Notices in delay regimes (conditions precedent and estoppel)

Welcome to 'Insights from TCS v DBS' – a four-part series providing an in-depth look at the judgment handed down in Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) (17 May 2024).

In the first article of this series, we look at the judicial focus on delay and notice provisions, conditions precedent, compliance and the importance of contractual language, and estoppel.

For ease, we include the Introduction and Case Summary in each part of the series.

Introduction

The judgment handed down in Tata Consultancy Services Ltd v Disclosure and Barring Service [2024] EWHC 1185 (TCC) (17 May 2024) determined a significant and long-standing tech modernisation and business process outsourcing dispute. The ruling addresses a number of contractual themes common to IT disputes arising from delay. Reviewing the decision offers valuable insight into the meticulous analysis undertaken by the court to examine relevant sequences of events during the project, and to properly construe the agreement between the parties, particularly in relation to proving causation and loss.

Much of the judgment comprises analysis and determination specific to the agreement between the parties.[1] There are however key parts offering valuable learning points for those working close to contracts for tech transformation projects, particularly where problems have arisen, or where litigation is threatened, imminent or underway. We explore here four key areas for learning from the judgment:

Case Summary

DBS engaged TCS to supply the IT modernisation project in 2012. The project did not go well, beset by delays from an early stage.

TCS contended that the main causes of critical delay were the lack of availability of technical infrastructure and mismanagement of DBS' IT hosting provider. DBS argued that the cause of delay was TCS' delayed development and testing of the software.

TCS claimed just over £110 million in delay damages. DBS counterclaimed for delay as well as bringing claims for defects in the quality of the software in the sum of just under £109 million. TCS also claimed for underpayment of Volume Based Service Charges to the value of around £14 million.

Constable J. rejected almost all of TCS's claims for delay damages, but TCS was awarded £2.4m for a particular period where the court found delays were caused by DBS's actions (see Part 2). DBS was awarded £4.6 million due to delays attributed to TCS. Most of DBS's other counterclaims were dismissed. For TCS, the overall outcome and award of £2.4m represents a partial victory in their claims as it brought acknowledgement from court of some responsibility on the part of DBS for the delays.

Part one Summary

As Constable J set out at the start of his judgment, "Responsibility for the delays lies at the heart of TCS's claim and a large part of DBS's counterclaim."

Judicial analysis of the project's critical path was key to establishing causation because TCS was required to demonstrate not only that it had been critically delayed by an "Authority Cause" (defined in the agreement as a breach of contractual obligations by DBS), but also that were it not for delay by DBS, it would have met the milestones.

Contractually, the delay and notice provisions were closely scrutinised by the court, in particular the relief available to TCS in the event it was prevented from reaching a milestone due to an "Authority Cause".

Part of the delay regime in the contract required TCS to serve an Exception Report within five days. Compliance with this was a condition precedent to claiming compensation. TCS successfully pleaded there had been a communicated common assumption between the parties that TCS did not have to serve an Exception Report within five days in respect of the delays, giving rise to an estoppel by convention. The evidence of the parties' conduct clearly showed both parties were working on the basis that the five-day condition precedent had fallen away. DBS was thereby estopped from arguing that TCS had no entitlement to compensation for delay under the contract.

In relation to a separate clause containing a condition precedent, the court concluded that DBS's entitlement to recover damages for delay was subject to the condition precedent to "promptly issue a Non-conformance Report". As DBS had not done so, it was unable to claim liquidated damages or general damages for the first six months of delay.

Background

Exception Report

The contract entitled TCS to relief from delay damages (and to recover its own losses) where delay was due to an "Authority Cause", provided it served:

  • Notification of delay "as soon as reasonably practicable" if it became aware that it would not (or was unlikely to) achieve a milestone date.
  • an "Exception Report" within five working days of its delay notification.

DBS argued that that this constituted a condition precedent, and failure to comply meant that TCS would not be entitled to compensation for delays attributable to an "Authority Cause".

TCS had not served an Exception Report within five working days of its delay notification. DBS contended that TCS's claim for delay damages was therefore barred due to the condition precedent. TCS countered with its case on estoppel, which was successful.

Non-conformance Report

Conversely, where delay to a milestone was due to "Contractor default", TCS became liable to pay delay liquidated damages. In such a scenario, the Authority (DBS) was required to "promptly" issue a Non-conformance Report. The clause provided that the Authority "will then have" the option to claim delay liquidated damages.

TCS argued that this meant that DBS' entitlement to recover liquidated damages was also conditional upon compliance with this clause. Whilst DBS argued that there was no condition precedent, the judge held that the use of the words "if" and "then" created conditionality. As a result, because DBS had not served a Non-conformance Report, DBS was unable to claim liquidated damages or general damages for the first six months of delay.

Judgment

Constable J comprehensively reviewed the English authorities on conditions precedent, helpfully distilling the authorities into the following key points:

  • The overriding principle remains that every contract must be construed according to its own particular terms.[2]
  • There is nothing as a matter of principle to prevent parties freely agreeing to a condition precedent, but parties will not be taken to have agreed that the exercise of a particular right to payment or relief is subject to a condition precedent absent clear wording to that effect.
  • English law will uphold conditions precedent provided that they (a) specify a precise time limit for serving notice; and (b) expressly provide that the right to claim will be lost if the notice is not served within that time limit.[3]
  • The use of language of obligation (e.g. "shall") is necessary but will not on its own be sufficient to render a provision a condition precedent.
  • The absence of the words "condition precedent" is not "determinative against construing the regime as one of condition precedent".
  • The absence of any language expressing a clear intention that the particular right is conditional upon compliance with a particular requirement is, however, likely to be a "powerful indicator" that the parties did not intend the clause to operate as a condition precedent.
  • The "requisite 'conditionality' may be achieved in a number of different ways using different words and phrases when construed in their ordinary and natural meaning".
  • The clearer the wording of the requirement to be complied with (in terms of substance and / or timing), the more consistent it will be with the conclusion that the clause forms part of a condition precedent regime.

In this case, the "plain language" of the relevant clause made compliance with the notice regime a condition precedent to TCS's entitlement to compensation for delays which were due in whole or in part to an "Authority Cause". However, the condition precedent applied only to the contractor's entitlement to compensation for such delays. Failure to comply with the condition precedent regime did not impact upon its entitlement to other forms of "relief" including an extension of time and relief from liability for both general and delay damages.

In relation to DBS's entitlement to claim delay liquidated damages, Constable J also found that the claim was barred by reason of DBS's failure to serve Non-conformance Reports. The wording of the relevant clause was "very clear…DBS is required ('shall') to 'promptly issue a Non-conformance Report'." It concluded that: "The AUTHORITY will then have the options set out in Clause 6.2". The entitlement was found to be "clearly linked" to the service of a Non-conformance Report, through the conditional phrasing of 'If…. then….'".

Comment

The judgment serves as a reminder of the rigorous standards that will be applied to conditions precedent. On the facts of this case, DBS was still able to advance a claim for unliquidated or general delay damages for the delays exceeding six months. However, this turned on the wording of the applicable delay provisions – in different circumstances, all entitlement might have been lost.

The overriding principle is that each contract is to be construed according to its own particular terms. As the judge stated, "Clauses, or parts of clauses, which look similar, but which are set in different contractual matrices may have different effect." Whilst the parties chose to express the condition precedent nature of compliance in one clause in a different way to another (and both clauses dealt with a related requirement to serve a form of notice/information to the other party responsible for the delays as a condition of claiming compensation), they were both, on examination of the language, construed as conditions precedent.

This decision is also a good exposé of how rights under a contract can be lost by the way that parties behave, and the strength of an argument in estoppel in such circumstances. Evidence showed that both parties were working on the assumption that the five-day requirement to serve an Exception Report had "fallen by the wayside". Because of that, DBS was estopped from arguing TCS had no entitlement to compensation for delay on account of its failure to comply with the condition precedent within that clause. In contrast, DBS was precluded from recovering liquidated damages for delay from TCS because it had not served a Non-conformance Report at all, and this fact was not disputed by DBS in the case. This outcome is a clear reminder of the risk of the doctrine of estoppel by convention or acquiescence or conduct if contracting parties allow between them notice formalities set out in the contract to be dropped.

The team at Gowling WLG is experienced in resolving disputes arising from Tech contracts. We can help you manage risk quickly, commercially and cost-effectively. For advice, please contact Patrick Arben and Amber Strickland.

Footnotes

[1] On that point, from a litigation procedural perspective, Constable J required the parties to produce a Spiegelman Schedule, as used in arbitrations. This is a single reference document linking the issues in the pleadings to the witness statements, expert reports, transcripts of live evidence, together with identification of quantum, claims no longer pursued and closing submission references. He recommended the use of such a document in all complicated litigation as a standard tool.
[2] Scottish Power UK PLC v BP Exploration Operating Company Ltd [2016] All ER 536
[3] Bremer Handelsgesellschaft mbH v Vanden-Avenne Izegem PVBA [1978] 2 Lloyd's Rep 109