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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> GB Gas Holdings Ltd v Accenture (UK) Ltd & Ors [2009] EWHC 2734 (Comm) (06 November 2009)
URL: http://www.bailii.org/ew/cases/EWHC/Comm/2009/2734.html
Cite as: [2009] EWHC 2734 (Comm)
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
High Street Winchester SO23 9EL |
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B e f o r e :
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| GB Gas Holdings Limited |
Claimant |
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| - and - |
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| (1) Accenture (UK) Limited (2) Accenture SCA (3) Accenture International SARL (4) Accenture Inc |
Defendants |
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Geoffrey Vos QC, Joe Smouha QC and Philippa Hopkins (instructed by Freshfields Bruckhaus Deringer LLP) for the Defendants
Hearing dates: 29, 30 June and 2, 6 and 7 July 2009
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Crown Copyright ©
- This is a trial of a number of preliminary issues arising out of proceedings brought by the Claimant ("Centrica") for breach of an agreement dated 28 January 2002 ("the JPA"), as amended, under which the counterparty, Accenture plc, contracted to design, supply, install and maintain a new IT system ("the Jupiter System"), including an automated billing system based on pre-packaged SAP IS-U software.
- Under the JPA, the Jupiter System was to be delivered in 5 software releases, the third of which ("Release 3") was to be the billing system.
- GB Gas Holdings Limited is a subsidiary of Centrica plc which was originally part of the British Gas Corporation. Through its subsidiary, British Gas Trading Limited, Centrica supplies gas and electricity to residential customers in England and Wales. In 2002, at the time of the execution of the JPA, Centrica plc supplied energy to 18.8 million customers (13.4 million gas accounts and 5.4 million electricity accounts) and each month was issuing approximately 5 million bills.
- The first defendant ("Accenture") became a party to the JPA by a novation dated 24 November 2003. Accenture carries on business as a global management consulting, technology services and outsourcing company. The other defendants are guarantors of Accenture.
- The roll out of Release 3 was considerably delayed. There were disputes between the JPA parties over the functional and system performance of Releases 1 and 2 and there were concerns about: (i) the adequacy of the testing regime in respect of Release 3; (ii) the future development of Releases 4 and 5; and (iii) Accenture's cashflow problems. A settlement of these disputes was agreed on 29 June 2004, the formal terms of which were set out in Contract Change Note 165 ("CCN 165") dated 19 July 2004.
- Under CCN 165:
- On 21 December 2005, the parties agreed that the planned migration of 2 million customer accounts from existing billing systems to the new system should be conducted in two phases, comprising 1.25 million customer accounts at the end of December 2005 and 0.75 million customer accounts during February 2006. Between December 2005 and March 2006 4.5 million customer accounts were migrated to Release 3B.
- On 31 March 2006, the JPA was amended by the Jupiter Programme Contract Amendment No.1. The amended agreement is called hereafter "the Amended JPA". The amendments that are especially relevant to this trial are those to the warranty provisions contained in Clause 15 of the JPA. The drafting technique in the original Clause 15 was to set out what was warranted and then to provide what was to happen in the case of a breach of a warranty depending on whether the breach involved a "Fundamental Defect" (as defined) or a "Material Defect" (as defined). To that end, Clauses 15.2, 15.3 and 15.4.1 – 15.4.6 of the JPA provided:
- 4 Level of Effort
- Under Clause 16 of the JPA each party's aggregate liability to the other arising from or in connection with the JPA was made subject to a number of financial caps depending on the type of claim in question. In the case of claims relating to the Billing System, the cap is the higher of (a) £25 million and (b) 100% of the VAT exclusive Project Fees invoiced by Accenture to Centrica as at the date of the claim.
- In the Definitions clause of the JPA (Clause 1.1) "Fundamental Defect" and "Material Defect" are respectively defined as:
- Under the amended Clause 15 in the Amended JPA, the warranties given by Accenture apply in relation to Release 3B only (save for the words in square brackets in Clause 15.2.1(i) set out above) and endure for a specified period beginning on 23 December 2005 and ending on 28 February 2007 ("the Warranty Period"). Further, under the amended Clause 15.4, Accenture is no longer under any obligation itself to fix Material Defects but instead is obliged during the warranty period to fund the fixing by Centrica of such defects and any other defects caused by Accenture that are not Fundamental Defects, with moneys paid under this obligation counting towards and reducing the aggregate liability cap set out in Clause 16.
- In respect of Fundamental Defects, the obligation on Accenture is made subject to a notice in writing by Centrica of the Fundamental Defect and to Centrica having provided such analysis and detail as is reasonably practicable as to its reasons for believing there is a Fundamental Defect in relation to Release 3B. That obligation was referred to at the trial as an obligation to "fix" but this is a somewhat inaccurate description. The obligation is to do what a commercial, reasonable and prudent organisation using the System to carry on its business would do when acting in its own best interests (having due regard to the costs necessary and benefits likely from correcting the Fundamental Defect), which sometimes will require Accenture to fix the defect and other times not. (Hereafter, I refer to what Accenture has to do under Clause 15.4.3 as "the prescribed steps").
- These amendments reflect the fact that disputes as to the implementation of the JPA had broken out between the parties and it had been agreed that: (i) Releases 4 and 5 were to be cancelled; (ii) Accenture should move off site with Centrica taking over operational responsibility for the Jupiter system, including its implementation, day-to-day operation and maintenance; (iii) employees of Accenture were to be transferred to Centrica; and (iv) with certain exceptions, including any right accruing to Centrica to pursue the warranty provisions in Clauses 15.2 to 15.4, Accenture was to be released from all other claims in connection with the JPA.
- The definitions of "Fundamental Defect" and "Material Defect" in the JPA were not amended by the Amended JPA.
- Clauses 15.2 to 15.4 as amended provide:
- 4.2 Material Defects
- 4.3 Fundamental Defects
- 4.4 Reduction in Cap
- 4.5 Data and Documentation
- 4.6 Fundamental Defects caused by Centrica
- The release of Accenture in respect of all claims other than claims in respect of the Release 3B warranties was provided for in Clause 27.4B (b) as follows:
- It is also appropriate to note that in Clause 21.3 (that deals with termination for default) it is provided:
- Considerable problems with Release 3B began to emerge around June 2006. On 23 October 2006 an Accenture team that had gone back on site to investigate these problems produced a report setting out the results of its initial investigations. Increasing numbers of customer accounts were going unbilled and customer satisfaction was falling off. This was being caused in significant part by a backlog of "work items".
- "Work items" are called "exceptions" in the SAP-ISU programme. They refer to a feature invariably found in automated billing systems that requires manual intervention in certain circumstances before a bill is issued. An example might be an exception generated by an erroneous meter reading which has been entered incorrectly by the meter reader. Since critical data does not conform to what the system is expecting, the system suspends the billing cycle until the matter has been investigated and resolved by a business operative known within Centrica as a Customer Service Assistant or "CSA".
- Centrica estimates that Release 3B generated between 4.5 million and 6.6 million "unnecessary" exceptions in 2006 and between 8 and 18 million in December 2007. On 17 November 2006 Accenture presented a study into the exceptions generated by Release 3B which recorded that between 23 October and 2 November 2006 Release 3B had generated 1.2 million new exceptions. The result was a massive backlog of unresolved exceptions.
- By letter dated 12 February 2007 ("the Notification Letter"), Centrica notified Accenture of certain Fundamental Defects pursuant to Clause 15.4.3 of the Amended JPA and gave what it says was such analysis and detail as was reasonably practicable at that stage in relation to those defects. It was stated in the Notification Letter that the most serious Fundamental Defects related to "the large numbers of technical and business exceptions, management information and controls, insufficient hardware capacity, excessive workflow, and Jupiter integration". The Notification Letter then gave details of eight Fundamental Defects – Design of User inboxes; Management Information; Hardware capacity; SAP Archiving; Transactional and reporting systems sharing a common infrastructure; Excessive workflow; Business and technical exceptions; and Jupiter integration.
- In the Conclusion the Notification Letter stated:
- Notwithstanding the Notification Letter, Accenture has refused to take any steps under Clause 15.4.3 of the Amended JPA. In its view, it was under no legal obligation to do so. Its position was, and is, that there were no Fundamental Defects in Release 3B, that the Notification Letter was ineffective to "trigger" Accenture's obligations under Clause 15.4.3 and that those obligations expired on 28 February 2007.
- Faced with this stance, Centrica has issued proceedings against Accenture in which it alleges that: (I) the massive backlog of unresolved exceptions that was generated in the wake of Release 3B was a breach of the Clause 15.2.2(i) and 15.2.2(ii) warranties in the Amended JPA; and (II) the breaches complained of have caused Centrica enormous damage due to: (a) the need to employ thousands of additional staff to try to resolve the exceptions and to deal with rising volumes of contact with complaining and dissatisfied customers; (b) the writing-off of millions of pounds in respect of unbilled or late-billed supply of gas and/or electricity; and (c) the cost of investigating and rectifying the exceptions problem including the cost of purchasing significantly more powerful hardware and third party software.
- Centrica pleads that Accenture's overall design of Release 3B contained two basic and critical design errors in relation to the generation of exceptions and the adequacy of accurate automation within Release 3B -- "the Exceptions Error" and "the Automation Error". It contends that each of these basic errors was a fundamental breach of warranty within the meaning of the Amended JPA, and either individually or in combination, caused a severe adverse effect on the British Gas Residential Business and therefore constituted a Fundamental Defect (or Fundamental Defects) for the purposes of the Amended JPA.
- Centrica also asserts that there were 23 individual breaches of warranty in respect of the design, programming and implementation of Release 3B in addition to the Exceptions Error and the Automation Error. The identification and particularisation of these individual breaches was completed only after the sending of the Notification Letter. Centrica alleges that these breaches are either manifestations of, or evidenced, the Exceptions and Automation Errors and are themselves material design, programming and implementation errors in Release 3B. Centrica does not allege that they individually constitute fundamental breaches of warranty or Fundamental Defects.
- In summary, Centrica pleads:
- Accenture contends that individual breaches of warranty asserted by Centrica cannot be combined whether for the purpose of establishing a fundamental breach or for the purpose of establishing a Fundamental Defect pursuant to Clause 15.4.3 of the Amended JPA. Instead, Accenture was only liable to do anything under Clause 15.4.3 if Centrica could establish, at the time it notified Accenture: (i) of the individual breaches of warranty of which Accenture was guilty; and (ii) that any such individual breach of warranty was in and of itself a "fundamental" breach of warranty which had already caused a severe adverse effect on the British Gas Residential Business. Accenture also contends that the obligation on it to take the steps specified in Clause 15.4.3 would only be triggered if Centrica served a timely notice specifying in respect of each individual fundamental breach relied on: (i) what warranty or warranties it was alleged had been breached; (ii) with what requirements of the Statement of Release Requirements ("the SoRR") it was alleged that Release 3B did not materially comply; (iii) the nature of the alleged material design, programming or implementation errors; and (iv) the severe adverse effect that was alleged to have resulted from each breach.
- Accenture also disputes Centrica's contention that the Notification Letter stands to be construed against the background of what Accenture knew of the defects at the time the letter was received.
- As to Centrica's damages claim, Accenture pleads that its liability for damages for Fundamental Defects under Clause 15.4.3 of the Amended JPA is limited to: (i) losses suffered after Accenture was notified of the Fundamental Defect(s); (ii) losses suffered after a reasonable time to allow Accenture to comply with its obligation; and (iii) losses calculated on the Time and Materials basis set out in Clause 15.4.3 in relation to its own obligation to fix (and not Centrica's right to claim damages).
- Accenture also pleads that a number of items of loss for which Centrica claims damages are irrecoverable by virtue of Clause 16.2 of Amended JPA which excludes liability for "any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential…".
- It was in the light, inter alia, of these rival contentions, that Burton J ordered the trial of, inter alia, the following preliminary issues:
- In addition to these six issues, there are four additional issues concerned with Centrica's Hardware claims with which I shall deal later in a later judgement.
- Issues 1 to 4 raise questions of the true construction of Clause 15.4.3 of the Amended JPA. The modern approach to the construction of written instruments is that propounded by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, at 912H- 913 E. The court is concerned to ascertain "the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." As for the admissible background or "matrix of fact", Lord Hoffmann said:
- The material on which Centrica relies as constituting the factual matrix of Clause 15.4.3 of the Amended JPA is voluminous. It is identified in a pleading called Statement of Facts which is some 85 pages in length. In my judgement the relevant background includes: (i) the "high level" processes and functions which play a role in bills being sent to customers by a utilities provider in the UK; (ii) the nature of a utilities billing system, including the automated processes involved; (iii) the history of the Jupiter Project leading up to the JPA and the Amended JPA, including: the Project Jupiter Qualification Report; the Memorandum of Understanding; the Programme Definition phase; the invitation to bid process; the design and development of Release 3; Release 3 documentation; the Release 3 SoRR; (iv) CCN 165; (v) the findings I make below on the oral evidence; and (vi) the events leading up to the conclusion of the Jupiter Programme Contract Amendment No.1 and the changes introduced by that agreement to the implementation of the billing system and the handling of defects.
- Clause 15.4.3 also has to be construed against the background of the Amended JPA as a whole, including in particular certain relevant Recitals and clauses contained in the main body of the contract, and certain paragraphs contained in Schedule 1 to the contract.
- During the Programme Definition Phase in the lead up to the execution of the JPA there was produced the Jupiter Programme Definition Report in June 2001. This recorded, inter alia, that "business processes will be re-designed to deliver a common customer focused experience…" It also summarised a list of 14 business requirements for billing, including bill production, account maintenance, payment methods, payments received, meter readings and customer enquiry.
- The specific definition of these 14 requirements was worked out in subsequent documents, including (i) the "PD04 - Business Requirements" Report dated 27 April 2001, which set out the operational, functional and technical conditions of the Jupiter Project and 24 key systems of a billing system generally; (ii) the PD06 – "Functional Requirements" Report dated 12 April 2001, which set out all of the Jupiter Programme's functional and non-functional requirements including 116 energy billing functional requirements; (iii) the Release 3 Scope Document dated 7 January 2002, which contained a detailed specification of the requirements to be met by Release 3 and set out in Appendix A the benefits to be achieved by the requirements; and (iv) the Release 3 SoRR that was finalised after the execution of the JPA but before the execution of the Amended JPA. This latter document was based on the Release 3 Scope Document and set out: (i) in great detail the functional and non-functional requirements and system service levels that Release 3 had to deliver; and (ii) the stipulated "Business Capabilities".
- I have already touched on the events leading up to the conclusion of the Jupiter Programme Contract Amendment No.1 and the changes introduced by that agreement to the implementation of the billing system and the handling of defects. The relevant facts are these. There had been disputes between Centrica and Accenture concerning the implementation of the first two Releases and Accenture claimed large sums were due for work which it contended were not covered by the JPA, whilst Centrica claimed that they were covered by the agreement. These disputes were settled on terms that the parties would be released from all claims arising out of the JPA except for warranty claims in respect of Release 3B and upon payment of an additional £10 million to Accenture. Working relations between the parties had deteriorated to the point that Centrica had decided that Accenture should leave the site and it (Centrica) would take over JAM (Jupiter Application Maintenance) and migration of the billing system and its stabilisation, with a number of Accenture employees moving over to join Centrica's large team of experienced computer technicians. In addition, Releases 4 and 5 were cancelled. By the time of the Amended JPA, 4.5 million customer accounts had been migrated on to the new system but there were 12.5 million accounts still to be migrated.
- I find on the evidence that amongst the automated processes involved in a utilities billing system there are very likely to be billing and control processes such as: (i) reading meters; (ii) creating meter read request files and handling the automated loading of meter reads into the billing process; (iii) identifying incorrect meter readings; (iv) calculating bills based on actual or estimated meter readings; (v) sending invoices to be printed; (vi) receiving payments and managing payments adjustments; (vii) handling key financial postings; (viii) handling customers moving house; and (ix) handling interaction between the utility and its customers.
- I heard live evidence on the factual matrix from Ms Fiona O'Hara, Director of Operations in Accenture's Resources Operating Unit with responsibility for Europe, Africa and Latin America; Mr Nigel Barnes, a Senior Executive at Accenture leading the UK technology architecture practice; Mr Richard Barton, the lead consulting partner at Deloitte for the utilities sector; and Dr Mark Watmough, Managing Director of Barnsnape Consulting Services Ltd, a consultancy with specialist knowledge in the design and implementation of billing systems for utilities.
- Ms O'Hara, Mr Barnes and Dr Watmough were called by Accenture, Mr Barton by Centrica. Mr Barton and Dr Watmough gave evidence as experts. Parts of Mr Barnes's evidence were in the nature of expert evidence but I admitted them upon his assurance that he gave this evidence in an independent capacity subject to the duties owed to the court by an expert witness.
- Ms O'Hara's evidence was concerned with events leading up to CCN 165 and the Jupiter Programme Contract Amendment No 1. Much of the evidence given by the remaining witnesses was directed to whether Accenture had made errors in designing the new billing system, but this was not an issue for decision in the trial. In respect of the evidence that was relevant, it was common ground that a retail concern's billing system is at the heart of the concern and is business critical because cash flow will be significantly impacted if the system does not work. Mr Barton and Dr Watmough also agreed that a utility's billing system is complex, Dr Watmough speaking of "the labyrinth of the complexity of the billing system." I also accept Mr Barnes's evidence that the billing system involved inter-related processes and sub-processes and an error in one process can affect a related process (Day 2, p 67). Mr Barnes also agreed that it was quite common to have defects which in combination created an aggregated defect (Day 2, p 69).
- Dr Watmough accepted that: (i) design errors in one of a large number of processes involved in an automated billing system can have an impact on other parts of the business and numbers of design errors in different processes can cumulatively impact on other processes; (ii) exceptions not designed-in can occur as customers' accounts are migrated on to the new system and it can be very difficult to identify precisely what is causing those exceptions; (iii) when the system is running for real with the data flows operating, that end-to-end environment can be complicated and if something goes wrong it can be very hard to find out why; (iv) what might seem to be a trivial non-function might with a greater amount of understanding turn out to be more important; and (v) the people who implement new billing system contracts would appreciate it may be difficult to tell which errors revealed in the migration process are important and which are trivial.
- Dr Watmough also accepted what is set out under the heading C1. General purpose and function of a utilities billing system in the Statement of Facts. In summary it is there stated: (i) the basic function of a utilities billing system is to generate bills for gas customers and electricity customers and to process payments from those customers; (ii) generating a bill includes calculating the amount payable by the customer having regard to the product - gas or electricity – the difference between the last and the present meter reads, tariff, payment arrangements and causing the bill to be issued by reference to the customer's details; and (iii) to generate bills the system must be able to handle (a) "new joiner" when someone becomes a customer for the first time; (b) "customer changes" when an existing customer changes his current arrangements; (c) "change of tenancy" when an existing customer notifies a change of address and the final meter reading; (d) "leaver" when an existing customer terminates his supply contract; and (e) "consume and pay": the billing system calculates the bill on the basis of the actual or estimated meter reading and allocates payment to the appropriate customer's account.
- Mr Vos QC for Accenture invited me to make findings on the evidence that went beyond those that were relevant for the purposes of this trial but which he said would assist the parties generally. I decline this invitation. The evidence was given for the specific purpose of determining the selected preliminary issues and it is inappropriate in my opinion to make findings for any other purpose.
- Turning to the contractual context of Clause 15 in the Amended JPA, the pertinent provisions in relevant part in the Amended JPA are:
- Schedule 1 to the Amended JPA is also relevant background and was heavily relied on by Mr Onions QC for Centrica. This sets out, inter alia: (i) the parties' intentions as to the Business Capabilities of the System; (ii) the services required of the System by Centrica including a "best-of-breed" replacement billing system incorporating billing functionality in respect of the entire British Gas Business and to be installed and implemented without adversely affecting the standard of service of the British Gas Business; (iii) 16 specific requirements and 59 common requirements for the billing system; (iv) the performance requirements to be met by the billing system including being able to administer 16,270,000 customers in 2005.
- Mr Vos QC submitted that the words of Clause 15.4.3 and of the definitions of Fundamental Defect and Material Defect should be given their ordinary meaning against the background that: (a) after the amendment of Clause 15.4.3 there remained a vital distinction between Material Defects and Fundamental Defects; (b) Accenture was now to be off site with no obligation to fix Material Defects but only an obligation to fund their rectification above an agreed level; (c) the migration of the remaining 12 million customer accounts and the installation, implementation and maintenance of the system were to be done by Centrica; and (d) the amendments to Clause 15 reflected a full compromise agreement between the parties of claims under the JPA. In his submission, Clauses 15.2.1 and 15.2.2 created separate and distinct warranties and it was clear from the foregoing that a Fundamental Defect could only be constituted by a single fundamental breach of a particular warranty which in and of itself causes a severe adverse effect on the British Gas Business. If it had been the intention that breaches of warranty and/or their effects could be aggregated, Clause 15.4.3 would have spelt this out but, in contrast to Clause 21.3, it did not do so. Centrica's construction of Clause 15 to the effect that: (i) a fundamental breach of warranty could be established by aggregating separate breaches of warranty; and (ii) a Fundamental Defect could be established by aggregating the effects of separate breaches of warranty, was therefore wrong. In particular, it flew in the face of the distinction drawn in the Amended JPA between Material Defects and Fundamental Defects. Those two categories were mutually exclusive. Once a Material Defect, always a Material Defect: there was no scope for a Material Defect later to become a Fundamental Defect whether by a process of aggregation or otherwise. In particular, if a claim is made by Centrica for the cost of rectifying a Material Defect and that claim is paid, the defect in question cannot later surface as a Fundamental Defect because the liability in respect thereof will have been discharged. Further, Centrica's aggregation contentions were wholly inconsistent with the notice requirements prescribed in Clause 15.4.3 since a written notice had to specify the Fundamental Defect(s) relied on and Centrica had to provide such analysis and detail as is reasonably practicable as to its reasons for believing there is a Fundamental Defect.
- Mr Vos contended that there was nothing unreasonable or unfair with the construction he advanced. Centrica had taken over the migration, maintenance, installation and implementation of the system when it was to be expected that defects would emerge and that those defects would likely be Material Defects at worst. Centrica was therefore on the spot and its team was as expert as the Accenture team that had been removed from the site.
- Mr Onions QC submitted that the effect of the words "and/or" in the definition of Fundamental Defect ("a fundamental breach of Clauses 15.2.1 and/or 15.2.2 and/or 15.1.1(i)") was that Clause 15.4.3 expressly provided that a "fundamental breach" could be constituted by a breach of one or more (in combination) of Clauses 15.2.1 and/or 15.2.2 and/or 15.1.1(i). He also submitted that the warranties given by Accenture in each of the subparagraphs of Clause 15.2 were composite in nature so that for each subparagraph there was one warranty that could be breached in the separate ways there provided for. Thus the effect of Clause 15.2.2 (i) was that material design errors, programming errors and implementation errors were all part and parcel of one breach of warranty and constituted the extent of that one breach. Clause 21.3 was concerned with something quite different from that dealt with in Clause 15.4.3 and was not inconsistent with Centrica's aggregation case. Further, the notice required by Clause 15.4.3 was one that simply stated that there was a Fundamental Defect or Defects. In addition, Centrica had to provide such analysis and detail as was reasonably practicable as to its reasons for believing there is a Release 3B Fundamental Defect.
- For reasons I give later when dealing with Issues 3 and 4, I agree with Mr Onions' submissions as to the requirements of a Clause 15.4.3 notice. I am also of the view that there is considerable force in his other submissions but the matter does not stop there because, as Mr Onions argued, Clause 15.4.3 must be construed in light of the following features of the relevant background. It was Accenture's contractual responsibility to install a billing system that was free of material design, programming and implementation errors and to do so without adversely affecting the standard of service of the British Gas Business. Further, as both parties must have realised when the JPA was concluded and amended: (i) the new billing system was immensely complex and involved inter-related processes and sub-processes; (ii) an error in one process could affect a related process; (iii) it was quite common to have defects in a billing system which in combination created an aggregated defect; (iv) design errors in different processes could cumulatively impact on other processes; (v) exceptions not designed-in could occur as customers' accounts are migrated and it could be very difficult to identify precisely what was causing those exceptions; (vi) if something went wrong when the system was running for real with the data flows operating it could be very hard to find out why; (vii) what appeared at first to be trivial non-functions could turn out to be more important; and (viii) the billing system was of critical importance to Centrica: if it failed to function properly to a significant degree there could be a serious impact on Centrica's revenues.
- In my opinion, the meaning which Clause 15.4.3 would convey to a reasonable person having the background knowledge I have set out is: (1) a fundamental breach of warranty can be constituted by individual breaches of warranty all falling within the same subparagraph under Clause 15.2.1 or Clause 15.2.2; and (2) the consequences of such individual fundamental breaches of warranty can be aggregated for the purposes of determining whether there was a severe adverse effect on the British Gas Business.
- In reaching this conclusion I have given careful consideration to all of Mr Vos' submissions, particularly those that focused on the distinct regimes established under the JPA for Material Defects and Fundamental Defects. In my judgement, the categories of Material Defects and Fundamental Defects are not mutually exclusive. There is no obligation under the JPA on Centrica to classify an apparent breach of warranty as either a Material Defect or a Fundamental Defect and I can see nothing in the agreement that prevents Centrica from asserting that a breach is a Fundamental Defect when to begin with they thought that the effects of the breach did not justify such an assertion, and may even have attempted to fix it. Nor do I see why Accenture should not come under the Clause 15.4.3 obligation even though they have paid a claim on the basis that the breach was a Material Defect. That obligation will not inevitably involve the further expenditure of money and if it does, it will go, together with the earlier expenditure, to reduce the Clause 16 cap.
- The definitions of Material Defect and Fundamental Defect use different language when specifying the effects that a breach of warranty must have to constitute the defect in question. Thus, the Material Defect definition uses the words "which has or is likely to have an adverse effect on the British Gas Business…", whereas the Fundamental Defect definition uses the words "causes a severe adverse effect on the British Gas Business." [Emphasis supplied]
- Mr Vos submitted that this difference in language is deliberate and that it follows that in the case of a Fundamental Defect the breach of warranty must actually have occurred before notification under Clause 15.4.3. Mr Onions submitted that the word "causes" encompasses "could cause" and "will cause". He drew an analogy with anticipatory breach cases which establish that an obligee can treat the contract as repudiated before a breach has actually occurred where it can be shown that the breach would have occurred if the contract had not been rescinded. I prefer Mr Onions' submissions to those of Mr Vos. I decline to accept that the contractual intention was that Accenture came under no obligation to take the prescribed steps where a severe adverse effect had not yet actually been suffered but was inevitably going to be suffered.
- I propose to deal with Issue 4 first because this is the more important of the two and its determination impacts on the practical significance of Issue 3.
- Mr Vos argued that the words used in Clause 15.4.3 should be given their ordinary, natural meaning without the application of any special rule of construction such as the contra proferentem rule. So construed, it was clear, he argued, that a valid Clause 15.4.3 notification had to be in writing and (i) identify the fundamental breach which is causing the claimed severe adverse effect on the British Gas Business; and (ii) Accenture had to be provided with such analysis and detail as is reasonably practicable as to Centrica's reasons for believing there is a Fundamental Defect in relation to Release 3B. He submitted that the words in brackets in Clause 15.4.3 do not cut back the notification requirement; instead they provide an additional conditional precedent to the notification.
- As for requirement (i), Mr Vos contended that the notice must identify: (a) the fundamental breach relied on by specifying the warranty broken and the particular requirement of the SoRR if that is the breach alleged; and (b) the serious adverse effect allegedly caused. This construction was supported, he argued, by the purpose of the notice. Accenture, who it was known would be off site, needed to be able to determine whether complaint was being made about a defect that fell within Clause 15.4.3 and also needed to consider what "a commercial, reasonable and prudent organisation using the System to carry on its business would do when acting in its own interests". The words in brackets were added because the previous Clause 15.3 had been deleted and it was accordingly to be presumed that the sort of detail given in the forms used under the old Clause 15.3 was intended to be given in a Clause 15.4.3 notification.
- On the question whether the contra proferentem rule applied when construing Clause 15.4.3, Mr Vos argued that under the Amended JPA the parties had agreed a complete release of their respective claims against each other (see Clause 27.4B (a) & (b)) on terms inter alia that Accenture should be subject to the prescribed steps obligation under Clause 15.4.3. It followed that that clause was not an exclusion clause and did not limit a liability that would exist but for the clause. There was also no evidence that the clause had been introduced at the behest of Accenture. Further, the rule only applied where there was doubt or ambiguity as to the meaning of the words in question, and here there was neither.
- Mr Vos also submitted that his construction of the notice requirements should not be regarded as unfair and/or over-burdensome. Centrica had a 30 strong JAM team and had agreed to the clause knowing that it (Centrica) would be carrying out the migration of 12 million odd customer accounts and that this migration process posed a significant risk of problems in the implementation of the billing system.
- Mr Onions submitted that the commercial purpose of Clause 15.4.3 was to provide for a mechanism whereby Accenture fixed Fundamental Defects so as to ensure that Centrica received the stipulated benefits of the new billing system, and if Accenture's construction were correct that purpose would be defeated. It would be defeated because, as the parties must have contemplated when the Amended JPA was concluded, it could be very difficult and time-consuming to discover what breach or breaches of warranty were causing the malfunctioning of the system in question, and the Warranty Period extended only to 28 February 2007. Mr Onions went so far as to submit that if Accenture's construction were correct, Clause 15.4.3 would be a trap for the unwary.
- Mr Onions observed that Clause 15.4.3 does not expressly state that the detail of the fundamental breach Accenture say is required should be provided. In his submission, what is required is a written statement that there is a Fundamental Defect together with the provision of the information called for by the words in brackets. In supplying that information, ie the analysis and detail that is reasonably practicable as to Centrica's reasons for believing there is a Fundamental Defect, Centrica would be letting Accenture know what it (Centrica) knew, which chimed with the prescribed steps that Accenture had to take.
- Mr Onions further submitted that since under Clause 15.4.3 Accenture's prescribed steps obligation was subject to a notice served before the end of the Warranty Period, and since Accenture is excused from further liability if it takes those steps, Clause 15.4.3 was in the nature of an exclusion clause to the benefit of Accenture and should be construed contra proferentem. The release reflected in Clause 27.4B did not apply to liability under the Release 3B warranties. Clause 15.4.3 accordingly diminished what would otherwise be Accenture's warranty obligations.
- In my judgement, Mr Onion's submission that what is required by Clause 15.4.3 is a written statement that there is a Fundamental Defect and the provision of such analysis etc as to Centrica's belief there is a Fundamental Defect is correct. My reasons are as follows. (1) Clause 15.4.3 must be construed contra proferentem: it is an exclusion clause excluding or limiting what otherwise would be Accenture's liability at common law for breach of the Release Warranties and there is doubt as to the meaning of the words "upon being notified in writing of a Fundamental Defect…". (2) Clause 15.4.3 does not expressly require specification of any particular breach of warranty or the severe adverse effect but refers only to a written notification "of a Fundamental Defect" and the provision of such analysis etc as to the reasons for the belief there is a Fundamental Defect. (3) The overall purpose of Clause 15.4.3 would be seriously impaired if Accenture's construction were correct; that purpose being to provide for a regime for the fixing by Accenture of Fundamental Defects if this is what a commercial, reasonable and prudent organisation would do, so that Centrica has the benefit of a billing system that is in accordance with contractual requirements. (3) The parties must or ought to have appreciated that: (a) when the system is running for real it can be very hard to find out why something is wrong; and (b) it could be difficult to tell which errors are important and which trivial. (4) The obligation to do what a commercial, reasonable and prudent organisation would do admits of the possibility that an enquiry should be made into the cause of the malfunction identified in the reasons given for believing there is a Fundamental Defect.
- I should add that I would have reached the same conclusion even if Clause 15.4.3 were not construed contra proferentem.
- Accordingly, my answer to the questions posed by Issue 4 is No.
- I turn to Issue 3. It is clear from Mannai Investment Co Ltd v Eagle Star Life Assurance Co. Ltd [1997] AC 749 that a notice must be construed in the light of the relevant background when determining its meaning. Centrica argues that its dealings with Accenture concerning the defects that emerged between June 2006 and February 2007 are relevant background for construing the Notification Letter. I agree. Once the Notification Letter has been so construed, it will then be appropriate to consider whether it satisfies the written notification and provision of information requirements imposed by Clause 15.4.3; see Trafford MBC v Total Fitness [2002] EWCA Civ 1513 at para 49.
- It should be noted that I have not been asked to determine whether the provision of such analysis etc as to Centrica's reasons for believing there is a Fundamental Defect must be in writing. Nor is the issue whether the Notification Letter complies with the trigger requirements of Clause 15.4.3 before the court.
- This issue raises the question whether Accenture's warranty obligations are free-standing so that they can found a claim for damages at large at common law if Accenture fails promptly to take the prescribed steps, or whether such a failure by Accenture entitles Centrica to recover damages measured only by Accenture's prescribed steps obligation.
- In common with his argument under Issue 4 that the contra proferentem rule had no application to the construction of Clause 15.4.3, Mr Vos submitted that the prescribed steps obligation was carved out of the general release in Clause 27.4B so that there was no other surviving obligation on Accenture for fundamental breach of warranty. It followed, he argued, that the relevant breach for damages purposes if Accenture failed promptly to use the endeavours set out in Clause 15.4.3 was that breach and not a breach of the Release Warranties provided for in Clauses 15.2.1 and 15.2.2. And this being so, Centrica was not entitled to recover damages for its costs in relation to a fundamental breach incurred before the prescribed steps obligation was engaged or for losses incurred before the expiry of a reasonable time for Accenture to comply with its Clause 15.4.3 obligations. Moreover, such damages as Centrica was entitled to recover were to be calculated on a "Time and Materials Basis" in accordance with Clause 15.4.3.
- Mr Vos drew attention to the fact that the words "for a Fundamental Defect" appear in the sentence "This shall constitute Accenture's entire liability and Centrica's sole and exclusive remedy for a Fundamental Defect" and in the later sentence beginning "For the avoidance of doubt, the only situation in which Centrica shall have a claim for damages for a Fundamental Defect shall be if Accenture does not promptly use the endeavours set out in this Clause 15.4.3 …". It followed, submitted Mr Vos, that the words "a Fundamental Defect" in the later sentence had the same meaning as in the earlier sentence. In other words, "for a Fundamental Defect" is shorthand for Accenture's prescribed steps obligation and has this meaning in both sentences.
- Mr Vos also submitted that if the intention had been to convert the prescribed steps obligation back to an obligation to pay damages for breach of warranty, the last sentence would not have used the words "for the avoidance of doubt" but would have provided for the restoration of the warranty obligation.
- I am unpersuaded by Mr Vos' submissions. In my judgement, the Release warranty obligations including the obligation to pay damages for the breach thereof were not merged in the prescribed steps obligation. Considerably clearer words would have had to have been used before it could be concluded that Centrica had relinquished its right to recover damages for defects that ex hypothesi had caused a severe adverse effect on Centrica's business. The words "shall have a claim for damages for a Fundamental Defect" in the final sentence of Clause 15.4.3 mean "a claim for damages at large at common law for a fundamental breach of Clauses 15.2.1 and/or 15.2.2 and/or 15.1.1(i) which causes a severe adverse effect on the British Gas Business".
- It is to be noted that Centrica accepts that the Clause 16 cap applies to the damages they seek to recover at common law for breach of the Release Warranties.
- For the reasons I have given, I answer Yes to Issue 5.1 and No to Issues 5.2 and 5.3.
- The question I have to decide is whether the items of loss listed below are irrecoverable under Clause 16.2 of the Amended JPA which provides:
- It was common ground that the words "directly" and "indirectly" in Clause 16.2 referred respectively to the first and second limb of the rule in Hadley v Baxendale (1854) 9 Exch 341:
- Accenture contends that this item, although dressed up in different language, is a claim for loss of revenue or loss of profits and is therefore excluded under Clauses 16.2.1 and 16.2.2. Accenture also submits that this is a type of indirect or consequential loss within the second limb of Hadley v Baxendale.
- Centrica pleads in paragraphs 14 to 15 of its Statement of Facts in relation to Losses ("the Losses Statement") that it purchases gas wholesale from distributors and is charged for this gas according to the volume of gas supplied to its customers. Centrica transmits electronically customer meter reads to the distributors which they use for calculating their charges to Centrica. As a result of the alleged automation error in Release 3B, gas distributors were not provided with meter data for about 15% of Centrica's customers' gas consumption and charged Centrica on the basis of an over-estimation of consumption for these customers. Centrica seek damages in respect of the charges based on the over-estimation.
- In my judgement, accepting the allegations made in the Losses Statement as if they were proved, this item of loss has arisen as a direct result of the automation error and falls within the Hadley v Baxendale first limb. Further, it is not a claim for revenue but for charges Centrica has paid which it would not have paid but for the alleged automation error. Accordingly, I find that this item is not irrecoverable under Clause 16.2.
- Centrica alleges that as a result of the alleged severe disruption to its new billing system it suffered serious reputational damage. It estimates that as a result of the defects in Release 3B about 770,000 more customers left Centrica between March 2006 and March 2007 than would have left at historical rates of customer loss. Centrica further alleges that as a result of this reputational damage it paid £8 million in compensation to its customers between these dates to reflect the billing difficulties and poor customer service they had received.
- Accenture contends that the sum paid out was paid ex gratia and is plainly an indirect or consequential loss. Mr Vos cited paragraphs 21 – 25 of Lord Hoffmann's judgement in The Achilleas [2009] 1 AC 61.
- In my judgement this item of loss is neither indirect nor consequential but falls within the first limb of Hadley v Baxendale. Having regard to the Amended JPA overall and to the relevant background, including Recital (A) I think it plain that one of the purposes of the new billing system was to improve customer relations and customer services. It is equally plain that in the context of the Amended JPA, Accenture assumed responsibility for losses in terms of compensation paid to customers if the billing system failed to perform as it was intended it should perform.
- Accordingly, assuming that Centrica's factual allegations are true, I find that this item of loss is recoverable.
- Centrica pleads due to the late billing or non-billing of customers as a result of Accenuture's breach of warranty, Centrica's revenue was reduced and between July 2006 and October 2007 it was forced to incur £2 million in additional borrowing charges to finance its business.
- The billing system was at the heart of Centrica's business. Its revenues depended on it operating efficiently. Breaches of warranty that delayed the issuing of bills or the non-issuance of bills were bound in my opinion to have an adverse impact on Centrica's revenue with the very likely consequence that there would have to be borrowing to make up for the loss of revenue. In my judgement, this loss falls within the first limb of Hadley v Baxendale and is not excluded by Clause 16.2.
- Centrica pleads that it incurred this sum chasing debt from its customers which in fact was not due, but which Centrica thought was due as a result of errors in Release 3B. Accenture submits that this loss is indirect and/or consequential. I disagree. In my opinion, if the alleged breaches of warranty are proved, this loss would have flowed naturally and in the ordinary course of events from those breaches.
- Centrica pleads that in September 2006 it established an Incident Management Team ("IMT") to investigate "hot topics" arising from Release 3B that were causing particular distress to its customers and contributing to an increase in customer call volumes. IMT wrote to customers to update them on the progress of these "hot topics" and in doing so incurred stationery and correspondence costs of £107,120.
- For the reasons I gave in concluding that the compensation paid to customers was not irrecoverable under Clause 16.2, I find that this item loss too is not excluded by Clause 16.2.
- This question does not strictly arise since I have found that none of the above items of loss is excluded by Clause 16.2. If it had been necessary to answer the question I would have held that the sums in issue were not recoverable as sums expended in mitigation. In my judgement, sums spent in mitigating loss that is indirect or consequential must in logic be sums paid in respect of indirect or consequential loss, and for that reason would be irrecoverable under Clause 16.2.
- For the reasons given above, I answer the Issues dealt with in this judgement as follows:
- 1.1 No. A "fundamental" breach of warranty can be constituted by individual breaches of warranty all falling within the same subparagraph under Clause 15.2.1 or Clause 15.2.2 of the Amended JPA.
- 1.2 Yes. The consequences of individual fundamental breaches of warranty alleged by Centrica can be aggregated for the purposes of determining whether there is a severe adverse effect on the British Gas Business.
- 2. No. It is sufficient if at the time of notification the breach would cause a "severe adverse effect" if left unremedied.
- 3. The letter of 12 February 2007 can be construed against the background of the parties' prior knowledge of alleged defects in Release 3 in order to determine its meaning. The question can then be decided whether, so construed, it is a valid notice.
- 4 (i) No
- 5. The damages recoverable by Centrica for a Fundamental Defect are damages at large at common law.
- 6. None of the items of loss dealt with in answering this Issue is excluded under Clause 16.2.
Mr Justice Field:
Introduction
i) Centrica agreed to pay an additional £10 million to the overall amount payable to Accenture under the JPA (Clause 1.1).ii) Accenture agreed to provide an additional 18,000 man days towards completion of Release 3 (Clause 1.5).
iii) Accenture agreed to a three to four month pilot of Release 3B with live users for which the parties were to agree a set of objective pilot acceptance criteria to identify any faults in relation to Release 3B during the pilot. It was also agreed that the relevant warranties under clause 15 of the JPA would not start to run until after completion of the pilot and the start of the migration of accounts from the old billing systems to the new one, rather than at the start of the pilot.
iv) Releases 4 and 5 were suspended.
The Warranty Provisions in the JPA and the Amended JPA
15.2 Release Warranties
15.2 .1 Subject as provided below Accenture warrants to Centrica that
(i) for the duration of the Initial Warranty Period:
(a) each Release will comply in all material respects with its Statement of Release Requirements separately and when combined with the previously delivered Releases; and
(b) completion of each Release will not materially adversely affect functionality achieved in any previously delivered Releases;
(ii) in respect of the Release(s) which implement the Billing System (currently planned to be Release 3), for the duration of the Full Warranty Period:
(a) each Release will comply in all material respects with its Statement of Release Requirements separately and when combined with the previously delivered Releases; and
(c) completion of each Release will not materially adversely affect the functionality achieved in any previously delivered Releases.
and in respect of this Clause 15.2.1(ii) only with regard to any functionality, processes, End User or data volumes which do not occur or are not used, operated or introduced during the Initial Warranty Period
15.2.2 Without limiting Clause 15.2.1, for the relevant Warranty Period:
(i) a Release will be free from material design and material programming and material implementation errors; and
(ii) a Release will meet in all material respects the Statement of Release Requirements to give Centrica the capability to achieve competitive advantage and the System will be capable of providing the Benefits.
15.3 Warranty Process
The Parties shall agree, prior to 31 July 2002 or (if earlier) the Acceptance Date for Release 1, a process for the notification and rectification of claims under Clauses 15.1.1, 15.2.1 and 15.2.2 including processes for (i) the categorisation of such warranty claims as being within the scope of Clauses 15.1.1, 15.2.1 or 15.2.2 (ii) the prioritisation of and tracking of such claims, and (iii) acceptance by Centrica of rectifications and/or work arounds delivered by Accenture and if the Parties fail to agree such a process within a reasonable time, the matter shall be referred to the Dispute Resolution Procedure.
15.4.1 Accenture will fix Material Defects and Fundamental Defects to the level of effort set out in this Clause 15.4 during the relevant Warranty Period.
15.4.2 Material Defects
Upon being notified by Centrica of a Material Defect Accenture shall promptly take all steps reasonably necessary to correct the Material Defect breach provided always that for the avoidance of doubt in no event shall the cost spent on fixing (being calculated on either the Time and Materials Basis or the Maintenance Daily Rate, whichever is relevant to the appropriate personnel being used) exceed the cap on liability set out in Clause 16. This shall constitute Accenture's entire liability and Centrica's sole and exclusive remedy for a Material Defect. For the avoidance of doubt, the only situation in which Centrica shall have a claim for damages for a Material Defect shall be if Accenture does not promptly take all steps reasonably necessary to correct the breach, and nothing in this Clause 15.4.2 shall remove Centrica's right to terminate this Agreement in accordance with its terms.
15.4.3 Fundamental Defects
Upon being notified by Centrica of a Fundamental Defect Accenture shall do what a commercial, reasonable and prudent organisation using the System to carry on its business would do when acting in its own best interests (having due regard to the costs necessary and benefits likely from correcting the Fundamental Defect) provided always that in no event shall the cost spent on fixing (being calculated on either the Time and Materials Basis or the Maintenance Daily Rate, whichever is relevant to the appropriate personnel being used) exceed the cap on liability set out in Clause 16. This shall constitute Accenture's entire liability and Centrica's sole and exclusive remedy for a Fundamental Defect. For the avoidance of doubt, the only situation in which Centrica shall have a claim for damages for a Fundamental Defect shall be if Accenture does not promptly use the endeavours set out in this Clause 15.4.3 to correct the breach and nothing in this Clause 15.4.3 shall remove Centrica's right to terminate this Agreement in accordance with its terms.
15.4.4 Reduction in Cap
The effort expended by Accenture in meeting its obligations under this Clause 15 will be calculated on either the Time and Materials Basis or the Maintenance Daily rate, whichever is relevant to the appropriate personnel being used, and will be treated as liability of Accenture and will count towards and reduce the aggregate liability cap set out in Clause 16. Accenture shall agree an action plan for fixing particular breaches of warranties with Centrica, implement such plan and keep Centrica informed as to the amount of money spent.
15.4.5 Data and Documentation
Notwithstanding Accenture's obligations under Clauses 15.1.1, 15.2.1 and 15.2.2 in relation to defects under Clause 5 (Data Audit, Cleansing, Matching, Conversion and Migration) Accenture will only be obliged to fix errors and to remedy the causes and consequences of such errors and then only errors notified during the Initial Warranty Period. In relation to Documentation defects shall be dealt with in accordance with Clause 7.1.4.
15.4.6 Material Defects and Fundamental Defects caused by Centrica
Accenture shall charge Centrica on a Time and Materials Basis or the Maintenance Daily rate, whichever is relevant to the appropriate personnel being used, for the correction of any Material Defects or Fundamental Defects notified by Centrica to the extent arising from or caused by:-
(i) defects in the Centrica System and/or Legacy System not caused by Accenture;
(ii) Centrica computer operator error or omission after Go-Live; and
(iii) diagnosis and/or rectification of problems not associated with the System and not caused by Accenture.
"Fundamental Defect" means a fundamental breach of Clauses 15.2.1 and/or 15.2.2 and/or 15.1.1(i) (to the extent a breach of Clause 15.1.1(i) would also constitute a breach of Clauses 15.2.1 and 15.2.2 had it occurred during the Warranty Period) in relation solely to the release(s) relating to the Billing System (currently planned to be Release 3) which causes a severe adverse effect on the British Gas Business;
"Material Defect" means a breach of Clauses 15.1.1 (i) (to the extent a breach of Clause 15.1.1(i) would also constitute a breach of Clauses 15.2.1 and 15.2.2 had it occurred during the Warranty Period), 15.2.1 and/or 15.2.2 which has or is likely to have an adverse effect on the British Gas Business, and which is not a Fundamental Defect;
15.2 Release Warranties
15.2.1 Subject as provided below Accenture warrants to Centrica that
(i) for the duration of the Warranty Period:
(d) each Release will comply in all material respects with its Statement of Release Requirements separately and when combined with the previously delivered Releases; and
(e) completion of each Release will not materially adversely affect functionality achieved in any previously delivered Releases;
(ii) in respect of the Release(s) which implement the Billing System (currently planned to be Release 3), for the duration of the Warranty Period:
(a) each Release will comply in all material respects with its Statement of Release Requirements separately and when combined with the previously delivered Releases; and
(f) completion of each Release will not materially adversely affect the functionality achieved in any previously delivered Releases.
15.2.2 Without limiting Clause 15.2.1, for the relevant Warranty Period:
(i) a Release will be free from material design and material programming and material implementation errors; and
(ii) a Release will meet in all material respects the Statement of Release Requirements to give Centrica the capability to achieve competitive advantage.
15.3 [Not used].
15.4 Level of Effort
15.4.1 Accenture will fix Fundamental Defects to the level of effort set out in this Clause 15.4 during the relevant Warranty Period.
Accenture shall have no obligation to fix Material Defects during the Warranty Period, but has agreed to fund the fixing of Material Defects and any other defects caused by Accenture that are not Fundamental Defects, by Centrica that might arise during the Warranty Period, which defects shall be determined by reference to the scope definition document set out in Schedule 21 and, in relation to Material Defects by reference to Clause 15.2 ("Defects") in the following circumstances and subject to the following conditions:
(i) the Centrica JAM Team (funded solely by Centrica) will comprise a 30 Full Time Equivalents team ("the Fix Team") which are intended to be sufficient to fix Defects that might arise during the Warranty Period (for the avoidance of doubt, this is in addition to the capacity provided by Accenture and Centrica for the Maintenance Release Development Services;
(ii) "Full Time Equivalents" for the purposes of this Clause 15 means an appropriately qualified, productive and skilled person working a 8 hour day (where productive means the expenditure of no more than an average of 5 days per Defect);
(iii) in the event that average effort required to fix such Defects exceeds 30 Full Time Equivalents then Centrica shall pay for such additional resource up to a cost of £100,000 and thereafter Accenture shall pay Centrica for such additional resource, in each case on the basis of hours worked multiplied by £460 per 8 hour period worked and lesser periods shall be prorated accordingly;
(iv) the additional effort for the purpose of this Clause 15.4.2 shall not include and Accenture shall not pay for time spent by Centrica on the following activities;
(a) business effort;
(b) design authority;
(c) management;
(d) merge of fixes into future code stream;
(e) Change requests;
(v) the additional effort for the purposes of this Clause 15.4.2 shall only be payable by Accenture where:
(a) Centrica has used reasonable endeavours to confirm that the code change required is to remedy a Defect rather than to implement a change to an agreed design;
(b) there is reasonable evidence that the Defect was present in the code as at 23 December 2005 as a result of actions by Accenture or that the fix effort is required to remedy a Defect caused by the implementation of a Change Request by Accenture in any of RJ313, 314, 314.2 and 315;
(c) Centrica has used reasonable endeavours to accurately prioritise the impact of the Defect in accordance with the classifications set out in (f) below;
(d) Centrica has provided adequate time reporting of effort spent on fixes of Defects;
(e) if within a calendar month Centrica is at any stage likely to exceed 30 Full Time Equivalents in order to fix Defects, Centrica shall promptly advise the Accenture Client Partner;
(f) Only Categories P1, P2, P3 or clusters of P4 as defined below shall be included:
| Fault Priority | Abbreviation | Definition |
| Priority 1 | P1 | Fault is of such severity that activities cannot continue at any level. (All users out). |
| Priority 2 | P2 | i) Fault prevents an entire business process from being completed or, ii) Prevents a team of business users from performing their role in its entirety. |
| Priority 3 | P3 | Fault impacts designed process so significantly that the workarounds required to complete a process are not sustainable at volume ramp up. |
| Priority 4 | P4 | Fault impacts the designed process and requires workaround to complete, however in isolation there is no risk to volume ramp up |
(g) Centrica is managing the fix team effectively and efficiently so as to minimise as far as reasonably practicable the average effort required to fix Defects and the utilisation of FTEs in any month.
(vi) The payment obligation set out in this Clause 15.4.2 shall be Accenture's sole liability and Centrica's sole remedy with respect to Defects.
(vii) The Parties shall meet on a monthly basis to review the number of Defects and effort expended to fix such Defects.
(viii) Any invoices delivered by Centrica shall be payable by Accenture within 30 days of receipt.
Upon being notified in writing by Centrica of a Fundamental Defect (and subject always to Centrica having provided such analysis and detail as is reasonably practicable as to its reasons for believing there is a Fundamental Defect in relation to Release 3B) Accenture shall do what a commercial, reasonable and prudent organisation using the System to carry on its business would do when acting in its own best interests (having due regard to the costs necessary and benefits likely from correcting the Fundamental Defect) provided always that in no event shall the cost spent on fixing (being calculated on a Time and Materials Basis, and for the purposes of calculating Centrica's time and materials costs for fixing Fundamental Defects Centrica shall only be entitled to multiply the number of days worked by relevant Centrica personnel as follows: £150 per day for business personnel; £550 per day for business IS personnel; and £460 per day for Centrica JAM personnel) exceed the cap on liability set out in Clause 16. This shall constitute Accenture's entire liability and Centrica's sole and exclusive remedy for a Fundamental Defect. For the avoidance of doubt, the only situation in which Centrica shall have a claim for damages for a Fundamental Defect shall be if Accenture does not promptly use the endeavours set out in this Clause 15.4.3 to correct the breach and nothing in this Clause 15.4.3 shall remove Centrica's right to terminate this Agreement in accordance with its terms.
The effort expended by Accenture in meeting its obligations under this Clause 15 will be calculated on a Time and Materials Basis, and will be treated as liability of Accenture and will count towards and reduce the aggregate liability cap set out in Clause 16. Any moneys paid by Accenture to Centrica pursuant to Clause 15.4.2 shall count towards and reduce the aggregate liability cap set out in Clause 16. Accenture shall agree an action plan for fixing particular breaches of warranties with Centrica, implement such plan and keep Centrica informed as to the amount of money spent.
Notwithstanding Accenture's obligations under Clauses 15.1.1, 15.2.1 and 15.2.2 in relation to defects under Clause 5 (Data Audit, Cleansing, Matching, Conversion and Migration) Accenture will only be obliged to fix errors and to remedy the causes and consequences of such errors and then only errors notified up until 30 June 2006. In relation to Documentation defects shall be dealt with in accordance with Clause 7.1.4.
Accenture shall charge Centrica on a Time and Materials Basis, for the correction of any Fundamental Defects notified by Centrica to the extent arising from or caused by:-
(i) defects in the Centrica System and/or Legacy System not caused by Accenture;
(ii) Centrica computer operator error or omission after Go-Live; and
(iii) diagnosis and/or rectification of problems not associated with the System and not caused by Accenture.
Release of Accenture: Centrica and each of its affiliates hereby release Accenture, and each of its respective subsidiaries, divisions, parents and affiliated corporations or partnerships, and each of their directors, officers, shareholders, agents, employees, partners, representatives, attorneys, successors and assigns, from the "Released Claims".
The Released Claims were then set out with the proviso:
provided, however, that Released Claims shall not include: (i) ….(ii) …(iii) …or (iv) any right accruing to Centrica now or in the future to pursue the warranty provisions in Clauses 5.2.2, 7.1.3, 7.1.4 and 15.2 to 15.4 hereof (the "Warranty Provisions"), in relation to a Release or Deliverable under a Release, is expressly reserved.
For the purposes of this Clause 21.3, the commission of a "material breach" shall include the commission of a series of related or unrelated breaches of this Agreement which, taken together, constitute a material breach of this Agreement.
The emergence of problems with the new billing system
The Notification Letter of 12 February 2007
The information set out in this letter represents our best understanding and analysis of the matters which are currently causing us extreme concern. At this stage we cannot rule out the possibility that other Fundamental Defects will emerge as we further implement and use the System… Furthermore, at this stage we are not in a position to fully particularise all aspects of defects we have identified, although we have given here what particulars are reasonably practicable and clearly further issues are likely to arise….
In accordance with Clause 15.4.3 of the JPA Accenture is required to commit to the process of identifying remedies and implementing them, failing which Centrica will make its own arrangements to do so and recover the costs from Accenture by way of damages….
Accenture's refusal to take any steps under Clause 15.4.3
Centrica's claim against Accenture
A. There were 6 fundamental breaches of warranty:-
(i) the Exceptions Error; and/or
(ii) the Automation Error; and/or
(iii) the combination of the Exceptions Error and the Automation Error; and/or
(iv) the individual material errors in combination; and/or
(v) the combination of the individual material errors which manifested or evidenced the exceptions error; and/or
(vi) the combination of the individual material errors which manifested or evidenced the automation error.
B. Each of the above six fundamental breaches of warranty caused a severe adverse effect on the British Gas Residential Business such that each constituted a Fundamental Defect.
C. Alternatively, the six fundamental breaches of warranty in combination caused a severe adverse effect on the British Gas Residential Business such that there were one or more Fundamental Defects.
Accenture's contentions (in brief)
The Preliminary Issues to be decided
1. On a true construction of the Amended JPA:-
1.1 In order for there to be a Fundamental Defect, does each individual breach of warranty proved by Centrica have to constitute a "fundamental" breach of warranty, or can a "fundamental breach of warranty be constituted by the breaches of warranty proved by Centrica?
1.2 In order for there to be a Fundamental Defect can the consequences of individual fundamental breaches of warranty alleged by Centrica be aggregated for the purposes of determining whether there was a severe adverse effect on the British Gas Business in order to constitute a "Fundamental Defect" or must an individual fundamental breach of warranty by itself cause a "severe adverse effect" without regard to the overall effect of different breaches?
2. In order "for a "fundamental" breach of warranty" to constitute a "Fundamental Defect", must the breach have caused an actual "severe adverse effect" on the British Gas Business before it was notified to Accenture under Clause 15.4.3? Or was it sufficient if, at the time of notification, the breach had started to cause or would cause a "severe adverse effect" if left unremedied?
3. On a true construction of the Amended JPA, to what extent is it legitimate to take into account the parties' prior knowledge of alleged defects in Release 3 when determining whether the letter of 12 February 2007 was a valid notice, in order to interpret it?
4. In order to provide valid notification under Clause 15.4.3, was Centrica required to state in the notification:
(i) what warranties it was alleging had been breached; and/or
(ii) with what requirements of the SoRR it was alleged that Release 3B did not materially comply; and/or
(iii) the nature of the alleged material design, programming or implementation errors; and/or
(iv) the severe adverse effect that was alleged to have resulted from each breach?
5. What is the correct basis for calculating the damages which can be claimed by Centrica for a Fundmental Defect under the terms of the Amended JPA? In particular:-
5.1 Is Centrica entitled to recover as damages its costs incurred in relation to the alleged Fundamental Defect before Accenture was notified of the alleged Fundamental Defect?
5.2 Are the losses recoverable by Centrica in relation to any alleged Fundamental Defect limited to those suffered after the expiry of a reasonable time for Accenture to comply with its obligations under Clause 15.4.3 following notification?
5.3 Is Centrica's entitlement to recover losses limited to losses calculated on a "Time and Materials Basis" in accordance with Clause 15.4.3?
6. In respect of the damages claim and the classes of loss claimed by Centrica in Schedule A, are any of those claims of loss excluded under Clause 16.2 of the Amended JPA? If so, are they nevertheless (as a matter of principle) recoverable as sums expended in mitigation of Centrica's losses?
Issues 1 to 4
Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
The factual matrix
The contractual context
The Centrica Group (hereinafter defined), of which Centrica is a member, has instigated a programme to improve its ability to provide excellent customer service, retain customers, cross sell to them within the Centrica Group and increase market share. This programme is referred to as "the Jupiter Programme". As part of implementing the Jupiter Programme, Centrica intends to implement a number of new systems and processes in the British Gas Business (as hereinafter defined), including new integrated customer relationship management and billing systems. The implementation of these new systems and processes and other services to be performed by Accenture under this Agreement are referred to as "the Jupiter Project", and is the subject of this Agreement.
Recital (D)
Accenture has represented that it has expertise and skill advising on the acquisition of computer hardware and software, systems integration and maintenance, project management and the provision of services envisaged by this Agreement and Centrica has already engaged Accenture to provides its services in the past. The parties have since discussed and negotiated the implementation of the Jupiter Project and prior to the signature of this Agreement, Accenture has performed services for Centrica in relation to the Jupiter Project under various arrangement letters…
Recital (E)
The Parties have agreed to work in a collaborative manner and the success of the Project will depend upon both parties performing their obligations under this Agreement. To this end, the Parties recognise that the following behaviours will be encouraged:
(i) mutually respect and trust each other;
(ii) act openly and honestly towards each other;
(iii) accept joint responsibility for finding appropriate solutions to problems as set out in this Agreement;
(iv) work together to achieve mutually beneficial objectives; and
(v) respect the balance between the home and work lives of each Party's staff who work on the Project.
Recital (F)
Accenture will assume responsibility for the implementation and success of the Jupiter Project for the cost set out in Clause 1.4.1 and will ensure that:
(i) the System meets the Business Capabilities as reflected in the Statement of Release Requirements;
Recital (H)
Accenture has represented that a project like the Jupiter Project would result in the delivery of financial benefits to Centrica in the form of reduced overheads, greater market share and increased income generation.
Clauses 1.4 and 1.5[1]
Clause 1.4
Scope and Objectives
The objectives of the Jupiter Project are:
1.4.1 to develop and implement the Business Capabilities (including Hardware and Third Party Software) at the total cost set out in Schedule 3;
1.4.3 for Accenture to provide the Services to Centrica for the benefit of the British Gas Business and Centrica IS and to meet the Business Capabilities, which include improving Centrica's ability to provide excellent customer service, improving customer retention and cross selling, in each case at reduced costs;
Clause 1.5
The parties intend to work together in good faith in accordance with their respective obligations set out in this Agreement to achieve the objectives of the Jupiter Project as set out in Clause 1.4 above. The parties will use reasonable endeavours to help, co-operate and liaise with each other to facilitate the provision of the Services and swift resolution of any issues provided that nothing in this Clause 1.5 is intended to diminish or affect either party's other obligations under this Agreement.
Clause 2 Accenture's Obligations
2.1 Accenture must …..
2.1.1[2] for each Release produce a Statement of Release Requirements to reflect the Business Capabilities in accordance with Clause 3;
Clause 3[3]
3.2 Preparation of Statement of Release Requirements
3.2.1 The Target Release Schedule will be prepared by Accenture and agreed by the Parties by 31 May 2002 and will then form Schedule 1, Appendix 1.
3.2.2 In relation to each Release, Accenture shall prepare and deliver, with Centrica's input and assistance (as provided pursuant to Clause 12.2 and 12.3), in accordance with the Project Plan (as amended from time to time by written agreement between the Parties and approved by the Jupiter Steering Group) a draft Statement of Release Requirements including:
(i) an updated Capability Statement;
(ii) the detailed requirements which will reflect the Business Capabilities for that Release;
(vii) the objectives of a Work Package;
(viii) the total approved cost of that Release (including Hardware and Third Party Software);
(x) the desired service levels (including the Service Levels) and non-functional characteristics for that Release;
(xi) the projected Benefits to be realised by that Release, the timing of such realisation and any relevant revised baselines from which to measure the Metrics (as described most fully in section 4.3.1(iii) of Schedule 3); and
(xii) the Data Migration Services contemplated by Clause 5 to be performed that Release.
3.2.8 For the avoidance of doubt, Accenture must deliver the non-functional requirements set out in section 3.3 of Schedule 1 in every Release (having regard to the introductory statement in section 3.3 of Schedule 1) except to the extent:
(i) any non-conformance with such non-functional requirements is set out in the Capability Statement for a particular Release; and
(ii) the Jupiter Steering Group has accepted such non-conformance in writing.
3.2.9 For the avoidance of doubt, other than to the extent any non-conformance, omission or inconsistency between the Statement of Release Requirements and the Business Capabilities is specifically set out in the relevant Capability Statement and accepted by the Jupiter Steering Group in accordance with this Clause 3, Accenture shall be obliged to ensure that the Statements of Release Requirements for all the Releases, when taken together, fully reflect all the Business Capabilities.
Issue 1
1. On a true construction of the Amended JPA:-
1.1 In order for there to be a Fundamental Defect, does each individual breach of warranty proved by Centrica have to constitute a "fundamental" breach of warranty, or can a "fundamental" breach of warranty be constituted by the breaches of warranty proved by Centrica?
1.2 In order for there to be a Fundamental Defect can the consequences of the individual fundamental breaches of warranty alleged by Centrica be aggregated for the purposes of determining whether there was a severe adverse effect on the British Gas Business in order to constitute a "Fundamental Defect" or must an individual fundamental breach of warranty by itself cause a "severe adverse effect" without regard to the overall effect of different breaches?
Issue 2
In order "for a "fundamental" breach of warranty" to constitute a "Fundamental Defect", must the breach have caused an actual "severe adverse effect" on the British Gas Business before it was notified to Accenture under Clause 15.4.3? Or was it sufficient if, at the time of notification, the breach had started to or would cause a "severe adverse effect" if left unremedied?
Issues 3 and 4
3. On a true construction of the Amended JPA, to what extent is it legitimate to take into account the parties' prior knowledge of alleged defects in Release 3 when determining whether the letter of 12 February 2007 was a valid notice, in order to interpret it?
4. In order to provide valid notification under Clause 15.4.3, was Centrica required to state in the notification:
(i) what warranties it was alleging had been breached; and/or
(ii) with what requirements of the SoRR it was alleged that Release 3B did not materially comply; and/or
(iv) the nature of the alleged material design, programming or implementation errors; and/or
(v) the severe adverse effect that was alleged to have resulted from each breach?
Issue 5
5. What is the correct basis for calculating the damages which can be claimed by Centrica for a Fundmental Defect under the terms of the Amended JPA? In particular:-
5.1 Is Centrica entitled to recover as damages, its costs incurred in relation to the alleged Fundamental Defect before Accenture was notified of the alleged Fundamental Defect?
5.2 Are the losses recoverable by Centrica in relation to any alleged Fundamental Defect limited to those suffered after the expiry of a reasonable time for Accenture to comply with its obligations under Clause 15.4.3 following notification?
5.3 Is Centrica's entitlement to recover losses limited to losses calculated on a "Time and Materials Basis" in accordance with clause 15.4.3?
Issue 6
In respect of the damages claim and the classes of loss claimed by Centrica in Schedule A, are any of those claims of loss excluded under Clause 16.2 of the Amended JPA? If so, are they nevertheless (as a matter of principle) recoverable as sums expended in mitigation of Centrica's losses?
16.2 Consequential Loss
Subject to Clause 16.7 or as otherwise expressly provided in this Agreement, in no event shall either Party be liable whether in contract, tort (including negligence) or otherwise in respect of any of the following losses or damages:
16.2.1 loss of profits or of contracts arising directly or indirectly;
16.2.2 loss of business or of revenues arising directly or indirectly;
16.2.3 any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential or punitive;
save that this Clause 16.2 shall not apply in the event that either party terminates this Agreement other than in accordance with Clause 21.
"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of it."
Gas Distribution charges (in the region of) of £18,700,000
Compensation paid to customers: £8,000,000
Additional Borrowing Charges: £2,000,000
Cost of chasing debt not due: £387,287
Additional stationery and correspondence costs: £107,120
Costs of Mitigation
CONCLUSION
4. (ii) No
4. (iii) No
4. (iv) No
5.1 Yes
5.2 No
5.3 No
Note 1 Following the Jupiter Programme Contract Amendment No 1, the provisions contained in clauses 1.4 and 1.5 applied only in respect of the warranties contained in clause 15. [Back] Note 2 Following the Jupiter Contract Amendment No.1, the parties were discharged from the obligations contained in this clause. [Back] Note 3 Following the Jupiter Contract Amendment No.1, the parties were discharged from the obligations contained in this clause. [Back]