CIS General Insurance Ltd v IBM United Kingdom Ltd
| Jurisdiction | England & Wales |
| Judge | Mrs Justice O'Farrell DBE,Mrs Justice O'Farrell |
| Judgment Date | 19 February 2021 |
| Neutral Citation | [2021] EWHC 347 (TCC) |
| Court | Queen's Bench Division (Technology and Construction Court) |
| Docket Number | Case No: HT-2018-000154 |
| Date | 19 February 2021 |
[2021] EWHC 347 (TCC)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
TECHNOLOGY AND CONSTRUCTION COURT (QBD)
Royal Courts of Justice
Strand, London, WC2A 2LL
Mrs Justice O'Farrell DBE
Case No: HT-2018-000154
Alex Charlton QC, Lawrence Akka QC & Michael Lazarus (instructed by Addleshaw Goddard LLP) for the Claimant
Nigel Tozzi QC, Matthew Lavy & Iain Munro (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for the Defendant
Reading dates: 14 th, 15 th & 16 th January 2020
Hearing dates: 20 th 21 st, 22 nd, 23 rd, 27 th, 28 th, 29 th, 30 th January 2020
th, 5th, 6th, 10th, 11th, 12th, 13th, 17th, 18th, 19th, 20th, 24th, 25th, 26th, 27th February 2020
nd, 3rd, 4th, 5th, 9th, 10th, 11th, 12th, 19th March 2020
Closing submissions (in writing): 8 th, 9 th, 27 th and 28 th April 2020
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.
Mrs Justice O'Farrell DBEINDEX
| 1. Introduction | Para 1–25 |
| 2. Chronology | |
| Background to the transformation programme | 26–37 |
| Tender Process | 38–44 |
| The IT solution proposed by IBM | 45–50 |
| Due Diligence | 51–56 |
| Interim Service Agreement | 57–62 |
| The MSA | 63–93 |
| Implementation tools | 94–95 |
| Agile methodology | 96–100 |
| Release 1 | 101–131 |
| The turning point | 132–139 |
| Deterioration of the relationship between the parties | 140–163 |
| The AG 5invoice issue | 164–175 |
| Termination | 176–185 |
| 3. The Dispute | Para 186–190 |
| The Issues | 191 |
| Evidence | 192–197 |
| 4. Issue 1—Termination | Para 198–200 |
| The software license payments | 201–216 |
| AG5 Milestone | 217–232 |
| Milestone payment process | 233–253 |
| AG milestone dispute | 254–265 |
| Discussion and finding on the AG5 milestone | 266–281 |
| Contractual provisions re invoices | 282–283 |
| AG 5 invoice submission and rejection | 284–299 |
| Validity of invoice | 300–316 |
| Was the AG5 invoice disputed? | 317–330 |
| Set-off | 331–358 |
| Termination | 359–364 |
| Wilful Default | 365–399 |
| Summary of findings on termination | 400 |
| 5. Issue 2—Breach of Warranty Claim | Para 401–402 |
| Clause 12.1 (c) warranty | 403–419 |
| Pleaded case | 420–422 |
| Whether Insurer Suite was written for the US market | 423–428 |
| Extent to which Insurer Suite re-written or developed | 429–454 |
| Analysis of Insurer Suite Code | 455–473 |
| All reasonable steps | 474–495 |
| Consequences of any breach of warranty | 496–499 |
| Conclusion of the warranty claim | 500 |
| 6. Issue 3—Reporting Claim on State of Insurer Suite | Para 501–503 |
| Reporting obligations | 504–508 |
| Pleaded allegations | 509–510 |
| Insurer Suite as at the date of the MSA | 510 |
| Knowledge attributable to IBM | 511–512 |
| Cards on table meeting | 513–526 |
| Consequence if IBM reported difficulties | 527–533 |
| 7. Issue 4—Delays and reporting failures | Para 534–536 |
| IBM's obligations to achieve the Milestone Dates | 537–553 |
| Expert evidence in respect of delay | 554–561 |
| Milestone IMP-018c | 562–602 |
| Milestone IMP-021 | 603–638 |
| Release 2 milestones | 639–649 |
| Reporting of delays | 650–656 |
| Conclusion on delay and reporting | 657–661 |
| 8. Issue 5—Quantum | Para 662–664 |
| Contractual exclusion or limitation of liability | 665 |
| Wasted expenditure claim | 666–669 |
| Legal principles | 670–679 |
| Discussion and finding on wasted costs claim | 680–688 |
| The Bond interest and transactional fees | 689–695 |
| Contractual caps | 696–703 |
| Quantum of wasted expenditure claim | 704–727 |
| Claim for delay and reporting failures | 728–734 |
| NOM Resource | 735–738 |
| COM Exit | 739 |
| Property Costs | 740 |
| Testing Resources from SQS and Test Direct | 741 |
| Sopra Steria data migration resource and architect resource | 742 |
| Experian and GSX | 743 |
| Accenture | 744 |
| Assurance by PwC and PA Consulting | 745 |
| IMP-018 Milestone | 746 |
| IBM additional work | 747 |
| Dual run resource | 748 |
| Bottomline Contract | 749 |
| Management expenses and secondees | 750–751 |
| IBM's counterclaim | 752 |
| Conclusions | 753–754 |
This case concerns a claim for wasted costs and damages arising out of the termination of a contract for a new information technology system.
The claimant (“CISGIL”) was a wholly owned subsidiary of the Co-operative Group Limited (“the Co-op Group”). CISGIL's business is the underwriting and distribution of general insurance products. Its principal products are home insurance and motor insurance which it underwrites and sells to its members and customers through a variety of retail channels, including direct website and telephone sales, aggregators (comparison web sites) and third-party brokers.
In about 2014, there was a re-organisation within the Co-op Group. The life insurance division was divested and separation of the Co-op Bank was initiated. CISGIL's network infrastructure, data centre, hardware, software and applications were all shared with the Co-op Bank. They were cumbersome and outdated and, when the Coop Bank left the shared platform, the operation and maintenance costs would be unsustainable. CISGIL considered that access to a flexible and contemporary IT infrastructure would enable it to provide tailored services to its customers and to compete as a market-leading digital and data-based business. Therefore, CISGIL decided to purchase and implement a new IT solution for its business (“Project Cobalt”).
On 16 June 2015 CISGIL entered into a contract with the defendant (“IBM”) for the supply of a new IT system for CISGIL's insurance business and for management of the system for a term of ten years. The contract comprised a Master Services Agreement (“the MSA”), an Implementation Statement of Work (“the Implementation SOW”) and the Managed Service Statement of Work (“Managed Service SOW”).
The cost of supply and implementation of the new system was £50.2 million. The cost of the management services to be provided over a period of ten years from implementation of the system was estimated to be £125.6 million.
By a contract dated 16 June 2015 IBM engaged Innovation Group (“IG”) to supply software and services for the insurance platform solution required, using a proprietary software called “Insurer Suite”.
The MSA provided for IBM to deliver the new operating platform substantially before the longstop date of 31 December 2017, when CISGIL's insurance business would be separated from the Co-op Bank:
i) the contractual completion date for the home insurance platform (“Release 1 Go Live”) was 30 April 2016, subsequently extended to the end of May 2016 by way of a working agreement;
ii) the contractual completion date for the motor insurance platform (“Release 2 Go Live”) was 15 August 2016; and
iii) the contractual date by which all historic customer data would be transferred from the existing system to the new system was the end of October 2016.
Delays occurred to Project Cobalt. The contractual dates for Release 1 Go Live and Release 2 Go Live were not met.
In 2016 IBM exercised its audit rights against IG and in 2017 it exercised step-in rights against IG.
On 24 March 2017 IBM submitted an invoice in the sum of £2.9 million in respect of milestone Application Gate 5. IBM's position is that the AG5 milestone reflected payments due in respect of software licences and became payable in January 2017. CISGIL's position is that payment was not due because the AG5 milestone had not been achieved and CISGIL had not authorised payment or issued a purchase order for the same.
By email dated 27 March 2017 CISGIL refused to accept or pay IBM's invoice for the milestone payment.
On 12 May 2017 CISGIL gave notice that it intended to exercise rights of set off against any sums due in respect of the invoice.
On 22 June 2017 IBM served on CISGIL a final notice in respect of the invoice. CISGIL did not pay the invoice.
On 27 July 2017 IBM purported to exercise a contractual right of termination based on CISGIL's failure to pay the invoice for the AG5 milestone.
CISGIL disputed IBM's right to terminate, treated the purported termination as repudiatory breach and by letter dated 28 July 2017 purported to accept such repudiation.
CISGIL's primary claim is for damages of £128 million in respect of its wasted costs arising out of the alleged wrongful termination by IBM.
CISGIL has an alternative claim against IBM for breach of a contractual warranty. Its case is that IBM contractually warranted that it had taken all reasonable steps and satisfied itself as to all risk, contingencies and circumstances as to its performance of the MSA but the warranty was untrue. Insurer Suite was not a proven, commercial off-the-shelf product that was highly configurable and capable of meeting most of CISGIL's requirements with a minimum amount of customisation of the out-of-the-box (“OOTB”) product. IG did not have the resources to undertake the nature and extent of base development required. Damages in the sum of £70.4 million are claimed on the basis that CISGIL would not have entered into the MSA had it known that the warranty was untrue.
CISGIL has alternative claims against IBM arising out of the delays to the project. Its case is that a material factor in the late delivery of the platform was that Insurer Suite had been developed for use in the United...
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