Spectrum v MCI Worldcom

Out-Law Guide | 14 Nov 2007 | 7:08 pm | 8 min. read

An application for specific performance was granted in circumstances where a large telecommunications company breaches a contract with a small reseller, on the basis that since the small company's business depended upon the contract, it was appropriate to award specific performance of the contract for 3 weeks in effect to allow the small company the opportunity to find an alternative carrier.

Spectrum Telecom Limited v MCI Worldcom International Inc. 1999

  • LTL 14/12/99 (Unreported elsewhere)

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Facts

MCI Worldcom is, of course, the well known US based company with a global cable telephone network.  It is a substantial company, with a large presence in the UK and it provides telecommunications services, mostly to corporate customers.  It is one of the telecommunications companies commonly known as a “carrier”.

Spectrum, on the other hand, is a small company, of the sort known as a “reseller”.  Such an enterprise buys on a wholesale basis from a carrier the right to use the carrier’s network for the sending of telephone calls, this being called “air-time”.  Obviously, the reseller sells this air-time on to the public at a profit.  Spectrum did this by the sale of pre-paid phone cards which were put on sale by a network of distributors.

MCI Worldcom owns a vast global network of switches, connected by fibre optic cables.  At each location of a switch, there will be switches of any relevant resellers.  A customer of a reseller will access the reseller’s switch when they make a phone call, and be routed by the carrier’s switch.  On making such access to the reseller’s switch, the customer dials a PIN, and the number of the person to whom they are making the telephone call.  The telephone call is then routed to the carrier’s switch, and thence to the destination of the call.  This basic outline of the facts was crucial to the extremely complicated (and disputed) technical evidence in the case, some of which was discussed in the judgment.

Spectrum launched its phone cards in November 1998, and in June 1999 bought two switches from another reseller for its own use.  Spectrum was keen to negotiate a contract with MCI Worldcom, and did so in July 1999.   There were a number of provisions that were relevant to the dispute .

The first task was to reconfigure one of Spectrum’s switches for use, this switch being rather more modern than the other one.  MCI Worldcom undertook the work, but technical problems arose, leading to the raising of documents known as “trouble tickets”  by MCI Worldcom.  These documents were important in the evidence and basically consisted of a description of the steps taken by an engineer to deal with a problem, together with the times of the steps taken.

The major problems were dealt with by 28 July 1999, with test calls being made and the circuits being then handed over to Spectrum.  Spectrum then began to distribute its phone cards, which were set to route calls through the switch just handed over.  In fact, Spectrum withdrew from distribution those cards programmed for the other switch.  Calls started to be made on the new switch almost immediately.

Almost simultaneously with the handover, MCI Worldcom raised a number of invoices for a substantial sum on Spectrum.  It appears that there had been some sort of clerical or administrative error, as these sums should have been invoiced to another reseller – the one, in fact, that had sold the switches to Spectrum.  Spectrum wrote twice to point out the error, but MCI Worldcom did not answer.  It ended with Spectrum’s customers finding it impossible to make phone calls on Spectrum’s cards as from 5 August 1999.  Spectrum complained by phone that same day and a letter went from its solicitors as well.

The lines remained down, and MCI Worldcom did not respond to the letter from Spectrum’s solicitors.  Spectrum therefore applied for and was granted on 10 August 1999 an interim injunction requiring MCI Worldcom to restore service.  The following day, 11 August 1999, Spectrum commenced proceedings for breach of contract and also for specific performance of the agreement.

Little was forthcoming from MCI Worldcom, but on 13 August 1999, service was restored, albeit with some problems.  Without “trouble tickets”, it was not possible to say what was being done on the technical side.  Indeed, Spectrum was for a few days uncooperative with MCI Worldcom.  However, by 17 August 1999, substantial service was restored.  A further hearing took place in October, and the trial took place on 17 and 18 November 1999.

MCI Worldcom denied being in breach of contract by the withdrawal of service, but said it was due to technical problems in Spectrum’s switch.  This gave rise to a consideration in the judgment of the total evidence led by each party, including the evidence of one independent expert for each party. 

Judgment

MCI Worldcom did not lead any evidence from persons actually involved with the work on the switch.  The independent experts differed in their opinions as to the cause of the disconnection.  The upshot of this was that there was no certain way of saying where the fault lay.

The learned judge looked at all the evidence and concluded that there were minor faults with Spectrum’s equipment, but the major problems lay on MCI Worldcom’s side.  The learned judge went on to hold that MCI Worldcom was in breach of clause 6.1 of the agreement as it had failed to use all reasonable endeavours to correct the fault as reported on 5 August 1999.  If it had, the fault would have been corrected by the end of the same day i.e. within a period of some 12 hours.  MCI Worldcom was thus liable for the lack of service between 5 and 13 August 1999.  There was no liability for the period during which Spectrum did not cooperate (between 14 and 17 August 1999).

The learned judge went on to look at the interesting question of whether a contract such as this could be specifically enforced.  MCI Worldcom took the view that such an award was wrong in principle and that damages were an entirely adequate remedy, even if damages were payable because MCI Worldcom decided to act deliberately in breach of contract.  Spectrum, on the other hand, claimed that damages would not, in effect, be an adequate remedy, as any failure to perform by MCI Worldcom might well mean the end of its business.

Jackson J reviewed the recent decision of the House of Lords in Co-operative Insurance Limited v Argyll Stores (Holdings) Limited [1998] AC 1.  In that case, the House of Lords refused to order specific performance of a covenant to keep open a particular supermarket.  The learned judge concluded that he had a discretion whether or not to order specific performance, based on the history of the remedy, and its origin in the Court of Chancery.  He observed that the contract had some 7½ months to run and asked what would happen if MCI Worldcom met further technical difficulties, or sought to terminate for non-payment: such matters would likely have to be determined in the context of contempt proceedings.

In the result, the learned judge made an order for specific performance only for a period of 3 weeks as being the best justice, taking all factors into account.

Commentary

Apart from the complicated facts, and what must have been exceptionally complex expert evidence, the case is of interest for a rare illustration of when it may be possible to apply for and obtain an equitable order that a party proceed with a contract.  Such cases are rare in English Law.  In A-G v Colchester Corporation [1955] 2 QB 207, 217 Lord Goddard CJ said

“No authority has been quoted to show that an injunction will be granted enjoining a person to carry on a business, nor can I think that one ever would be, certainly where the business is a losing concern.”

Sweeping words indeed, but expressing the common law’s distaste for such orders, and its strong preference for financial remedies (chiefly damages).  Note that the civil law systems of the continent do not necessarily share this order of priorities, and that courts there are by no means so keen to see a contract unperformed.  Article 1184 of the French Civil Code provides that a victim of breach of contract can either obtain specific performance where possible or requesting termination with an award of damages.  Similar provisions exist in German Law.  The US Uniform Commercial Code provides also for specific performance where commercial needs make it equitable to do so.

The traditional formulation of this rule has always been to ask first if damages were an adequate remedy.  In a commercial context, the answer to this question is nearly always a resounding yes: if goods are not delivered, then the remedy is to go to the market and buy other such goods.  The only context where such would not be the case would be in the case of something unique, and the classic example of this has always been contracts for the purchase of land or an interest in land.

Accordingly, the cases on specific performance in commercial (or at least non-land) contexts were somewhat rare, and tended to be given, if at all, in highly exceptional cases.  Such exceptions included Behnke v Bede (sale of item made to specific order) and Sky Petroleum v VIP Petroleum (alternative sources for petrol well nigh impossible in a situation of international petrol shortage).

The decision of the Court of Appeal in Co-operative Insurance Limited v Argyll Stores (Holdings) Limited seemed to mark a new departure for English Law.  This was a decision of a majority (Millett LJ dissenting) and the dissenting judgment is of great interest in re-stating the position as traditionally understood by the common law. 

The House of Lords, quoted by Jackson J in this decision, restored the trial judge’s order in Co-operative Insurance Limited v Argyll Stores (Holdings) Limited.  Lord Hoffman gave the leading judgment and considered the reasons why a court should not give specific performance in the ordinary course.  Difficulty of supervision has been the reason usually given, but he dismissed this as a primary reason.  The real reason was to be found in the means used to enforce such orders – commitment for contempt.  It would be invidious if a business had to be run under the constant threat that contempt proceedings might be commenced.  Similarly, the prospect that repeated applications might be made also made running a business in these circumstance very difficult.

Lord Hoffman distinguished orders to carry on some continuing activity, such as a business, from an order to achieve some particular result (which may require some activity to achieve).  A relevant factor in making any such order in the latter case is that the scope of the obligation should be capable of very precise statement.  The argument of the majority in the Court of Appeal tried to put this another way, by saying that if an obligation was capable of sufficiently precise statement, then specific performance was a possible remedy.  This the House of Lords rejected.

Nor was it, according to Lord Hoffman, decisive that Argyll had acted deliberately in breach of contract.  The real question, as ever, was to look at the compensation that the victim of a breach could look to and not to impose some order on the defendant that was oppressive and out of proportion to the damages that might be recoverable.

The judgment of Jackson J is something of a halfway house. It was possible that, if MCI Worldcom simply “pulled the plug” thereafter, Spectrum might go under.  The result was an order lasting for a further 3 weeks, presumably so that Spectrum could make alternative arrangements, if it thought fit to do so.

As the learned judge said, it all came down to a question of discretion.  Within the confines of the general position as stated in Co-operative Insurance Limited v Argyll Stores (Holdings) Limited, the fact remains that judges have some leeway and orders for specific performance cannot in any case be ruled out even if the order made is for some limited period or with a particular purpose in mind.