IBM case relating to breach of IT managed services agreement

CIS General Insurance Ltd -v- IBM United Kingdom Ltd [2021] EWHC 347 (TCC)

The Technology and Construction Court (TCC) gave judgment on February 2021 for a Co-operative Group insurance company (CIS) in proceedings against IBM UK Ltd following termination of a managed services agreement (MSA) for the provision of a new IT system. This was major litigation relating to a contract signed in 2015.

The case is of note because of the sums IBM were required to pay as a result of delay in reaching contractual milestones. It is also significant because in the context of interpretation of claims for lost profits, it suggests that exclusions of liability for lost profits or savings (which are extremely common in IT contracts) are apt to preclude ‘reliance loss’ claims.

IBM had served notice of termination when CIS failed to pay an invoice for around £3 million. CIS alleged that this was a repudiatory breach of contract and, alternatively, that the agreed milestones were unachievable and that IBM was in breach of a warranty as to its performance of the MSA.

CIS claimed that it would not have entered into the MSA if it had known that the IT system was not a proven, commercial off-the-shelf product that could meet its requirements with minimum customisation. Other claims arose from project delays and an alleged failure on IBM’s part to satisfy its reporting obligations. IBM’s case was that CIS was the cause of any delays and that IBM had complied with its reporting obligations.

The court held that:

• The £3 million invoice was payable but, because it was disputed by CIS under an agreed contractual procedure, its non-payment did not entitle IBM to terminate.
• IBM had fulfilled the warranty by taking all reasonable steps to ascertain the risks associated with the project.
• IBM had accurately represented the extent of software rewriting and base development that would be required and the MSA did not attribute to IBM its sub-contractors’ knowledge for the purpose of IBM’s reporting obligations.
• IBM was responsible for the critical delays to the project, which were largely due to failures by the third party supplier of software and services to whom it had subcontracted work. IBM failed to meet key milestones and to provide accurate reports as to delays during the project, in clear breach of the MSA.

CIS was awarded almost £16 million for additional costs incurred as a result of the delay in reaching contractual milestones, reduced by around £3 million by setting-off the unpaid invoice.