CIS General Insurance Ltd v IBM United Kingdom Ltd

A contractual milestone payment may become due independently of other project milestones where the contract identifies it as a free-standing, time-based payment and imposes no linked acceptance condition. A contractual invoice procedure may require disputes to be notified promptly, but clear words are needed to exclude equitable set-off altogether. Where notice conditions apply, set-off may be unavailable against an invoice if the notice is not given in time.

A warranty that a supplier has taken all reasonable steps to satisfy itself about risks is construed as a substantive promise concerning due diligence. It is not merely a limitation on the supplier’s ability to claim relief. Wasted expenditure may be an alternative method of quantifying expectation loss, and may fall within an exclusion of loss of profit, revenue or savings.

CIS General Insurance Ltd engaged IBM United Kingdom Ltd to provide and manage a new insurance IT system under a Master Services Agreement and implementation statement of work. The project suffered substantial delays and was ultimately abandoned.

IBM invoiced £2,889,600 for Application Gate 5. CISGIL rejected the invoice for want of a purchase order, later asserted set-off, and withheld payment. IBM served a final notice and purported to terminate. CISGIL treated that termination as repudiatory breach and claimed wasted expenditure, breach of warranty, reporting failures and delay losses. IBM counterclaimed for the invoice.

The court determined the validity and effect of the Application Gate 5 invoice, the alleged contractual warranty, IBM’s reporting and delay obligations, the availability of set-off, contractual exclusions and caps, and quantum.

The court held as follows.

1. Application Gate 5. The Application Gate 5 payment became due at the beginning of January 2017. It concerned software licence payments, was not subject to Schedule 6 acceptance, had no direct predecessor milestone and was not conditional on completion of the Release 1 or Release 2 milestones. CISGIL was contractually obliged to approve the milestone and issue a purchase order. It could not rely on its own wrongful failure to do so.
2. Invoice and dispute. The invoice was correctly prepared and properly submitted. The reference to IMP-020 rather than IMP-030 was a minor clerical error. CISGIL’s email requesting re-submission with a purchase order and stating that the invoice could not be accepted for payment validly disputed the whole invoice within seven business days. IBM therefore could not invoke the termination mechanism for non-payment of an undisputed invoice.
3. Set-off and termination. The invoice provisions created a pay-now, argue-later regime for invoices not disputed within the contractual period. They did not exclude equitable set-off generally, but restricted its exercise against an invoice unless a valid dispute notice had been given. Since the invoice was validly disputed, IBM’s final notice and purported termination were ineffective and amounted to repudiatory breach, which CISGIL accepted. There was no wilful default.
4. Warranty. Clause 12.1(c) imposed a substantive obligation to take all reasonable steps to ascertain the risks, contingencies and circumstances concerning performance. It was not merely a protection against later claims for relief. IBM had undertaken extensive due diligence, fit-gap analysis, resource assessment and risk review. It had therefore complied with the warranty, and Insurer Suite had not been substantially rewritten or redeveloped beyond the contractual scope.
5. Delay and reporting. IBM was responsible for critical delays to IMP-018c, IMP-021 and the Release 2 milestones. The principal causes included inadequate subcontractor resources, defective configuration and customisation, excessive defects and slow defect resolution. IBM also failed to report accurately on the delays. The court rejected the claim that more accurate reporting would have caused earlier termination.
6. Quantum. Wasted expenditure was excluded by the contractual exclusion of loss of profit, revenue and savings. The alternative delay claim succeeded in part. CISGIL was awarded £15,887,990, subject to VAT adjustment, less IBM’s entitlement to set off £2,889,600, with interest on the net sum.

First instance decision. The judgment records no earlier appellate decision in the same proceedings.