HT-2020-000448 - [2024] EWHC 1185 (TCC)

Clause 6.1 is first engaged if a Deliverable does not satisfy the Acceptance Test Success Criteria and/or a Milestone is not Achieved due to the Contractor’s Default.

It was not suggested by TCS, in either its pleaded case or Written Submissions, that this requires DBS to establish more than the fact of the non-achievement of a Milestone, in circumstances where TCS has, pursuant to Clause 3.1, an obligation to provide the Services in accordance with the Implementation Plan, itself incorporating the Milestones. In these circumstances, the non-achievement of a Milestone will, unless relief is obtained pursuant to Clause 7, amount to a CONTRACTOR Default. Although I explored during the course of Closing Submissions with Mr Cogley and Mr Croall whether some greater substance should be placed on the words ‘CONTRACTOR Default’ in the context of Clause 6.1, I have concluded that to do so would be wrong. This is principally because, in conjunction with Clause 7.2.2, it is plain that in the scheme of this Contract, failure to achieve the relevant Milestone by its Milestone Date is itself a breach. For what it is worth, this construction accords with the usual position in many standard form contracts where failure to meet a particular milestone of itself is justification for the imposition of liquidated damages, absent the Contractor successfully obtaining an extension of time.

As discussed further below, it does not follow from this, however, that, as Mr Croall submitted, the issue of a Non-conformance Report pursuant to Clause 6.1 is largely redundant in that it need only identify that the Milestone Date has been missed. Mr Croall’s related argument advanced in oral closing submissions, that Clause 6.1 focuses on the scenario where TCS has failed to achieve Acceptance Test Success Criteria, also paints the clause too narrowly. Although some of the language is geared towards this, the clause is plainly not directed solely towards a failure to pass the Testing.

To understand the clause it is necessary to set it in the context of TCS’s obligations and how a Milestone is achieved. TCS had certain ‘Deliverables’ These are defined as ‘an item, feature or service associated with the provision of the Services or a change in the provision of the Services which is required to be delivered by [TCS] at a Milestone Date or at any other stage during in the performance of this Agreement [sic]’ A Deliverable must be tested before an Acceptance Test Certificate can be issued. Pursuant to Clause 3.4 of Schedule 2-5 of the Agreement (‘Test and Acceptance Procedures’), TCS ‘shall use reasonable endeavours to submit a Deliverable for Testing or re-Testing by or before the date set out in the Implementation Plan for the commencement of Testing in respect of the relevant Milestone’. Pursuant to Clause 3.3 of the same Schedule, TCS ‘shall not submit any deliverables for AUTHORITY Testing’ until various criteria had been met, which interfaced with DBS. For example, pursuant to Clause 3.3.2, the parties were required to have agreed the Test Plan and the Test Specification relating to the relevant Deliverables before they could be submitted for testing.

In this context, the scope of the clause becomes clear. The first words of Clause 6.1 expressly contemplate non-satisfaction of the Acceptance Test Success Criteria. This applies therefore in circumstances where the Deliverable has been tested, but where there are Test Issues preventing some or all of the Acceptance Test Success Criteria from being Achieved. A (prompt) Non-conformance Report is required to be issued by DBS in these circumstances, whether or not the non-satisfaction has also led to the additional failure to have Achieved a Milestone. This is clear from the words ‘and/or’. The clause then expressly refers to its application where ‘a Milestone is not Achieved’. The words ‘due to the Contractor’s Default’ apply to either situation.

As becomes clear from the words which then follow, the reason why a Milestone has not been achieved may not be that the Testing has failed, but may also occur where no Testing has taken place at all as at the date of the Milestone. The wording of the clause is very clear that in each of these situations, DBS is required (‘shall’) to ‘promptly issue a Non-conformance Report’. The Non-conformance Report is to deal either/both with (a) the situation where the Deliverable has been tested, in which case the Non-conformance Report must categorise the Test Issues as described in the Testing Procedures; and/or (b), where no Testing has taken place, in which case the Non-conformance Report must set out in detail the non-conformities of the Deliverable, including any other reasons for the Milestone not-being Achieved. Whilst clearly the Non-conformance Report will be limited to such matters as are properly within DBS’s knowledge, it is improbable that a Non-conformance Report which simply says ‘TCS has not achieved the Milestone by the Milestone Date’ would comply with the requirements of the clause.

It is in this context that Clause 6.1 then concludes, ‘The AUTHORITY will then have the options set out in clause 6.2’. Clause 6.2 (at 6.2.3) includes the payment of Delay Damages. There is no other provision pursuant to which DBS become entitled to payment of Delay Damages.

The issue between the parties in respect of Clause 6.1 is whether it has the effect of making the prompt issue of a Non-conformance Report a condition precedent to recovering Delay Damages. TCS says it does, and DBS says it does not. TCS’s argument rests on a conditionality it says derives from the word ‘then’.

Bearing in mind the factors I have identified following my review of the law above, I start with the ordinary language of the clause. The word ‘then’ in the last sentence of Clause 6.1 makes clear, at the very least, that the entitlements in Clause 6.2 happen after the matters dealt with in the preceding words of Clause 6.1 have been engaged. ‘Then’ is a word which is often used in conditional sentences, but generally in sentences where the conditionality itself is derived from the words ‘If’ or ‘Unless’ or ‘Provided that…’. That conditionality is also present in Clause 6.1, which starts with ‘If’.

As a matter of normal usage of language, therefore, the entitlements in Clause 6.2 are clearly linked to Clause 6.1, through the conditional phrasing of ‘If….then….’. Construed naturally, the ‘If’ trigger in Clause 6.1 gives rise to two matters which are conditional on the ‘If…’ trigger: the first is an obligation (as set out in the remainder of Clause 6.1), and ‘then’ the second is an entitlement (in Clause 6.2). In other words, the requirement to carry out the obligation (service of a Non-conformance Report) is conditional on the ‘If…’ happening, just as the entitlement is conditional on the ‘If’ trigger happening. In my judgment, it makes no sense (either linguistically or commercially) to apply the conditional link between Clause 6.2 (the entitlement) and just the first part of Clause 6.1, effectively leapfrogging the second part of Clause 6.1 (the obligation).

It is true that the parties have chosen to express the condition precedent nature of compliance with Clause 5.1 to 5.3 in a different way, in the context of TCS’s entitlement to relief. This is potentially a factor weighing against construing Clause 6.1 as a condition precedent, when considering Lord Wilberforce’s second limb. However, it could equally be said with justification that when the delay provisions are considered as a whole, the existence of some symmetry in relation to the requirement upon both parties to provide a form of notice/information to the (other) party responsible for the delays as a condition of claiming compensation weighs in favour of TCS’s construction. This is particularly so where the rationale for the imposition of a notice regime as a condition precedent is to know where a party stands contemporaneously, and to allow the defaulting party to rectify its default. Whilst it is right that the parties will know when a Milestone has not been achieved, the Non-conformance Report must, in circumstances where the Milestone has passed but no Testing has been carried out, set out (insofar as within the knowledge of DBS) the non-conformances which have prevented Testing and any other reasons the Milestone has not been achieved (for example, the failure to have submitted a Test plan capable of agreement). In these circumstances, the conditionality created by the clear ‘If…then’ language attaching to the Non-conformance Report serves a useful purpose.

Whilst I also take account of the fact that the time period by which the Non-conformance Report has to be given is expressed by the word ‘promptly’ rather than a specified number of days, this does not in my judgment preclude the condition-precedent nature of compliance. Whether a report has been given ‘promptly’ is a question of fact and is sufficiently certain in meaning to be given effect to (as was the case in Merton, WW Gear Construction and Steria).

In the circumstances, as a matter of language, there is a clearly expressed intention to impose conditionality. ‘If’ certain CONTRACTOR Default occurs, DBS ‘shall’ comply with its obligation promptly to issue a Non-conformance Report in accordance with Clause 6.1. The last sentence of Clause 6.1 has an ordinary and natural meaning: that it is only ‘then’ that DBS have the options set out in Clause 6.2. The language should be given its ordinary and natural meaning, the effect of which is that compliance with the obligations imposed upon DBS in Clause 6.1 is necessary in order then for DBS to have the options set out in Clause 6.2.

In the present case, there is no dispute that no Non-conformance Report was provided, at any time. The pleaded averment (in DBS’s RFI Response dated 30 January 2023) that the letter of 15 June 2017 constituted a relevant Non-conformance Report and denied at paragraph 52A.2 to the Re-Amended Reply and Defence to Counterclaim was not pursed at trial or in Closing by DBS. To the extent necessary, I find for the reasons TCS aver at paragraph 52A.2.2 of the Re-Amended Reply and Defence to Counterclaim that it was not a relevant/valid Non-conformance Report in respect of the failure to achieve the relevant Milestones for the purposes of Clause 6.1. In these circumstances, DBS is precluded from recovering Delay Damages from TCS, if it would otherwise have been entitled to on account of Delay.

The story of Clause 6 does not, however, end there. As made clear by Clause 6.3, Delay Payments are provided as the primary remedy for TCS’ failure to Achieve the relevant Milestone Date and it shall be DBS’s exclusive financial remedy except where (pursuant to Clause 6.3.2) the failure to Achieve the Milestone exceeds a period of six months after the relevant Milestone Date.

The question arises: what happens if (a) the Authority fails to comply with the condition precedent in Clause 6.1 but (b) establishes that the Contractor’s failure to Achieve the Milestone exceeds a period of 6 months.

Absent the failure to have complied with the condition precedent, the parties agree that DBS would be entitled to claim its actual delay related losses over and above the sums it recovered by way of liquidated damages (i.e. giving credit for any sum recovered by way of liquidated damages). Mr Croall accepted in terms in his oral closing submissions that this meant that DBS would not be entitled to recover for the first six months of delay, because it is an exclusive remedy for that period and if the right is lost, it is not regained through the backdoor.

However, the right lost is greater than merely the payment of Delay Payment Damages for the first six months: Clause 6.2.3 provides an ongoing right to recover the relevant Delay Payments until the date the Milestone is Achieved. But for Clause 6.3.2, a failure to have complied with the condition precedent would mean that the right to recover that entire amount is lost. By reason of Clause 6.3.2, however, after six months, DBS has two potential remedies: a claim for (liquidated) Delay Payments, and a claim for unliquidated damages. As provided for explicitly in Clause 6.3, Delay Payments are provided as the ‘primary’ remedy. Moreover, DBS rightly accepted that it would not be able to recover both. Assuming compliance with Clause 6.1, after six months, DBS would be entitled to bring in addition to its primary remedy of Delay Payments, a claim for such actual losses as it could prove in addition to its claim for Delay Payments. In the period after 6 months, the logic of Mr Croall’s concession remains, and DBS’s entitlement to its primary remedy of Delay Payments, lost because of a failure to comply with Clause 6.1, cannot be regained by the backdoor. Its claim, therefore, in light of non-compliance with Clause 6.1, is limited to those actual losses incurred after 6 months of delay, to the achievement of the Milestone, over and above the Delay Payments it would have otherwise been entitled to.