Termination of an IT services contract is often the culmination of a gradual breakdown of the relationship between customer and supplier. Typically, the project begins with high hopes and expectations on both sides. Then the timetable starts to slip – slowly at first, but before long important milestones are missed. Tensions gradually build between the parties. A plan is agreed to put the project back on track. Soon, that plan too starts to slip. Testing is abandoned and rescheduled for a later date. That date is missed. Eventually, drained of patience, one of the parties terminates the contract.

 

Very often, the party that terminate the contract is content to do so. It wishes to end the unhappy relationship with the other party, and will be able to recover damages to recoup most of its losses. But that is not always the case. Sometimes, the huge investment of time and money spent on a project may make termination an unattractive option. Well-drafted limitation of liability or exclusion clauses may limit the scope of recovery of damages. The nature of the project may make it unsuitable for continuation by another supplier. In cases such as these, customers and (less frequently) suppliers, faced by a non-performing party or by a purported termination of the contract by the other party, are increasingly considering the remedy of specific performance.

 

Before examining the elements of the remedy of specific performance, we should add that its use as a final remedy in the context of IT projects is still extremely unusual. We are not aware of any reported cases in which a court has granted a final order for specific performance of an IT services contract. On the other hand, we are aware of only one case in which a court has declined to grant that remedy in the context of an IT services contract. In Internet Trading Clubs Ltd v Freeserve Investments Ltd (unreported, 19 June 2001, QBD), Morison J rejected a claim for specific performance of the terms of a joint venture agreement relating to the provision of a Web site. He held that it was a claim to enforce an ongoing business relationship, and that, on the facts of that case, specific performance would not be an appropriate remedy.

 

There is also a recent decision in which the High Court has refused to grant the related remedy of an interim mandatory injunction. In Vertex Data Science Limited v Powergen Retail Limited [2006] EWHC 1340 (Comm), Tomlinson J declined to grant an interim injunction restraining the defendant from terminating a services agreement (which, amongst other things, provided for the supply by the claimant of IT services), on the grounds that it would not be appropriate to grant injunctive relief, the effect of which would be to compel the parties to work together. In that case, it was unusually the supplier (not the customer) who was seeking the order for specific performance.

 

Notwithstanding the limited scope of IT-specific authority in this area, we nevertheless believe that, in an appropriate case falling within the established elements of the remedy, there is no reason in principle why an order for specific performance should not be made in relation to an IT services contract.

 

The Remedy of Specific Performance

‘Specific performance’, as readers will know, is a discretionary final remedy that forces one party to a contract to perform its obligations according to the terms of the contract, rather than simply paying damages for breach of contract after the event. Where an order for specific performance has been made, further breaches of the contract can, in certain circumstances, be punished as a contempt of court.

 

Specific performance is traditionally regarded in English law as an exceptional remedy.[1] There are no binding rules, but there are settled principles which the court should apply in all but exceptional circumstances.[2] 

 

So when will specific performance be ordered? The principles can be summarised as follows: 

 

(a)  Specific performance will generally not be ordered when damages are an adequate remedy,[3] since damages are the primary remedy available at common law for breach of contract. In that context, ‘…it is fundamental to all questions of damages that they are to compensate the claimant for his loss or injury by putting him as nearly as possible in the same position as he would have been in had he not suffered the wrong…’[4];

 

(b)  There is some flexibility, however, about the approach of the courts to the question of adequacy of damages.[5]  The authorities do not clearly define the term ‘adequate’ in this context. In C N Maritime v Stena Line A/B (The Stena Nautica) (No 2) [1982] 2 Lloyds Rep 336, at 348, May LJ reworded the test as follows: ‘Is it just in all the circumstances for the plaintiff to be confined to his remedy in damages?’ This suggests that the court has a broad basis upon which to assess whether or not damages would be an adequate remedy, namely whether damages would deal justly with the claimant’s claim. The factors which the court might take into account in its assessment of whether an award of damages would deal justly or adequately with the claimant’s claim (none of which are necessarily conclusive, and to none of which must the court give any particular weight) include the following.

 

                                                              i.      In most commercial situations, where the object of the exercise is to make money and/or to increase profitability, damages should generally be an adequate remedy, even though the claimant may suffer commercial inconvenience.[6]

 

                                                             ii.      Damages are generally an adequate remedy where the claimant can make a substitute contract for a performance equivalent to that promised by the defendant: the claimant should be adequately compensated by damages based on the difference between the cost of the substitute and the contract price.[7]

 

                                                           iii.      Difficulties in quantifying or in proving the claimant’s damages may be taken into account.[8] However, this factor should not be decisive, since ‘such difficulties frequently arise in litigation.’[9] Furthermore, ‘damages may be awarded on the footing of resolving uncertainties in favour of the innocent party and against the wrongdoer’.[10]

 

                                                          iv.      If certain items of loss are not (or may not be) legally recoverable (eg loss of goodwill and trade reputation),[11] then this may also be taken into account.

 

                                                            v.      If the defendant is not (or may not be) ‘good for the money’, then this may also be taken into account.

 

(c)  Specific performance ordering someone to carry on a business or an activity should generally not be ordered where it would require constant supervision by the court.[12]

 

(d)  An order for specific performance for the carrying on of a business, an activity or the achievement of a result may be refused on the following grounds.

 

                                                              i.      If there is imprecision in the terms of the order.[13] The first condition for specific performance of a building contract, for example, is that the particulars of the work are so far definitely ascertained that the court can sufficiently see what is the exact nature of the work of which it is asked to order performance.[14]

 

                                                             ii.      If it causes injustice by allowing the claimant to enrich itself at the defendant’s expense.[15]

 

                                                           iii.      If it conflicts with the claimant’s obligation to mitigate his loss.[16]

 

                                                          iv.      If it would be unfairly oppressive on, or cause severe hardship to, the defendant.[17]

 

                                                            v.      If the claimant’s conduct is such as to disentitle him from being granted the remedy.[18]

 

                                                          vi.      If the claimant’s delay is such as to disentitle him from being granted the remedy.[19]

 

As regards contracts of personal service or for personal services, the general principle of law is that the courts should not grant specific performance of contracts of service unless special circumstances can be shown.[20] Questions as to the adequacy of damages are generally irrelevant to this issue.

 

In each case, it will be a question of fact whether the services being provided are ‘personal’ in nature. There is no general rule against the specific enforcement of a contract simply because one party has contracted to provide services generally.[21] In Lauritzen Cool AB v Lady Navigation Inc [2005] 2 Lloyds Rep 63, CA, Mance LJ, having reviewed the authorities, concluded that ‘commercial arrangements between independent companies involving the employment of no named individuals where the services are not “personal” in nature can be distinguished for these purposes from contracts which involve very personal skills or talents. In the event of injunctive relief, business concerns can be expected to make the arrangements work in their own interests, and sort out any complaints subsequently, if necessary’.[22]

 

Is an IT Services Contract a Contract of Personal Service?

Common features of cases involving the provision of ‘personal’ services is that they all tend to involve acts involving personal skill, knowledge, or inclination, and trust and confidence at the individual (rather than the corporate) level.

 

Whether an IT services contract is personal in nature will obviously depend on the particular facts of the case, including the size of the businesses involved, the relationships between the individuals involved, and the size and scope of the contract.

 

In many IT projects, the level of trust, confidence and mutual cooperation that is required may incline a court to characterise the contract as one for the provision of personal services. Whilst this will not always be the case,  that view derives some support from the judgment of HHJ Toulmin QC in Anglo Group plc v Winther Brown & Co Ltd [2000] 72 Con LR 118. At paragraphs 125, 127 and 128, HHJ Toulmin QC said that:

 

‘125… It is well understood that the design and installation of a computer system requires the active co-operation of both parties…

 

127. The duty of co-operation in my view extends to the customer accepting where possible reasonable solutions to problems that have arisen…

 

128. In relation to a contract for the supply of a standard computer system it is an implied term that: …

 

(f) the purchaser and supplier work together to resolve the problems which will almost certainly occur. This requires active co-operation from both parties….’

 

That view is also echoed by Tomlinson J’s reasoning in Vertex Data Science Limited v Powergen Retail Limited [2006] EWHC 1340 (Comm). Tomlinson J held (at [46]):

 

 In these circumstances I do not consider that it is appropriate to grant injunctive relief which will have the effect of compelling the parties to work together. Nor do I consider that the terms of the contract are sufficiently precisely defined to indicate to Powergen precisely what is required of it if it is not to prevent or hinder Vertex from performing its functions under the MSA. In this regard I derive considerable guidance from the decision of the House of Lords in Co-operative Insurance Society Limited v Argyll Stores (Holdings) Ltd [1998] AC 1. As Lord Hoffmann pointed out, at page 17, the question of certainty must be decided on the assumption that the court might have to enforce the order according to its terms. I note also the distinction drawn by Lord Hoffmann at page 13 between orders which require a defendant to carry on an activity, such as running a business over a more or less extended period of time, and orders which require him to achieve a result. The present case cannot in my judgment be characterised as one in which Powergen would simply be enjoined to bring about a result’.

Limitation of Liability Clauses?

We are not aware of any reported decision that deals directly with the effect that an exclusion or limitation of liability clause might have on the court’s determination of the question of whether damages would be an adequate or just remedy. It would, arguably, be logically inconsistent for the court to form the view that the limitation of liability clause was fair and reasonable (for the purpose of the Unfair Contract Terms Act 1977), but that, in light of that agreed limitation of liability clause, damages would not be an adequate remedy, such that the justice of the case demanded an order for specific performance.

 

That view derives support from Tomlinson J’s reasoning in Vertex Data Science Limited v Powergen Retail Limited. In declining to grant an order for an interim injunction that would effectively be granting specific performance, and when considering the effect of a limitation of liability clause, Tomlinson J found as follows (at [47] to [49]):

 

‘[Counsel] refers to the following well-known passage in the judgment of Sachs LJ in Evans Marshall and Co v Bertola SA [1973] 1WLR 349 at p.379: –

 

“The standard question in relation to the grant of an injunction, ‘Are damages an adequate remedy?’, might perhaps, in the light of the authorities of recent years, be rewritten: ‘Is it just, in all the circumstances, that a plaintiff should be confined to his remedy in damages?”

 

To this citation I would add the following passage from the dissenting judgment of Millett LJ in the Co-operative Insurance  case [1996] Ch. 286 at p.305: –

 

“The equitable jurisdiction should not be exercised in a manner which would defeat the commercial expectations of the parties at the time when they entered into their contractual obligations.”

 

This passage must I think be regarded as having received the implicit approval of the House of Lords where Lord Hoffmann speaks, at page 15 of the report, of the purpose of the law being to satisfy the expectations of the party entitled to performance. These sophisticated parties included in their contract clause 11 which excludes liability for loss of profit, loss of contract and loss of goodwill and imposes a cap on each party’s liability in the aggregate sum of £12 million. Of course there will be issues as to the proper construction and applicability of these provisions and Vertex also contends, somewhat implausibly as it seems to me, that they are unfair and as such unenforceable. However that may be, it is not immediately obvious to me that it would be unjust for Vertex to be confined to such remedy in damages as is determined to be the extent of the bargain which it struck’. (emphasis added)

 

However, the decision of the Court of Appeal in Bath and North East Somerset District Council v Mowlem plc [2004] BLR 153 warrants consideration (although it was a building case rather than an IT case). In that case, the parties had agreed a liquidated damages clause, which was lower than the actual damages which the claimant would suffer if an injunction was not granted restraining the defendant’s breach of contract. At [15], Mance LJ said:

 

‘The agreement on liquidated and ascertained damages is not an agreed price to permit Mowlem to [act in breach of contract], and it does not preclude the court granting any other relief that may be appropriate’.

 

         

Conclusion

 

IT lawyers, and anyone else contending with a non-performing party to an IT services contract or a purported but unjustified termination, should consider the possibility of an order for specific performance or a pre-emptive application for an interim injunction. Although there is only limited IT-specific authority in this area, we nevertheless believe that, in an appropriate case falling within the established elements of the remedy, there is still a possibility that an order for specific performance could be made in relation to an IT services contract, especially if such a remedy has not been expressly excluded by agreement, and even if there is an express limitation of liability clause.

 

Duncan McCall and Alex Potts are Barristers and members of the IT Group at 4 Pump Court, Temple, London, EC4Y 7AN. www.4pumpcourt.com.