De Beers UK Ltd (formerly Diamond Trading Company Ltd) v Atos Origin IT Services UK Ltd
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE EDWARDS-STUART,Mr Justice Edwards-Stuart |
| Judgment Date | 16 December 2010 |
| Neutral Citation | [2010] EWHC 3276 (TCC) |
| Docket Number | Case No: 2010-TCC25491 |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Date | 16 December 2010 |
[2010] EWHC 3276 (TCC)
IN THE HIGH COURT OF JUSTICE
Royal Courts of Justice
Strand, London, WC2A 2LL
Before: Mr Justice Edwards-Stuart
Case No: 2010-TCC25491
Mr Simon Croall QC & Mr Yash Kulkarni (instructed by Wedlake Bell) for the Claimants
Mr Christopher Lewis and Mr Peter Land (instructed by Charles Russell LLP) for the Defendants
Hearing dates: 4 th October 2010 to 4 th November 2010
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Edwards-Stuart:
Introduction
1. The Claimant in this action, to whom I shall refer as De Beers (“DB”) although at the relevant time its name was the Diamond Trading Company (“DTC”), probably needs no introduction. Unsurprisingly, this action arises out of the movement and handling of diamonds.
2. In about May 2006 DB entered into a joint sales agreement for 5 years with the Government of the Republic of Botswana (“GRB”) which included an undertaking by DB to move a major part of its operations, in particular what is known as the aggregation process, to Botswana (although it is not clear whether this obligation was contractually binding). This undertaking came about partly because Botswana produces about 25% of the diamonds handled by DB and partly because DB wished to make a contribution to the economy of the Republic of Botswana. This transfer of operations would have involved the development of a software system to support the diamond supply chain management and DB decided also to take the opportunity at the same time to upgrade its existing software systems, which were out of date and often differed from department to department.
3. In April 2007 DB put the software contract out to tender with a view to selecting a shortlist of two potential suppliers from whom it would obtain a Best and Final Offer (“BAFO”) before finally entering into a contract with one of them.
4. The Defendant, to whom I will refer as Atos, was one of the companies who responded to the invitation to tender. It was ultimately successful. However, at some point during the tender process DB decided to enter into a preliminary contract, known as the Initiation and Analysis Phase (“IAP”), in order to give the chosen software supplier an opportunity to investigate and analyse the business requirements of DB so that it would be in a better position to enter into a fixed price contract for the project.
5. This duly happened and, by a letter of intent dated 11 July 2007, Atos agreed to carry out the IAP. They did so between the end of June and October 2007, at the end of which they entered into a fixed price contract for the project in November 2007 (“the Contract”).
6. Unfortunately things did not go well. In spite of attempts by Atos to replace the weaker members of its team and to bring in additional senior managers and other staff, progress fell well behind schedule and this continued until March 2008 when Atos told DB that it would not be able to deliver the software by the end of June 2008, as the Contract required, and would probably not be able to do so before mid October 2008. This was not acceptable to DB and protracted discussions ensued with a view to arriving at an acceptable revised programme, which the parties did in early April 2008.
7. In the meantime, on 3 March 2008 Atos issued its fourth invoice, which DB failed to pay. It was for a sum a little in excess of £320,000, and was due for payment at the beginning of April 2008. The reason given by DB for refusing to pay this invoice was its dissatisfaction with delays and with the quality of the work being done by Atos. At the same time the senior management within Atos had become very concerned about the substantial cost overruns on the contract.
8. By a letter dated 21 May 2008 Atos claimed that the progress of the work had been delayed and obstructed by the lack of co-operation from DB and by very significant increases in the scope of the work and that, unless DB agreed to renegotiate the contract by 31 May 2008, Atos would suspend all further work. Atos relied also on the non-payment of the fourth invoice. Although, at DB's request, the deadline was extended to 6 June 2008, DB was not prepared to negotiate on these terms and Atos suspended work at the end of the first week in June. The work was never resumed.
9. In these proceedings each side is asserting that the termination was the result of a repudiatory breach of contract by the other which it accepted. Which of them is right about this is the central issue in the case. Depending on the outcome of that issue, there are consequential and difficult issues of causation and quantum of damages. Both sides claim substantial sums.
The De Beers operation
10. Since DB's business concerns diamonds, for reasons of security it has always been anxious to ensure that its internal processes were kept confidential, with the result that different departments within the company operated in a series of organisational “silos” in which the particular business processes involved were carried out in relative secrecy. For the same reasons the company was reluctant to use third party consultants or service providers in relation to matters such as IT systems. Historically, therefore, DB had developed its own IT systems using in-house resources and these tended to be configured specifically for each different department. The result was that instead of having what is known as an “end to end” system, many departments had their own bespoke software so that there were a large number of interfaces between different parts of the system and a good deal of duplication. This was obviously inefficient.
11. Accordingly there was a strong case for updating and harmonising the DB IT systems throughout the company. Previously, in about January 2000, DB had engaged Accenture to redevelop its integrated stock management systems, but the project did not go well and after three years it was terminated without achieving most of its objectives. Accenture complained that the project had gone badly because Accenture's team had not received sufficient cooperation from the relevant personnel within DB, and so one of the lessons that came out of this unsuccessful project was that DB came to recognise just how unusual the nature of its business was and the difficulty facing outside consultants who needed to understand it.
12. DB has a long connection with GRB and, as I have already mentioned, in 2006 it decided to move its aggregation process from London to Botswana. Aggregation is the process by which operators combine and blend batches of sorted uncut diamonds, some of which have been extracted by DB in its own mines in Botswana and others of which have come from mines elsewhere in the world. The identification, classification and valuation of the diamonds take place before they get to the aggregation process. This sorting and blending process requires highly trained experts because there are over 16,000 different categories of uncut diamond based on a stone's size, shape, quality and colour. This gives an indication of the sophistication of the operation. The object of aggregation is to ensure consistency and accuracy in supply for DB's customers, who are known as “sightholders” (because they attend the “sights” or sales weeks at which the rough diamonds are sold).
13. The following description of the physical processes which take place along the Aggregation part of the supply chain (or pipeline) is largely taken from Atos's opening submissions. For the purposes of this action it starts with the diamonds which are already sitting in a local sorting office (“LSO”), to which they have been transported from the mine. The first module in the pipeline is “Export for Aggregation”: this covers the steps which need to be taken in order for the diamonds to be transported (exported) from the LSO to their destination for Aggregation (which was to be Gaborone in Botswana). The next module, “Import for Aggregation”, covers the steps taken when the diamonds are received for Aggregation. Having received the diamonds, the next stage is described as “Rolling Management”: here the diamonds from the different mines, which have been imported for Aggregation, are aggregated or “rolled” together—a process which, as will now have become apparent, is not as simple as it sounds. After the stones have been aggregated, they are split up into the groupings in which they will be presented to the sightholders for sale: this is known as “Splitting”. It is common ground between the parties that “Splitting” was originally outside the scope of the Contract: it was introduced by means of a change request. Once the diamonds have been split up (into boxes), they are then exported for the purposes of the sights which are to be held: this is “Export for Sight”. The next module is “Import for Sight”, which consists of the steps to be taken at the LSO (now a local sales office) when the boxes of diamonds are received. The final stage in the pipeline is the steps to be taken in order to prepare for and hold the sight, attended by sightholders from all around the world, “Prepare and Hold Sight”.
14. From an IT point of view one of the challenges of the aggregation process was that it required a system that would keep a precise check on the diamonds as they moved through the process so as to ensure that no stones are lost and would provide facilities for valuing the stones (or groups of stones) as they went on—as well as providing a proper audit trail of the movements of the stones.
15. Although it was the...
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