Soteria Insurance Ltd v IBM United Kingdom Ltd

[2022] EWCA Civ 440 

At first instance, amongst other issues, the Judge held that IBM had wrongfully repudiated the contract with CISGIL. The Judge found that, in accordance with clause 11.7 of Schedule 5 of the contract, CISGIL disputed the AG 5 invoice in good faith, and that, in consequence, IBM could not rely on the non-payment of that invoice to justify termination. The CA agreed.

In reaching this conclusion, the CA had to consider whether or not there was a dispute. Coulson LJ said that the “best simple summary” was provided by Mr Justice Akenhead in the case of Whitley Town Council v Beam Construction (Cheltenham) Ltd [2001] EWHC 2332 (TCC), where the  Judge said that:

“a dispute arises generally when and in circumstances in which a claim or assertion is made by one party and expressly or implicitly challenged or not accepted.”

Coulson LJ also considered that construction adjudication was relevant to the Judge’s, at first instance, description of the overall scheme set out in paragraph 11 of Schedule 5 as being one in which, “unless CISGIL disputed the invoice in good faith in accordance with paragraphs 11.11 and 11.12, it was obligated to pay the invoice within 7 Business Days of receipt.” 

Those provisions were “clear and unambiguous and introduced a ‘pay now, argue later’ principle” - the basic principle underlying construction adjudication.

The first issue was whether or not the AG 5 invoice was disputed by CISGIL. Coulson LJ said that it was. CISGIL said in an email that they: “cannot accept this invoice for payment”. A claim had been made by IBM in the form of the invoice, and that claim was expressly not accepted by CISGIL because of the absence of the Purchase Order Number. There was, therefore, in the plainest terms, a dispute as to the AG 5 invoice.

The suggestion that there was no dispute because CISGIL did not use the word “dispute” or similar and/or did not trigger the dispute machinery under clause 11 was rejected. This was not necessary for there to be a dispute in law. The email was also not “simply (making) an administrative request for the invoice to be resubmitted with a Purchase Order.” That is not what the email said.

LJ Coulson noted that these arguments ignored the common-sense approach to the meaning of “dispute.” They were also an overly-technical approach to the construction of notices. A reasonable recipient of the notice would have the terms of the contract well in mind and the contract required a unique Purchase Order number for every invoice. The CA also considered whether CISGIL acted in good faith. Coulson LJ was of the view that, unless the contracting party has acted in bad faith, it is difficult to see how they can be in breach of an obligation of good faith. Here, IBM had conceded that IBM accepted that no individual acted dishonestly or in bad faith. If no-one acted in bad faith, there could not have been a breach of the obligation to dispute invoices in good faith. 

The Judge, at first instance, found that  CISGIL acted fairly and honestly towards IBM and did not conduct itself in a way which was calculated to frustrate the purpose of the contract or act in a way that was commercially unacceptable. There was no intentional or objectively reprehensible conduct, and so, no room for a good faith challenge.

That left the so-called prevention principle. However, given that the invoice was disputed and that CISGIL acted in good faith, it followed that CISGIL complied with the contract. That leaves no room for the prevention principle, which simply provides that a contract should not be construed in a way that allows the contract-breaker to take advantage of his own breach. Here, there was no breach in the first place. 

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