Bristows’ SnippITs – As the old phrase goes, Never Assume! – it’s commercial common sense

This post is part of the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

In the recent decision of Capita Business Services Ltd v IBM United Kingdom Ltd [2023] EWHC 2623 (Comm), the Court considered: i) whether assumptions can amount to a binding obligation; and ii) the extent to which “commercial common sense” can affect the interpretation of the terms of a contract.

Key takeaways

• If you include an assumption in a contract, that assumed state of affairs may have contractual force if you have not set out an agreed plan to review that assumption, or what the consequences are of that assumption not being met.
• Where the construction of the language and contractual context are clear, any appeal to the allegedly uncommercial consequences of that construction would have to be particularly compelling before they change the Court’s opinion.
• Arguments of commercial common sense require the effect of that common sense to be objectively apparent to both contracting parties at the time of contracting – it cannot be enough for a particular construction to be uncommercial for private reasons apparent only to one party.

Background

Capita was engaged by its client to provide IT related services under a "Head Agreement", the provision of such services Capita subcontracted to IBM under the "Agreement", including the "Managed Services" for the "Relevant Service". When an extension to the Head Agreement was being negotiated by the client and Capita, the commercial proposal IBM put forward in relation to the Relevant Service was not acceptable to the other parties and so this was left as subject to further discussion, per "Condition 2" as follows (emphasis added):

“Capita is awaiting the [client] to commission work to replace the [Relevant Service], and contract for the ongoing [Managed Services] of such, and it is assumed that this replacement [Relevant Service] will be operational on or before 30 August 2023.

As such the Contractor's obligations for the Managed Services relating to the current [Relevant Service] shall cease at that time. …”

What was the issue?

The issue between the parties was whether IBM's "obligations for the Managed Services relating to the current Relevant Service" cease on the assumed date (30 August 2023 – even if (as proved to be the case) the replacement Relevant Service was not operational by that date), or on the actual date the replacement service became operational.

IBM claimed that if the Relevant Service had not been replaced by 31 August 2023, it had no contractual responsibility to provide the Managed Services supporting the Relevant Service from that date.

Capita argued that IBM had to provide the Managed Services after 30 August 2023, until the earlier of: i) when a replacement of the Relevant Service was commissioned by the client and was ready for operation; or ii) 2027 (when the Head Agreement and Agreement were extended to).

The Court's conclusions

The Court preferred IBM's construction and IBM was not required to continue providing the Managed Services past 31 August 2023.  

1.   Construction of Condition 2

The use of the word "assumed" proved significant. While there are, in general, many contexts in which it is clear that assumptions are merely a present view which can be revisited, there was no language addressing the consequences of that assumption being incorrect.  By comparison, Conditions 1 and 3 expressly provided for what was to happen if an anticipated event did not occur. Therefore the Court found that there was no reason for setting out the parties' assumption as to the date a replacement system would become operational in the first sentence, unless that assumed date was intended to have contractual effect.

Further, the Court found that the phrase "As such" did form a clear link between the second sentence and the cessation date. Whilst it has the effect of linking the cessation of IBM’s obligations with the matters in the previous sentence, it was not deemed sufficiently clear whether the link was to the event anticipated (i.e. a new system becoming operational) or the date by which it was anticipated that the event will have taken place, whether or not it does so (i.e. 30 August 2023). 

2.  Commercial Common Sense

Finally, both parties sought to support their arguments by reference to considerations of commercial common sense, although the Court found that the construction was clear and IBM did not need to further bolster its position with such arguments. 

Further, the Court rejected Capita's assertion that by allowing a scenario where IBM could stop supporting the Relevant Service on 31 August 2023, even if no replacement system was operational, this would defy commercial common sense, despite there being adverse consequences which would follow for Capita, reputationally and financially.