Bristows' SnippITs - TCS v DBS: Lessons from Major IT Dispute (Bonus lessons - Part 5)

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

What interest rate applies to judgment sums?

On 17 May 2024, the Technology and Construction Court handed down its judgment on one of the largest IT disputes in recent years: Tata Consultancy Services Limited v Disclosure and Barring Service. The 243-page judgment (summarised here) provides a relatively rare and detailed insight into the court’s determination on a broad range of issues that often arise when a complex IT project goes wrong.

Our four part series of posts covered the key considerations for suppliers and customers of large-scale IT projects. Our earlier posts can be found here:

• Part 1: Delays, critical path and “unconscious pacing”
• Part 2: Systems integrator - who is responsible for managing third party dependencies?
• Part 3: Rebaselining, renegotiations and the dangers of estoppel
• Part 4: Exclusions and Limitations - a £multi-million lesson on clear drafting

Following the handing of the substantive judgment, a further hearing took place dealing with consequential matters and the Court handed down an additional judgment on 1 August 2024. In this bonus post, we explore the issues raised in this judgment  relating to interest.

Key takeaways

• Interest clocks up: As is often the case in any long-standing dispute, there were claims and counterclaims going back many years, including claims for sums invoiced, invoice credits and claims in respect of damages. This highlights the importance of understanding how interest provisions apply to sums found to be owing.
• Statutory interest can be disapplied with careful drafting. If this is the intention, it is crucial that consideration is given to the Late Payment of Commercial Debts (Interest) Act 1998 (the “1998 Act”).  It is also crucial that claims for interest under the 1998 Act are pleaded.
• Notice of the debt should be given as soon as possible: Suppliers should ensure that they give notice of any invoices which form part of the debt on which interest is claimed as soon as they are able. Otherwise, interest may only start to run at the point when it is possible, conservatively, to conclude safely that the relevant demand for payment had been made.

Summary of issues considered

1. The Judge considered whether interest under the 1998 Act would apply, at 8% over base rate, or whether discretionary interest under S35A of the Senior Courts Act 1981 would apply (with a much lower interest rate of 1% or 2% over base rate).
    
2. In the Judgment, TCS was awarded sums in respect of service charges, which had been unpaid because they were disputed. TCS asserted that the 1998 Act rate should apply to these amounts and it sought to amend its pleading to add this claim. DBS’s position was that the Agreement had ousted the 1998 Act, so that interest would only run in respect of “undisputed Charges”. DBS also asserted there was no qualifying debt under the 1998 Act because the obligation to pay, in respect of a disputed invoice, was limited to the undisputed amount.  The Agreement stated that:
   
   “Interest shall be payable on the late payment of any undisputed Charges properly invoiced in accordance with the [1998 Act].”
   and
   “In the event of a disputed invoice, [DBS] shall make payment in respect of any undisputed amount in accordance with the provisions of Clause 16 of this Agreement and return the invoice to [TCS]…”
    
3. TCS contended that the argument about the qualifying debt was wrong and that the disputed part of an invoice would accrue interest for the duration of a dispute, relying also on the escalation procedure in the dispute resolution provisions, which stated that “the parties shall continue to comply with their respective obligations under the Agreement, regardless of the nature of the Dispute and notwithstanding the referral of the Dispute to the Dispute Resolution Procedure.”
    
4. TCS also asserted that, if DBS’ interpretation was right, the Agreement failed to provide for an alternative “substantial remedy” for disputed debts. This “substantial remedy” is required by sections 8(1) and 8(4) of the 1998 Act, and if it is not provided, the provision is deemed void (and the higher rate of interest will apply).  In other words, TCS argued that it was not permissible to restrict the accrual of statutory interest to “undisputed Charges”.
    
5. DBS also argued that, under the 1998 Act, where there is no agreed date for payment, interest does not start to run until the purchaser is given notice of the amount of the debt. Prior to Judgment, the requests for payment had only been made in invoices which included other sums. DBS argued that this meant interest had never started to run.
    
6. Finally, DBS asserted that interest should be remitted pursuant to section 5 of the 1998 Act, which provides for the remission of interest by reason of the supplier’s conduct.  In this case, TCS had not made a claim for statutory interest (or pleaded it) until after the Judgment.

Decision

The Court accepted DBS’s position that interest would not be awarded at the higher rates in the 1998 Act.

1. The Court found that the obligation for DBS to make payment only attached to undisputed amounts.  As such, non-payment of these amounts could not create a qualifying debt for the purposes of the 1998 Act, meaning it could not attract the higher rate of interest.
    
2. The judge disagreed with TCS’ argument that this meant there was no “substantial remedy”, contrary to section 8 of the 1998 Act.  He held that in the absence of a qualifying debt, there could be no avoidance of interest on that debt.
    
3. The judge also held that an overall remedy which seeks to distinguish between sums that are undisputed and those which are disputed was nonetheless a “substantial remedy”:
   
   1. he reasoned that the correct question was not “is there a substantial remedy in relation to a debt which is disputed” (to which the answer would be “no”) but whether an overall remedy limiting the application of statutory interest to situations where the debt is (genuinely) disputed is “a substantial remedy”;
       
   2. he concluded that, although the Agreement disapplied interest to “undisputed Charges”, the overall remedy was a deterrent to late payment.  After considering the authorities, he held that the mischief to which the statute appeared to be directed was casual or feckless non-payment and that the contractual regime that had been agreed by the parties was sufficient to provide a “relevant deterrent” against the non-payment of sums that were undoubtedly due;
       
   3. he noted that TCS was still able to claim interest pursuant to section 35A of the 1981 Act and that this was traditionally regarded as a fair remedy;
       
   4. he also noted that the Agreement had been negotiated and that the parties had considered what should be regarded as “undisputed”, including in the contractual dispute resolution process. He noted that the parties were of equal bargaining power and it was otherwise fair and reasonable to disapply statutory interest in respect disputed debts;
       
   5. in response to TCS’ argument that any party could avoid interest by declaring that debt was disputed, the judge made it clear that the dispute has to be bona fide. If the debt was one in which there was no room for reasonable dispute, the term which disapplied interest to “undisputed Charges” would not work.
       
4. The judge did not accept DBS’ argument that interest had not started to run.  Section 4 of the 1998 Act provides that, in the absence of an agreed date for payment of the debt, interest does not start to run until the purchaser has notice of the amount of the debt, or the sum which the supplier claims is the amount of the debt. DBS was never asked to pay a debt in the sum awarded to TCS at any stage prior to the Judgment. However, because the invoices rendered by TCS had “over-claimed” the sums due, this was sufficient to “start the clock”.
    
5. Nevertheless, the judge did accept DBS’ point that it was necessary to identify the date from which such interest is to run, and this point had not been pleaded and was not clear on the evidence. Since no date could be precisely identified by TCS, the judge held that a “not later than” date needed to be set, being a date on which it could safely be concluded that the relevant demand had been made.
    
6. DBS had also argued that interest should be remitted pursuant to section 5 of the 1998 Act because TCS had failed to assert a claim for interest under the 1998 Act for 6 years, both parties apparently operating on the basis that the relevant parts of the invoices were disputed in accordance with the contractual procedure.  By failing to make a claim for statutory interest, TCS had deprived DBS of the opportunity to make a protective payment to avoid the statutory interest rate. This was akin to an estoppel.  The judge held that it was too late to explore these points in factual evidence, and that this showed the potential for prejudice which would have arisen if TCS’ late amendment had been accepted.
    
7. The claim for interest had not been pleaded and therefore this judgment does not deal with any questions as to the meaning of a bona fide dispute.  However, the judge noted that when TCS first made its claim for statutory interest, DBS had responded by asserting that the sum was disputed and by seeking to engage the contractual distinction between “disputed” and “undisputed” debts. It is plainly helpful for a party which is seeking to disapply statutory interest to be very clear when it is seeking to dispute any debts.