On 20 October, the High Court handed down a 10,000 word judgment in a dispute concerning the interpretation of that innocuous phrase that many might be ‘guilty’ of having using: “it is assumed…”.
The dispute related to a contract between Capita and IBM pursuant to which Capita subcontracted the provision of certain IT-related services to IBM, including services for the provision of "the Relevant Service" (which involved middleware and various applications).
Schedule 2 of the contract included a set of conditions, including the following “Condition 2” (emboldened for emphasis):
Capita is awaiting the [client] to commission work to replace the [Relevant Service], and contract for the ongoing Managed Service of such, and it is assumed that this replacement [Relevant Service] will be operational on or before 30 August 2023.
As such the Contractor's obligations for the Managed Services relating to the current [Relevant Service] shall cease at that time.
Further, any requirement for the Contractor to design and/or build and/or implement such a replacement [Relevant Service], and/or to operate such replacement [Relevant Service], shall be handled pursuant to the Change Control Procedure and at Capita's expense, whether the impact is against the Managed Service, or the IT Upgrade Programme, or other work commissioned by Capita, or a combination thereof.
The question before the court was whether IBM’s “obligations for the Managed Services” ceased: (i) when the replacement Relevant Service became operational, OR (ii) on 30 August 2023 (regardless of whether the replacement Relevant Service had become operational by then). The replacement Relevant Service did not become operational by 30 August 2023.
Capita’s position was that the second sentence of Condition 2 (which states that IBM’s obligations for the Managed Services cease) is “contingent on a replacement for the Relevant Service being operational, as anticipated in the first sentence”. Capita also argued that the third sentence “supports its construction, because it ‘makes clear that all aspects of any commission for a new [Relevant Service], both as to the work to develop or implement a new [Relevant Service] or to operate a new [Relevant Service] would all be subject to change control’”.
IBM's position was that, if the Relevant Service had not been replaced by 31 August 2023, it had no contractual responsibility to operate it (unless agreed via the Change Control Procedure by 29 July 2022). It stated that the words “as such” in the second sentence of Condition 2 “make clear that the agreed assumption of a new Relevant Service being operational by 30 August 2023 is the reason that IBM's obligations in relation to the old Relevant Service cease on that date”. Further, the reference to an assumption (rather than, for example, an expectation) is significant on the basis that “there was no reason for setting out the parties' assumption as to the date a replacement system would become operational in the first sentence unless that assumed date is intended to have contractual effect”. Finally, the judge also commented that Condition 2 did not contain any provisions covering a circumstance in which the assumption proved to be false (i.e. if, as has occurred, the replacement Relevant Service was not operational by 20 August 2023).
Ultimately, the judge was not persuaded by Capita’s arguments and found in favour of IBM.
We have (some) sympathy with both parties here as negotiations can move fast but there are clear lessons to be learned:
- Try hard to avoid the use of general assumptions without clearly explained consequences; often tech and outsourcing contracts include a Schedule of assumptions/dependencies (or a RACI) (the intention of which might typically be to allow the provider to have more time to perform and/or to charge more (or trigger a pricing discussion)) BUT it is important to set out a clear process as to what happens if one ore more assumptions turns out to be incorrect
- Do pay attention to all of the schedules (these need rigorous review, and to align with the front end)
- Consider if the change control procedure should set out what happens if the parties are unable to agree a change.
That has made this judgment longer than might be expected for a decision resolving a dispute as to the meaning of three words.