In Disclosure and Barring Service v Tata Consultancy Services Ltd the Court of Appeal considered the interpretation of a condition precedent to uphold the Technology and Construction Court's decision and find against an employer seeking liquidated damages.

Background

In December 2012, Disclosure and Barring Service ("DBS"), the public body responsible for issuing disclosure checks in England and Wales, entered into an agreement with Tata Consultancy Services ("TCS"), an IT services consultancy, to modernise DBS's manually intensive paper-based disclosure checks by developing a new IT system.

The project faced significant delays and issues, leading to claims and counterclaims between the parties for delay damages and losses caused by alleged software defects. TCS raised a claim against DBS for breach of contract valued at Ł110.2 million, and a claim of Ł14.3 million for underpayment. DBS counterclaimed for delay and defect losses totalling Ł108.7 million.

On interpretation of a liability clause, the Technology and Construction Court ("TCC") found that TCS's liability was capped at Ł10 million, and that a separate condition precedent applied to the entitlement of both parties. TCS was awarded Ł4.8 million after set-off. DBS was subsequently granted leave to appeal on the existence of the condition precedent at clause 6.1, which it claimed prevented DBS from being able to recover Delay Payments (akin to liquidated damages).

Conditions precedent

A condition precedent is a contractual term that requires a specific event or action to occur before a party's obligation or right is enforceable. The condition precedent was whether DBS's right to claim Delay Payments under clause 6.2 was contingent upon its compliance with clause 6.1, which required the prompt issuance of a Non-conformance Report ("NCR") following failure to meet an acceptance test or milestone due to TCS's default:

"6.1If a Deliverable does not satisfy the Acceptance Test Success Criteria and/or a Milestone is not Achieved due to the CONTRACTOR's Default, the AUTHORITY shall promptly issue a Non-conformance Report to the CONTRACTOR categorising the Test Issues as described in the Testing Procedures or setting out in detail the non-conformities of the Deliverable where no Testing has taken place, including any other reasons for the relevant Milestone not being Achieved and the consequential impact on any other Milestones. The AUTHORITY will then have the options set out in clause 6.2."

The Court of Appeal agreed with the TCC's ruling that clause 6.1 was a condition precedent. DBS's failure to fulfil the condition precedent (by failing to provide the NCR) meant that the remedies contained within clause 6.2, including the right to claim Delay Payments, were not available to DBS.

The appeal judgment addressed the question of how to identify and interpret conditions precedent clauses. The main arguments can be categorised as follows:

1. The language of clause 6.1

DBS complained that:

  1. the language of clause 6.1 was not clear enough to suggest that, without an NCR, clause 6.2 did not apply;
  2. clause 6.1 did not contain the words, 'condition precedent'; and
  3. the TCC ruling relied too heavily on the 'if-then' phrase.

In his judgment, Lord Coulson explained that the words 'condition precedent' are not a necessary component of a condition precedent clause, and instead it needs to be considered "whether the words, in their context, make it plain that there is a conditional effect: that unless one step is taken, you are not entitled to the relief envisaged at step two". In his opinion, clause 6.1 achieved the required conditionality.

With regard to DBS's 'if-then' argument, DBS relied upon the two stages at clause 6.1, the first being the failure to satisfy the "Acceptance Test Success Criteria" or reach a "Milestone" date, and the second being to issue an NCR. DBS argued that only the first stage was provisional on an NCR being issued. DBS also argued that the use of the first comma in clause 6.1 meant that although an NCR was mandatory, it was not a condition precedent.

Lord Coulson rejected both arguments, finding that the NCR did have a purpose, being to explain the issues leading to delay and to aid the parties as they worked together to resolve them. The purpose of the comma was solely to break up an otherwise lengthy sentence.

2. Lack of clarity

Lord Coulson rejected DBS's submission that the use of "promptly" was too vague to be given effect, noting that the purpose of the clause was to avoid rigidity and provide DBS with time to provide an appropriate NCR. Therefore, a condition precedent is not dependent upon a precise timescale.

DBS also argued that the TCC gave too much weight to the use of the word "shall". Lord Coulson disagreed, noting that "shall" created a mandatory obligation linked to the "if" contained at 6.1. Alone, "shall" did not bring the pre-condition into existence, but it did when taken with "if".

3. Inconsistent language

Lord Coulson considered DBS's assertion regarding inconsistent language between (i) a clearly defined condition precedent and (ii) one not so clearly defined. DBS argued that because the terms used to narrate a condition precedent in clause 5.6 were different to those in 6.1, the words used in 6.1 meant something less. DBS relied upon Prestcold (Central) Ltd v Minister of Labour [1969] 1 WR 89 ("Prestcold"), where the judge noted that this difference could be a consideration in the determination of a condition precedent.

Lord Coulson held that Prestcold concerned the qualification of a statutory provision, so the reasoning could not easily be applied to a commercial contract. In this instance, the court's primary task was to give meaning to the words "actually used", and not the inconsistency. Therefore, although the words were different, the clauses were both clearly conditions precedent.

Key takeaways

    While the Court of Appeal's decision does not provide new law, it does serve as a strong reminder of the importance of clarity in drafting.
  • The court will give effect to the words that are "actually used", and it is therefore imperative that conditionality is apparent, regardless of precise timescales or consistency across the contract. There is no requirement to include the words "condition precedent" in a clause, but the use of these words would assist if the clause is intended to be a condition precedent.
  • Requiring something to be done 'promptly' will not undermine a condition precedent clause, but having a precise deadline will always aid clarity.
  • The ruling also highlights the importance of adhering to contractual provisions, so as to avoid losing an entitlement.

    • The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mr Iain Drummond
Shepherd and Wedderburn LLP
1 Exchange Crescent, Conference Square
Edinburgh
EH3 8UL
UNITED KINGDOM
Tel: 131228 9900
Fax: 131228 1222
E-mail: paulina.barela@shepwedd.com
URL: www.shepwedd.com

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