Case update: What to do when your IT provider can’t deliver

Introduction

In the case of Topalsson v Rolls-Royce the High Court dismissed the Claimants’ (Topalsson) claim that a services agreement had been unlawfully terminated and upheld the Defendants (Rolls-Royce) counterclaim for damages for repudiatory breach. This case highlights key issues that customers and suppliers should be considering when preparing and entering into agreements, including ensuring that key requirements and milestones are clearly recorded and that termination notices are validly served.

Facts

In October 2019, Rolls-Royce contracted with software developer Topalsson to develop a new digital visualisation tool allowing prospective customers to see photo-realistic renderings of Rolls-Royce cars with different custom configurations, before purchasing “the Agreement”.

Under the Agreement, Topalsson was obliged to meet milestone dates contained in an agreed implementation plan, which gave a detailed breakdown of the project programme “the December Plan”.

The software development and supply were delayed, and a revised plan with later delivery dates was agreed “the March Plan”.

Despite agreeing the revised March Plan, in April 2020 Rolls-Royce served a termination notice on Topalsson “the First Termination Notice” relying on Topalsson’s repudiatory breach for its failure to meet the December Plan dates. Topalsson rejected the First Termination Notice and affirmed the Agreement claiming that the milestones at issue had never been agreed.

Later in April 2022, Rolls-Royce served a further notice “the Second Termination Notice” purporting to terminate the Agreement for repudiatory breach for missing the March Plan deadlines or alternatively under clause 13.11 of the Agreement, which permitted termination if Topalsson failed to meet the agreed delivery or milestone dates.

Topalsson rejected the Second Termination Notice, alleging that Rolls-Royce was itself in repudiatory breach of the Agreement and purporting to accept that repudiatory breach to bring the Agreement to an end.

Topalsson issued proceedings against Rolls-Royce, claiming damages for unlawful termination and lost profits, alternatively for work carried out and/or invoices as at the termination date. Topalsson asserted that:

• Topalsson was not in breach, as it had achieved some deliverables and would have completed the others but for Rolls-Royce’s termination or alternatively;
• There were no contractually binding delivery dates and time was not of the essence, and Rolls-Royce was partly to blame for the delays.

Rolls-Royce counterclaimed damages from the alleged repudiatory breach, claiming losses for software replacement costs, lost profits, and other related damages. Rolls-Royce argued that the December and March Plan dates were contractually binding.

Judgment

The High Court (O’Farrell J) dismissed Topalsson’s claim that the Agreement had been unlawfully terminated and upheld Rolls-Royce’s counterclaim for damages for repudiatory breach.

The court found that the December Plan dates were contractually binding on Topalsson and Topalsson itself had proposed the December plan timeline to Rolls-Royce. Topalsson had agreed to the March Plan dates in circumstances where it had already failed to meet the December Plan. The court held that the milestone dates in these plans were contractually binding on the parties.

The court found that Rolls-Royce’s First Termination Notice was erroneous because it relied on Topalsson missing the December Plan dates, when the revised March Plan dates had already been agreed. This was, however, ultimately immaterial as Topalsson had affirmed the Agreement in response.

As to the Second Termination Notice, this was based on Topalsson’s failure to achieve the milestone dates set out in the March Plan and relied upon:

• a contractual right to terminate for failure to meet milestone dates pursuant to clause 13.11 of the Agreement; and/or
• the common law right to terminate for repudiatory breach on the basis that time was of the essence in respect of achieving the milestone dates and Topalsson had breached the obligation.

There was a key difference between the two termination avenues available to Rolls-Royce: case law is clear that the contractual termination right under clause 13.11 could only be exercised in respect of a significant or substantial breach justifying termination; whereas under clause 5.8, the parties had agreed that time for delivery deadlines was “of the essence“, i.e. a condition of the Agreement, any breach of which, irrespective of severity, would in principle amount to a repudiatory breach and justify termination.

On the facts, the court found that Rolls-Royce had been entitled to rely on either avenue as Topalsson’s delays were significant and “could not be described as a ‘near miss’. One milestone was achieved 11 days late and others were not achieved at all. The court found that under the Agreement, time was of the essence. That meant that timely performance was a condition of the Agreement and that any delay goes to the root of the contract, no matter how small or trivial the breach. Topalsson’s failure to meet the agreed milestones therefore amounted to a breach of condition in any case, which entitled Rolls-Royce to terminate either under the Agreement or at common law for repudiatory breach. The Second Termination Notice was accordingly valid.

Key takeaways

Make sure milestones are clear:

• Parties should ensure that their key requirements and deadlines are clearly recorded in the contract to avoid subsequent confusion and disputes arising as to whether deadlines are binding and when they have been achieved.
• Parties should define and make use of contractual change control mechanisms- whether relating to scope, delivery dates or other requirements- to give clarify about the contractual status of any variations agreed.
• Here, the timing of the milestones in the later plans, which provided specific dates for each stage, were contractually binding.

Plan ahead:

• If there are important milestones, agree the dates up front where possible and re-agree them as necessary as the project develops. Comply with contractual provisions governing variation and evidence the agreement in writing each time.

Consider if time is of the essence:

• If time is of the essence, timely performance is a condition of the contract, meaning that any breach is repudiatory and will enable the innocent party to terminate the contract and claim damages.
• If time is to be of the essence, include a clearly drafted provision in the agreement and make sure that it is consistent with the termination clause.

Take care when drafting or receiving a termination notice:

• Parties seeking to terminate for repudiatory breach or based on a contractual right should, in the notice of termination, take care to rely on valid legal and factual bases to do so, or else risk being in repudiatory breach themselves.
• For example, if contractual timelines or scope have been varied by agreement, failure to meet the original requirements may no longer justify termination.
• Here, Rolls Royce’s first termination notice erroneously relied on milestones that had been superseded in a later plan.

This article was written by Nicole Simpson