In this case a business process outsourcing service provider responded to a notice of termination from its customer by seeking an injunction to prevent the customer from terminating the contract and from otherwise hindering the service provider's continued performance.

Vertex Data Science Ltd v Powergen Retail Ltd

  • PMCLR June 2007

  • [2006] EWHC 1340 (Comm)

  • (2006) 2 Lloyd's Rep 591

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Facts

Vertex Data Science ("Vertex"), is a UK based business process outsourcing service provider.  Powergen Retail Limited ("Powergen") is an electricity supply company.

In 2002 Powergen acquired TXU, another UK electricity utility company.  TXU had outsourced its customer relationship management operations to Vertex earlier in 2002.  In July 2003 Vertex and Powergen signed a new 9 year agreement which replaced the agreement between TXU and Vertex.  Shortly thereafter the relationship between the parties became strained with Powergen alleging various breaches of the agreement.  After a further period of renegotiation the parties agreed a new 7 year deal, in the form of a Master Services Agreement ("MSA"), in April 2005.  The value of the MSA to Vertex was estimated at around £30m in the first year, and approximately £24m per annum in subsequent years.

The new arrangements were no more successful and broke down almost immediately.  Powergen served a termination notice in March 2006 alleging material and repudiatory breaches of the MSA. Vertex denied being in breach and sought an interim injunction to prevent Powergen both from terminating the MSA and otherwise hindering Vertex's performance of the services.  In seeking the injunction Vertex argued that the loss it would suffer in the event of termination, not least in terms of the damage to its reputation, could not be adequately compensated in money.

Judgment

Whilst the judgment recites numerous alleged defects in Vertex's performance (based on Powergen's account) the lawfulness of Powergen's termination was not an issue for Mr Justice Tomlinson to determine.  However the various complaints raised on each side served to demonstrate the extent to which the relationship between the parties had deteriorated.

Powergen pointed to a number of issues which, of their type, are not uncommon in any outsourcing dispute including:

  • allegations that Vertex failed to carry out the services with reasonable care and skill and/or in compliance with Good Industry Practice;
  • a disagreement over who was responsible for performance of a particular service element.  The MSA was silent on the provision of certain debt recovery services.  Vertex denied that it had responsibility until such time as SLAs were agreed (they were not set out in the MSA). Powergen argued that debt recovery was an essential element of an "end to end" outsourced service; 
  • allegations that Vertex adopted an obstructive approach to Powergen-initiated change requests; and
  • Powergen had obtained an apparently damning third party consultancy report on Vertex's call centre operation performance.

Vertex argued that Powergen had no genuine grounds for complaint.  Vertex asserted that Powergen had decided to adopt a new customer services strategy, dealing with its customers directly, and the complaints were nothing more than a pretext to enable Powergen to terminate the MSA.  Vertex further alleged that Powergen had itself not complied with its obligations under the MSA.  To the extent that the services had not been provided to the required standard then Powergen had contributed to this thereby excusing Vertex from liability.   Importantly for the outcome to this application, Vertex alleged that the following implied terms applied to the MSA:

  • that Powergen would provide all such cooperation as Vertex reasonably required to enable it to carry out its obligations under the MSA; and
  • Vertex was not to be liable to Powergen and Powergen was not to be entitled to terminate the MSA to the extent that any failure by the Vertex to discharge its obligations under the MSA was attributable to any failure by Powergen to comply with the above implied duty of co-operation. 

In determining whether to grant the injunction, Mr Justice Tomlinson referred to the complexity and length of the MSA which necessitated "extensive mutual cooperation if it is to work".  At the same time he acknowledged that in some respects the MSA was not sufficiently detailed or was otherwise incomplete in setting out the parties' respective responsibilities. 

Mr Justice Tomlinson determined that an injunction compelling performance of a contract is inappropriate in circumstances where apparently hostile parties would be required to work together to perform the contract.  He considered that it was “unrealistic” to order the parties to cooperate in circumstances where the parties’ relationship had broken down.  He also referred to the lack of clarity regarding the existence of the implied terms upon which Vertex relied.  He stated that:

"In these circumstances I do not consider that it is appropriate to grant injunctive relief which will have the effect of compelling the parties to work together.  Nor do I consider that the terms of the contract are sufficiently precisely defined to indicate to Powergen precisely what is required of it if it is not to prevent or hinder Vertex from performing its functions under the MSA."

Vertex's application therefore failed.  As discussed below, the dispute resolution clause in the MSA contains a provision referring disputes to arbitration rather than litigation.  As a result the ultimate outcome of this dispute, including any determination of the lawfulness of Powergen's termination, will not be in the public domain.

Commentary

This is an outsourcing dispute which has played out, if only partly, in the public arena.  For that reason alone, it is somewhat unusual.  A significant proportion of outsourcing arrangements are either terminated prematurely or renegotiated to better align with the parties' expectations. However the common thread running through all of these "failed" projects is that the parties have resolved their differences privately, either by way of informal discussions, the contractual dispute resolution procedure, alternative dispute resolution or arbitration.  The main reasons for this are obvious - the supplier has a reputation to maintain and the customer will not necessarily want to publicise the white elephant which the outsourcing arrangement has become.  This case is thought to be the first reported instance of an outsourcing dispute being litigated in the UK.

Perhaps even more surprising, and the second point of interest about this case, is that injunctive proceedings were initiated by Vertex.    If Powergen's termination was unlawful then Vertex would have an action for repudiatory breach and could, subject to the contractual provisions, seek to recover any losses flowing from the termination.  Vertex's motivating factor for seeking the injunction appears to have been to protect its reputation by preventing what it considered to be an unjustified termination for cause.  In arguing its case Vertex stated that termination of the MSA would have to be disclosed in tenders for certain public sector contracts, which could place it at a disadvantage in securing the work.  The judge observed that this concern was now perhaps misplaced as the damage was effectively already done.  Vertex argued that if an injunction were granted it could continue to complete tender documents without referencing the purported termination by Powergen.  Mr Justice Tomlinson found this a surprising suggestion particularly where Vertex appeared to rely upon Powergen as a key reference client.

An important question arising from this case is whether injunctive relief would have been similarly denied if it been Powergen seeking to prevent Vertex from terminating the MSA.  In those circumstances the detailed interdependencies upon which any outsourcing arrangement is based would still exist and the potential task for the court in observing the compliance with the agreement of the party subject to the injunction would undoubtedly be greater, as the suppler bears the vast majority of the performance obligations.  This issue has yet to be decided however it is perhaps likely that, in weighing up where the balance of convenience lies in an application for an injunction by a customer, the courts may more readily grant the injunction preserving the status quo until a determination of the overarching dispute, particular where significant damage would otherwise be caused to the customer's business.

A final noteworthy point in this case, particularly for contract drafters, is that the MSA contained an arbitration clause which expressly provided that certain powers, including the power to order specific performance, make declarations, and grant injunctions would not be available to the arbitrator. The clause did however provide for the right to resort to the courts for "relief in relation to a genuine dispute between the Parties which is not capable of being referred to this Clause 19 [the Arbitration clause] for resolution." Powergen argued that as Vertex had agreed to submit disputes to arbitration, and agreed that the arbitrator should have no power to grant injunctive relief, it was attempting to evade its bargain by seeking both an interim and a permanent injunction from the court.  In considering the operation of the clause Mr Justice Tomlinson stated:

"the parties have not by agreeing to subject their disputes to an arbitrator whom they have expressly deprived of the power to order specific performance, make declarations and grant injunctions, agreed also that those remedies should simply be unavailable. I reach this conclusion with reluctance and hesitation because it ascribes to the parties an intention which I do not regard as entirely sensible. However the parties must be the judges of what it was sensible for them to agree, circumstanced as they were in 2005, not me."

This highlights the importance of ensuring that the dispute resolution provisions in any contract, and certainly in one as business critical as an outsourcing agreement, are carefully drafted and not simply regarded as standard boilerplate terms.