12 July 2011 by

Refusing to perform may repudiate a services contract

In December 2010, the English High Court (the Court) handed down judgment in a dispute between De Beers UK Ltd (De Beers) and Atos Origin IT Services UK Ltd (Atos), jointly the "parties", concerning the repudiation of an information technology services contract. While the decision is not binding on South African courts, it may have persuasive effect.

In brief, Atos was contracted on a fixed price basis to provide a customised supply-chain management system to De Beers. The parties agreed on an iterative development methodology. Performance in terms of the contract did not progress well. Atos suspended work six months before the end of the contract and De Beers withheld certain payment because of delayed performance.

A central question the Court had to answer concerned which party's actions had resulted in repudiation and ultimate termination of the contract. The Court considered which of the two parties had clearly shown an intention to abandon and refuse performance of the contract. It found that De Beers' conduct fell well short of a repudiatory breach, whereas Atos' conduct had clearly shown an intention not to be bound by the contract and to repudiate it. Atos had not exercised its rights under the contract but had instead threatened to suspend the contract until a new commercial agreement was negotiated. In doing so, the Court concluded that Atos had repudiated the terms of the contract.

Based on this finding, De Beers was entitled to recover damages equal to the cost of purchasing the services elsewhere (irrespective of whether or not it would replace the services) and taking account of the fees which would have been paid to Atos had the contract been performed in full.

This case highlights the importance of contractual terms which clearly set out the cost, scope and timeframe for service delivery and which clearly provide for the procedure to be followed if the scope of the services should change. These changes should also be documented. Robust terms relating to scope change are especially needed in information technology service contracts, which are by nature prone to change.

This judgment highlights that parties to an agreement should not threaten to withhold performance of any obligations unless there is a clear contractual basis for doing so as doing so may amount to a repudiation or breach of contract.

Preeta Bhagattjee, Simone Gill and Victor Omoighe

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