit for purpose’ or not."

Mr Justice Knowles concluded that "ultimately it is the public that is affected by this dispute, and by the shortcoming in the drafting of the Agreement and the failings in performance" and hoped that a similar situation could be avoided in future.

Key lessons to learn

• Contract drafting: the importance of ensuring that key provisions are drafted in a way that will assist the parties and provide clarity, especially in areas such as performance management, what constitutes a material breach and termination. Recent case law has confirmed that a court will base its decision on what the parties agreed in the contract, so clear terms are important.

• Duty of good faith: this case adds to recent case law in confirming that a narrow express term of good faith (for example regarding "partnering", "best value" or "continuing partnership dialogue") will not apply to the overall agreement and nor, therefore, will it have a bearing on general contractual rights and obligations. As such, parties are required to explicitly agree to act in good faith and make clear what provisions that duty would apply to. Another drafting recommendation is to consider including a definition of “good faith” and link this to the exact clauses intended.

• Contemporaneous Data: the Court relied on contemporaneous data collected by BTC in its monthly review reports to determine whether the KPIs had been breached. BTC tried to correct some of this data after the event, but the judge did not accept that BTC had met the requirements for this (that existing data was not objective, fair and reasonable or the assessment had not been conducted in good faith). This demonstrates the weight that the Court places on contemporaneous reporting information and the importance of ensuring it is accurate and retained for future reference.

• Disclosure of internal emails: the case also serves as a useful reminder of the rules of disclosure. A party's internal documents including emails, meeting notes, reports etc. are usually required to be disclosed to the other side in litigation if they are relevant to the dispute. BTC was caught out in this matter by a damaging email sent between contract officers. This is not the first time we have seen this happen and it won't be the last. It is advisable to brief employees on this and let us know if you would like to receive further information.

• Act quickly in enforcing performance: In this case, the Court found that the public sector partners had acted correctly in attempting to enforce the contract and had not waived their rights. In similar instances it is important to bear this in mind and consider taking advice at an early stage to help ensure contractual rights are protected.

If you wish to discuss any of the items noted in this section please contact Laura Brealey or Emma Norman.