Top tips for effective IT dispute management - navigating breaches & termination effectively: Written guide

Businesses are often caught off guard and are ill-prepared when a technology contract dispute is on the horizon or actually arises. In this fourth article in our series about issues which might impact on technology disputes, we consider how best to navigate breaches and termination effectively.

Common reasons disputes arise

Issues can occur in technology contracts for a wide variety of reasons. These can be a result of individual failings by either side, but often it is not clear cut. Common issues that arise include:

• poor communication;
• failure to clearly agree what is required or can be delivered, and in what timescales
• changes in customer requirements
• vagueness of contract terms / requirements;
• costs running out of control; and
• performance bearing little resemblance to what the contract requires.

Ascertaining the obligations and the intention of the parties as revealed by the original contract can be a complex problem, particularly if there have been written variations or addendums, or if the contract may have been varied by conduct, or orally, or in writing but without the requisite formality (e.g. by email only).

Whether a party has a right to terminate a contract when a dispute arises is therefore rarely a straightforward question to answer, particularly when further arguments surface concerning implied terms.

Implied terms

A term can be implied into a contract at common law, on the basis that the parties must have intended such a clause to be included, or by statute.

Common law

Terms can be implied at common law where:

• it is necessary to give business efficacy to the contract;
• the term represents the obvious but unexpressed intention of the parties;
• it is implied from usage or custom; or
• it is implied from a previous course of dealing

In technology contracts, terms can also be implied by law which are not necessarily based on the common intention of the parties, but rather are implied as a result of the specific type or class of contract. The courts also can and do imply terms requiring cooperation between the parties to ensure that effect is given to the performance of their obligations as intended in the contract.

Statute

The most frequently relied on statutory implied terms are those implied pursuant to the Sale of Goods Act 1979 – that what will be delivered is of satisfactory quality and fitness for purpose – or the Supply of Goods and Services Act 1982 – that a service will be provided with reasonable care and skill.

However, the benchmark legal test for implying terms into a contract is quite high and the presence of other clauses in the contract (e.g. entire agreement clauses) can make it difficult for a party to successfully argue that a term should be implied.

Classification of terms and breaches

A breach of contract can have wide ranging consequences – some of minor significance, others that can be business critical or even business-ending. Identifying the classification of the term and the extent and seriousness of the breach are important immediate considerations.

This is because a breach of a contractual term does not necessarily entitle the non-defaulting party to terminate, but rather may only entitle that party to damages and only then if it has suffered a financial loss as a result of the breach. It is important to assess what the term says. For example:

• If relating to the time for delivery is time stated to be “of the essence”?
• Is a term stated to be a “condition”?
• Is the breach a “material” breach?
• Does the contract provide for there being inter-related obligations, such that non-p
• performance by one party may be excused by non-performance of the other.

Even if a clause appears on its face to entitle a party to terminate, there is a need to follow the relevant clauses through the rest of the contract and ascertain if there are any preconditions on exercising a termination right, any rights to remedy a material breach, as well as having regard to any dispute escalation and/or notice provisions.

Determining whether a breach of contract is a material breach can be challenging. Often, a contract may contain a defined list of material breach events. However, this may not be the case or any such list may be noted to be non-exhaustive such that a review of the prevailing facts and the nature of the relationship between the parties and the subject matter of the contract will likely still be necessary. An event might constitute a material breach despite not appearing in the list of material breaches within the contract.

If a material breach provision affords a party the opportunity to remedy, then purporting to terminate before the deadline for the opportunity to remedy has passed is likely to be considered a repudiation of the contract. Conversely, if the breaching party has been given notice to remedy, then the breach should be remedied as soon as possible and certainly within the prescribed time limits – simply informing the other party that the breach will be remedied is insufficient to remedy the breach.¹

Repudiatory breach of contract

A repudiatory breach is an established concept under English common law, which also determines its meaning and effect. It will generally relate to the breach of term of the contract which is so important that amounts to a condition of the contract.

It is a breach of contract by the other party which is so serious (it is often said that it goes to the heart of the contract) that it affords the non-defaulting party to elect to continue (affirm) the contract and seek damages, or accept the repudiation and terminate the agreement and claim damages.

However, the innocent party making that election cannot ‘bank’ such a breach and hold it over the party indefinitely like the proverbial ‘sword of Damocles’, but instead has a reasonable period of time to make its election. What is a reasonable period of time is highly case sensitive. Moreover, it is important to note that while the innocent party is considering what to do it runs the risk that:

• the defaulting party will remedy the breach;
• the innocent party may itself commit a repudiatory breach entitling the other party to terminate, which right it may exercise first; or
• the innocent party may be deemed to have affirmed the contract, if it takes too long to make its election.

In any of those scenarios the right to terminate will be lost, such that any purported termination by the innocent party will itself be a repudiatory breach entitling the other party to terminate (assuming it has not already done so).

Early questions to ask when an technology dispute arises

• Has there been a breach, and how serious is it? Does it only give rise to a damages claim, or does it give rise to a right to terminate? 
• Can the breach be remedied, and does an opportunity to remedy have to be given? 
• Has any damage been suffered? If so, is the loss quantifiable? Is a financial remedy sufficient? 
• Does anything need to happen quickly? Might injunctive relief be necessary? 
• If a right to terminate arises, do you want to exercise that right? Is partial termination an option? Any decision to terminate may need to be made fairly quickly, in order to avoid potentially losing the right as noted above. 
• What are the attendant consequences of a termination? For example:
  • Are there exit provisions, and what do they entail?
  • Will a re-tender be necessary?
  • An investment of management time in seeking a resolution
  • Reputational issues
  • Litigation risk

Soteria Insurance Ltd v IBM United Kingdom Ltd²

A number of issues highlighted in this article were recently considered by the Court of Appeal in Soteria v IBM. You can read an article by Simon Kenyon and Phillip Kelly regarding that judgment as well as some important takeaways by clicking here.

¹ Bains v Arunvill Capital Ltd [2020] EWCA Civ 545
² [2022] EWCA Civ 440