The Honourable Mr Justice Flaux:
Introduction and background
- The present dispute concerns the charging for software licensing and system service for three mainframe computers supplied by the Claimant (to which I will refer as Fujitsu) to the Defendant (to which I will refer as EDS) and used by EDS for business continuity purposes, that is as back up for disaster recovery in the event that a catastrophe occurred involving its mainframe computers.
- Since about 1995, EDS has supplied information technology services to various government departments, including what is now known as the Department of Work and Pensions (DWP). Those services include developing, maintaining and operating software applications used by DWP on mainframe computers. Throughout that time, the mainframe computers and software have been supplied by Fujitsu. The mainframe computers (whether leased or sold to EDS) operate on Fujitsu's proprietary operating system "Virtual Machine Environment" (VME). Fujitsu licences EDS to use the VME operating system and associated software and provides system service (repair, maintenance and support) for the mainframes. The charging arrangements between the parties (whether in relation to purchase/leasing costs, licensing or system service) are based upon a measure of computing capacity of the relevant mainframes known as MIPS (Millions of Instructions per Second).
- At the time when DWP first outsourced its IT services to EDS in 1995, DWP had four data centres at Swindon, Livingstone, Norcross and Washington, at which the computer hardware to run DWP's "live" estate was located. DWP did not have a full disaster recovery or business continuity service in the event that some catastrophe occurred at one of the data centres. After EDS took over the IT function, it implemented a number of changes, concentrating the "live" mainframes in Livingstone, Norcross and Washington, with Swindon becoming the business continuity centre for DWP and the Inland Revenue to which EDS also provided IT services.
- The business continuity service at Swindon was provided from late 1998 principally by 9 Fujitsu Trimetra SY mainframes (designated BCE002 to BCE010) which would back up any of the mainframes at the three live data centres. These were leased to EDS under a Business Continuity Agreement (BCA) dated 9 December 1998 which provided for rental of the hardware, licensing of the VME software (but on the restricted basis that it was only for use to provide the business continuity service to DWP and the Inland Revenue) and system service. Charging was on the basis that the MIPS for the 9 mainframes totalled 1306. As detailed hereafter, the BCA was originally for a maximum of 5 years but was extended by agreement ultimately until 31 March 2006.
- Thereafter, on 29 December 1999, the parties entered into an agreement designated EDS 100, covering the remainder of the DWP estate and other systems under which EDS provided IT services to government departments. This was in the nature of an umbrella contract which dealt initially with the estate as it stood at that date, but was thereafter used as a framework for other mainframes or equipment which were added to the overall estate from time to time. EDS 100 contained provisions for payment for licensing and system service on the basis of an agreed minimum guaranteed MIPS figure for each of the years 2000-2001 until 2006-2007 assessed by reference to the installed hardware as it was at the outset or was projected as likely to be over the period of the contract. Under EDS 100, each year on or about 1 March there was to be a census of the actual installed MIPS to be undertaken by Fujitsu and agreed by EDS. If the actual MIPS at that date exceeded the minimum guaranteed MIPS, EDS would pay more for both software licensing and system service for the forthcoming year running from 15 March. Such additional charges were calculated as an amount per additional MIP equivalent to the total payable for software licensing or system service respectively for the minimum guaranteed MIPS divided by that minimum guaranteed MIPS figure.
- So far as can be discerned from the materials before the Court, at the time that EDS 100 was entered, the mainframe computers covered by it were all part of the EDS live estate rather than used for business continuity, with one exception. Indeed clause 2 (h) stated that for the avoidance of doubt EDS 100 specifically excluded the Business Continuity Systems under the BCA. The one exception was a mainframe designated DCI 165 which, until July 1999, had provided a live service. After that date it did not provide a live service but was located at Swindon providing a business recovery system for a particular live system in Washington, DCI 100. DCI 165 was what is termed a "warm start" machine, that is, although not providing live services, it has partially built applications so that in an event of a disaster occurring to DCI 100, it could be invoked more quickly than if business recovery were being undertaken from a cold start.
- DCI 165 had a capacity of 64 MIPS and was one of the machines covered by EDS 100 as part of the DWP live estate and included as such in each annual MIPS census. EDS did not disagree with this and paid for licensing and system service on DCI 165 on the basis that it formed part of the live estate until about March 2006 when the current dispute arose. Indeed, when the March 2005 census was in draft and being discussed between representatives of Fujitsu and EDS, Ms Anderson of EDS reminded Mr Green of Fujitsu that the MIPS for DCI 165 should be included in the census as part of the DWP live estate, it having been omitted. In the event, in circumstances detailed hereafter, one of the matters in dispute between the parties is the charging for DCI 165 for the 2006/2007 year.
- As already noted, during the period of time from inception of EDS 100 in late 1999, a number of additional mainframes or other items of equipment were added to the overall EDS estate. These were supplied pursuant to quotations which were expressly subject to the terms and conditions of EDS 100. In March 2002, Amendment Agreement No. 2 to EDS 100 was made under which EDS undertook to purchase a minimum of 1,500 MIPS of new NOVA VME System hardware at £4,000 per MIP, ordering up to 10 NOVA Systems immediately upon signature of the Amendment. These new systems were more up to date than the SX and SY systems previously supplied by Fujitsu and were intended to replace those systems within the overall estate in time. The Amendment Agreement amended the number of minimum guaranteed MIPS for the years 2002/2003 to 2006/2007 and in fact reduced the annual system charge for each of those years. It also extended the BCA until 31 March 2005.
- In addition to new hardware used by EDS as part of the live estate, some mainframes were supplied which were "partitioned" so that part of the relevant capacity was used for business continuity purposes. These too were supplied pursuant to quotations subject to the terms and conditions of EDS 100. What seems to have happened though, is that it was agreed between the parties that licensing and system service for the disaster recovery or business continuity partitions would be charged at 50% of the full live estate rates under EDS 100, no doubt to reflect the fact that the software would only be used in that partition if there were a disaster and that the need for system service is correspondingly less.
- Thus, for example, on 29 September 2003, quotations were provided by Fujitsu to EDS for new NOVA 300 systems to be supplied "under the auspices of EDS 100" for Ministry of Defence data centres at Bicester, Donnington and Ensleigh to replace existing technology. These were configured as three partition systems, one partition for production workload, one for development workload and one for disaster recovery of the Ensleigh production workload. It was agreed that only 50% of the MIPS of the disaster recovery partitions would be counted for the purposes of computing the software and system service charges.
- In 2004, DWP decided to implement a project known as the Payment Modernisation Project, which required EDS to acquire new live hardware to perform batch processing of payments to benefit claimants which could not be performed by the existing SY machines. The new hardware consisted of NOVA machines. That upgrading of the live estate required EDS to acquire two NOVA machines to provide business recovery functions in relation to this batch processing of payments in the event of a disaster afflicting the live NOVA machines. DWP agreed to fund the purchase of two NOVA machines for business continuity purposes.
- On 5 August 2004, Fujitsu provided what was its final quotation EDS-QUT-87d for the supply of the two new NOVA 310 systems, stated in the quotation to be required for DWP business continuity. These were to be two Trimetra NOVA 310 systems delivering 309 and 241 MIPS respectively, at a total price including the disc storage required of £2,498,291.54. The standard "Fujitsu Services Quotation Statements" appended to the Quotation (as with previous Quotations for other mainframes and equipment) included a provision headed "Contract Terms" which read: "Unless otherwise indicated in this quotation, this quotation is submitted subject to the terms and conditions of FFA-EDS-100". The two systems, which were designated BCE 011 and BCE 012, were delivered to the EDS business continuity centre in Swindon in September 2004.
- Unlike on other occasions when mainframes (or partitions forming part of them) had been supplied by Fujitsu to EDS, no consideration seems to have been given by either party to reaching any specific agreement as to how the two systems were to be treated for charging purposes, whether by agreeing to charge 50% of MIPS or by some other arrangement. It is the failure to reach such a specific agreement which is largely responsible for the dispute between the parties in these proceedings, as to the charging for software licensing and system service for BCE 011 and BCE 012 for 2005/2006 and 2006/2007.
- One possible explanation for the failure to address these issues at the time that the two systems were purchased is that, around that time, EDS was in the process of implementing a programme of alterations and improvements to the DWP estate known as the 5 Step Plan, which contemplated the entire live and business recovery estates being concentrated in two locations: the Washington Data Centre and a new data centre at Doxford. Each would provide part of the live service and the business recovery centre for the other. This would involve rationalisation of existing equipment and some new equipment, with older equipment (including the 9 leased SX systems at Swindon) being disposed of or returned to EDS.
- This programme required agreement with Fujitsu going forward to 2010 or 2011 and, since the BCA expired in March 2005 and EDS 100 in March 2007, it was necessary for Fujitsu and EDS to negotiate a new agreement or series of agreements. Negotiations had begun in the summer of 2004 and these eventuated in what became a series of agreements designated EDS 200, 300 and 400 signed at the end of March 2005, together with two side letters and Amendment Agreement No. 5 to EDS 100. I will consider the details of those various agreements later in this judgment.
- From October 2004, Fujitsu was considering internally a series of drafts of spreadsheets for the purposes of the annual MIPS census at 1 March 2005. These were produced in the first instance by Mr Mike Green, a Project Director of Fujitsu and circulated by e-mail to Mr Allan White (Mr Green's superior) who was the account director with overall responsibility for the EDS account from 1999 onwards and to Mr Tim Mullock, Mr Green's equivalent on the commercial rather than technical side, who also reported to Mr White. Mr Green and Mr White gave evidence before me, Mr Mullock did not, although he is still employed by Fujitsu.
- In all the various iterations of the spreadsheets, BCE 011 and 012 are included in the Business Continuity Estate with the 9 SY systems BCE 002 to 010 at Swindon. Equally, in the summaries, the Business Continuity MIPS for the SY systems and the two NOVA systems BCE 011 and 012 are shown on a separate line and are not included in the actual MIPS which count towards the calculation of additional charges under EDS 100 as amended, pursuant to the MIPS census. In view of the fact that Fujitsu's case now is that the 550 MIPS of BCE 011 and 012 should count towards the actual MIPS for the census, it is striking that none of these three experienced businessmen (or anyone else at Fujitsu to whom drafts were sent) spotted what is said to have been a mistake, despite a number of opportunities to consider and check the spreadsheets.
- At all events, on 11 January 2005, the spreadsheets were sent by Mr Green to Ms Cheryl Doran of EDS for agreement. They were then considered internally within EDS by e-mail, by Ms Doran, Ms Janice Anderson and Ms Deborah Tokley, all of whom gave evidence at the trial. Ms Doran informed Ms Anderson and Ms Tokley that Fujitsu seemed to have included the BRC (Business Recovery) MIPS and that she thought they should negotiate on those. Ms Anderson's response was that it did not look to her as if Mr Green had included the BC MIPS for either the existing SY systems or the two new NOVA systems in the MIP census. She did pick up that he had not included the 64 MIPS of DCI 165 in the actual MIPS calculation (apparently on the assumption that it would be replaced before March 2005) but that it should be included because it would not have been replaced.
- Deborah Tokley's response to the e-mail from Mrs Doran is of some interest:
"No problem-Allan White is aware of this view and he has agreed we can keep using the MIPS (somehow, yet to be worked out) until we have agreement going forward assuming we go with "a" proposal in whatever form we agree on. I know that Mike was not involved in those discussions and suspect Allan may not have passed it on. We have also discussed BRC charges going forward and Allan is well aware we are NOT going to pay the 50% suggested by them and should be working on a much lower figure for system service with no charge for software".
- This e-mail was put to Mr White in cross-examination. He said that he was aware that Ms Tokley said she would not pay the 50% but he did not necessarily agree with her. He accepted however that he could not say that he actually had in mind that Fujitsu would be entitled to be paid on the basis of 100% of the MIPS for BCE 011 and 012. Ms Tokley did not give any evidence about this e-mail. In the circumstances, it is not possible to make any definitive finding about it. Nonetheless, it seems to me to be indicative of some informal arrangement that the question of what would be charged for software licensing and systems service on the two new NOVA systems would be resolved as part of the new agreement or agreements extending the period of the relationship.
- At all events, on 13 January 2005, the actual MIPS for the purposes of the audit were agreed at 3822 for the DWP estate. This included DCI 165 at 100% and excluded BCE 011 and 012. Thereafter, at a meeting on 17 February 2005 to discuss the possible extension, Ms Tokley of EDS handed to Mr White a letter which set out a number of "common requirements" for any proposal for extension, one of which was that Fujitsu should provide a price for the VME System Software and System Service Charges for Business Recovery together with an explanation as to how that price was calculated.
- On 28 February 2005, Mr Mullock sent Ms Tokley an e-mail headed "Spreadsheet for pricing" enclosing an updated spreadsheets and to summary sheets. The first of these headed "EDS 100 Contract Software and System Service Summary" set out MIPS figures for both Production (i.e. the live estate) and Business Continuity for the years 2005/2006 to 2010/2011. The MIPS Census figure for the upcoming year 2005/2006 of 4075 was the actual MIPS audit figure for the whole EDS estate (including the 3822 for DWP) and excluded BCE 011 and 012. No Business Continuity MIPS Census figure is shown for 2005/2006, possibly because there had been no such census.
- For subsequent years, the figures given are clearly projections based on the expected requirements of EDS. For 2006/2007 and the two subsequent years, the business continuity MIPS are shown as 3011. This figure appears to derive from a spreadsheet prepared by Mr Green in January 2005 of the expected position at June 2006. For some reason it does not include the MIPS for the two NOVA systems. This may be because what was anticipated was what has in fact occurred, namely that they would be dismantled and their constituent parts used in other systems at the two data centres, but this is speculation on my part. Whatever the explanation, those 3011 MIPS were used to set out proposed software charges and system service charges for those three years of £929, 259 and £601,320.
- In his evidence Mr White sought to contend that this was not a proposal but a modelling tool and the figures were taken from "the existing numbers". However, this simply cannot be right as the figures for all years after 2005/2006 were obviously projections based on various assumptions. Furthermore, the figures of £929,259 and £601,320 for 3011 MIPS equate to £308.62 and £199.71 per MIP for software charges and system service charges respectively. These are precisely the figures per MIP for additional MIPS above the annual BC census figure, subsequently agreed in Schedule 2 of EDS 200 and clause 4.4.2 of EDS 400 respectively. Accordingly, this summary was clearly a proposal in response to Ms Tokley's request in the letter handed over at the meeting.
- Thereafter, EDS 200, 300 and 400 together with the side letters and Amendment Agreement No. 5 to EDS 100 were signed by the parties on 29 and 30 March 2005. The next significant event so far as the present dispute is concerned is the preparation by Fujitsu in late 2005 of the draft spreadsheet for the 1 March 2006 MIPS audit which was again discussed internally within Fujitsu. On 6 February 2006, Mr Green of Fujitsu sent Mr Winter of EDS an e-mail enclosing a spreadsheet and stating:
"I have discovered an oversight on the audit spreadsheet relating to the BCE 011 & BCE 012 systems. These are part of the EDS owned estate (as opposed to the BC lease) and as such should be reflected in the audit. I have calculated the MIPS as with other DR platforms (i.e. Quantum etc) and indicated the MIPS at 50% of the actual."
- Mr White's evidence was that this e-mail came to be sent following a long telephone conversation between himself and Mr Mullock, which he thought had taken place the previous day, during which the matter was discussed. Precisely how the "oversight" came to occur in the first place and who discovered it and in what circumstances remain something of a mystery. Mr Green had to accept in his evidence that his original witness statement, which said that he had discovered it before Christmas 2005 as set out in an e-mail to Messrs White and Mullock on 22 December 2005, was wrong, as that referred to an unrelated error. It may be that it was Mr Mullock who suddenly realised that BCE 011 and 012 could be treated as part of the live estate, but since he did not give evidence, I cannot reach a definitive conclusion. I remain sceptical however, given the number of opportunities these experienced executives had to consider the spreadsheets both in relation to the March 2005 audit and the audit in the subsequent year, as to whether this was really a "mistake" as opposed to an ex post facto realisation that an argument to that effect was available to Fujitsu.
- What is clear is that whether there was a mistake or not, when the point originally emerged in February 2006, Fujitsu did not consider that it was contractually entitled to charge for software and systems service on a 50% of MIPS basis (let alone the 100% basis now pursued). Rather this was put forward as what EDS should agree based on the precedent of the other BC systems within the overall EDS estate, such as those at Bicester.
- EDS was not prepared to agree this, taking the line that not only BCE 011 and 012 but also DCI 165 were now covered for the purposes of software and system service charges by EDS 200 and EDS 400 respectively. The present dispute was crystallised by a letter from Mr Lloyd, the Commercial Manager of Fujitsu to EDS dated 14 March 2006, which appears to have been drafted by a lawyer. This letter put forward for the first time the assertion that Fujitsu was entitled to claim software licensing and system services for BCE 011 and 012 at 100% of MIPS and that these were due not only for the disputed year of 2006/2007 but for the previous year 2005/2006, for which the MIPS audit not including the MIPS on these systems had been agreed on 13 January 2005. The letter also claimed such charges at 100% on DCI 165 in the 2006/2007 year. The total claimed was £5,992,974.82.
- The amount claimed in the Amended Particulars of Claim is slightly less by way of principal, it would appear because no claim is advanced for system service charges for 2005/2006. EDS denies that any sums claimed are due.
The issues
- At the trial the issues had narrowed somewhat and can usefully be stated in EDS's formulation as follows:
i) Did the contract under which Fujitsu supplied BCE 011 and BCE 012 to EDS incorporate the software licensing and system service provisions of EDS 100?
ii) Irrespective of the answer to the first issue, were software licensing in 2005/6 and 2006/7 and system service in 2006/7 governed by EDS 100 or by EDS 200 and 400 in relation to BCE 011 and BCE 012?
iii) Were software licensing and system service in 2006/7 governed by EDS 100 or by EDS 200 and 400 in relation to DCI 165?
iv) Is Fujitsu entitled to recover in relation to BCE 011 and BCE 012 pursuant to an implied term or a quantum meruit on one of the bases pleaded in the Amended Particulars of Claim?
The contractual framework in place from March 2005
- Before considering each of these issues in turn, I should deal in more detail with the various contracts between the parties which were in place as at 30 March 2005 and which potentially applied in both the 2005/2006 year and the 2006/2007 year.
- Beginning with EDS 100, the provisions relevant to the present dispute are as follows:
"The following ICL Terms and Conditions apply to this order:
1. ICS Flexible Finance (January 1999) ("FF Terms")
General Conditions of Contract for the Supply of Equipment, Programs and services (September 1998 Edition) ("General Conditions")
Equipment Service (September 1998 Edition)
Program Licence (September 1998 Edition)
The Payment profile for this Agreement is as follows:
| Year |
|
|
| 2000/2001 |
25/03/2000 |
18,110,000.00 |
| 2001/2002 |
25/03/2001 |
18,360,000.00 |
| 2002/2003 |
25/03/2002 |
19,060,000.00 |
| 2003/2004 |
25/03/2003 |
18,460,000.00 |
| 2004/2005 |
25/03/2004 |
13,290,000.00 |
| 2005/2006 |
25/03/2005 |
9,990,000.00 |
| 2006/2007 |
25/03/2006 |
7,920,000.00 |
The Payment Period is 84 months from the Payment Start Date 15th March 2000. Provided the Customer has fully performed all its obligations under the Agreement, the Customer shall have the right to terminate the Agreement at any time following 15th March 2005, subject to giving ICL not less than 6 months prior written notice. For the avoidance of doubt, in the event that EDS wish to exercise this right to terminate on 15th of March 2005, then they must notify ICL (in writing) no later than 15th September 2004. In the event of such termination, the provisions of clause 11.2(b) of the FF Terms shall not apply.
…….
ADDITIONAL CLAUSES
A Amendments to General Conditions
Interpretation
For the purpose of the Agreement the following words all have the following meanings
"Combined Environment" means the Inland Revenue, DSS and MOD estate of ICL VME Systems utilised by EDS, including any element of workload for additional United Kingdom Central Government Departments which may be incorporated in accordance with clause 2(c) hereinafter
"Annual MIPS Census" means a calculation by ICL and agreement with EDS of the actual installed VME MIPS (Actual MIPS) in the Combined Environment on or about the 1st March
"System Service" means that service delivered by ICL in accordance with the ICL System Service Product Description PD-CS-0763, Issue 3 0, dated August 1998
"System Service Charges" means those charges based in column 5 of the table set out in clause 2
"VME Software Library" is the complete VME Software portfolio licensed to run on the Combined Environment ……
2. CALCULATION OF ADDITIONAL CHARGES
Minimum Guaranteed Installed VME System MIPS
(a) ICL hereby agrees to supply the VME Software Licence and the System Service for the number of VME MIPS detailed in the table below for the Payments set out in the Payment Profile and the Systems Service Charges set out in the Payment Profile and the Systems Service Charges set out below
| Year |
DSS/IR
MIPS |
MOD (AFPAA & LISA) MIPS |
Total EDS installed minimum guaranteed MIPS |
System Service Charge (£M) |
| (1) |
(2) |
(3) |
(4) |
(5) |
| 2000/2001 |
5981 |
96 |
6077 |
9 91 |
| 2001/2002 |
5000 |
96 |
5096 |
7 97 |
| 2002/2003 |
5000 |
96 |
5096 |
7 97 |
| 2003/2004 |
5000 |
53 |
5053 |
7 97 |
| 2004/2005 |
3500 |
53 |
3553 |
5.61 |
| 2005/2006 |
2500 |
53 |
2553 |
3 78 |
| 2006/2007 |
2000 |
53 |
2053 |
2 95 |
(b) The total EDS installed minimum guaranteed MIPS shown in the table above represent EDS's estimate of the Actual MIPS for each year (For the purpose of estimating MIPS usage, the year is based on each calendar year during the term of the Agreement, commencing on 15th March in each year and ending on 14th March in the following year)
(c) EDS may, at its sole option, extend the VME Software Licence to include up to a maximum of 400MIPS capacity to be used for additional United Kingdom Central Government Department workloads For the avoidance of doubt, this additional 400MIPS capacity may be used as part of the installed minimum guaranteed MIPS as set out in the table above
(d) Should the Actual MIPS, at the time of the Annual MIPS Census exceed the amounts shown in column (4) above, then the additional MIPS will be the subject of a separate additional charge. The additional charge to EDS for these MIPS will be calculated as follows
(i) Year 2000/2001 No Additional Charge
(ii) Year 2001/2002 First 200 MIPS at No Additional Charge, thereafter for each MIPS
| For the VME Software Licence |
£18.36M |
| |
5096 |
| For System Service: |
£7.97M |
| |
5096 |
(iii) Years 2003/2007 Each additional MIPS charged at
For the VME Software Licence
VME Software Licence Charge for the Year
Installed minimum guaranteed MIPS for the year
For System Services:
System Service Charge for the Year
Installed minimum guaranteed MIPS for the Year
(e) ICL shall invoice EDS for any additional charges (together with VAT thereon) no later than 31st March in each year of the Agreement and EDS shall pay such amounts to ICL in cleared funds on or before 30th April in the same year
For the avoidance of doubt the later invoicing date for the additional charges shall have no effect on the Payment Period
(f) The charges for the additional MIPS will be reviewed annually by ICL, coincident with the Annual MIPS Census, who may adjust the charges to the mutual benefit of EDS and ICL
(g) For the avoidance of doubt, if the Actual MIPS fall below the EDS installed minimum guaranteed MIPS in any year, the Payments in respect of the VME Software Licence as set out in the Payment Profile and Systems Service Charges as set out in the table above shall continue to apply and no rebate will be given for any EDS under-utilisation
(h) For the avoidance of doubt the Agreement specifically excludes the DSS and IR VME Business Continuity Systems as detailed in the ICL/EDS Contract for the Supply of Business Continuity Systems signed by EDS on 9/12/98
3) SYSTEM SERVICE CHARGES
(a) Save for any extra charges payable under Clause 2(d) EDS shall pay the Systems Service Charges due under the Agreement (together with VAT thereon) by Standing Order such that ICL (or its nominated agent) shall have received into cleared funds the System Service Charges (in full) by the 25th March in each year of this agreement. All payments shall be made free from any set off
(b) If any System Service Charge due to ICL is in arrears for more than 30 days, ICL may charge interest on a day to day basis at the base rate of Barclays Bank plc in force from time to time, from the date such sum should have been paid until the date such sum is actually paid
(c) EDS shall pay all taxes, rates or government charges (except any taxes imposed on the income of ICL) which are payable in connection with the supply of the System Service."
- On 28 March 2002, the parties agreed Amendment Agreement No. 2 to EDS 100 at the time that EDS was acquiring new NOVA systems from Fujitsu. This set out the terms upon which such systems would be supplied, licensed and serviced:
"NOW IT IS HEREBY AGREED as follows:"
A. FFA-EDS-100
A1 Precedent
Notwithstanding any provisions to the contrary contained in the Agreement the following amendments and additions to the terms and conditions of the Agreement in relation to technology enhancements and revised financial commitments, shall apply and have precedence for the date of signature of this Amendment Agreement.
A2 Interpretations
A2.1 The interpretations contained within the Agreement shall have the meanings set out therein unless expressly provided otherwise in this Amendment or the context otherwise requires.
A2.2 For the purposes of this amendment the following words shall have the meanings ascribed to them:
"Nova VME System" means the Equipment as defined at Schedule 1 hereto.
"Normal Working Hours" means 0800-1800 Monday to Friday, excluding English Public Holidays
"System Service" means in respect of SX and SY systems the service delivered by ICL in accordance with the ICL System Service Product Description PD-CS-0763, Issue 3.0 dated August 1998 or in respect of Nova VME Systems means the service delivered by ICL in accordance with the ICL Trimetra Nova System Support Service Product Description I0-SD-MSS-001 Issue 1 dated August 2001.
"SY System" means the relevant SY Package as detailed in Schedule 1-7 of Supplemental Agreement 002 dated 9 December 1998 between ICL and EDS.
A3 EDS Commitments
A3.1 EDS intends to reduce the number of Department of Works and Pensions (DWP) data centres to two (2). EDS will promptly notify ICL if this intention should change.
A3.2 EDS shall procure form ICL a minimum of 1,500 VME MIPS at £4,000 per MIP in accordance with the following provisions:
A3.2.1 The minimum size of Nova VME System available for purchase by EDS at the above price will be 150 MIPS. EDS will order up to 10 Nova VME Systems immediately upon signature of this Amendment by both parties and ICL will ship them (or, if agreed between ICL and EDS, alternative SY Systems) to ICL store on EDS's behalf.
…….
A3.2.3 Any Orders for VME Nova Systems with a VME System size less than 150 MIPS will be charged at £6,500 per MIPS
A3.2.4 Any upgrades to Nova VME Systems will be charged at:
a) £6,500 per MIP for Nova VME Systems with a VME System size less than 150 MIPS
£4,000 per MIP for Nova VME Systems with a VME System size of 150 MIPS and above.
……
A3.7 For the avoidance of doubt the Equipment referred to above in Clauses A3.2 to A3.6 inclusive, shall be the subject of an outright sale agreement between ICL and EDS and shall not be subject to the arrangements in Clause A.5 below.
……
A4 ICL Commitments
A4.1 The system Service Charges and the calculation of additional charges under Additional Clause A2 of the Agreement are hereby amended as detailed in Schedule 2 hereto. ICL's revised System Service Charges have been calculated on the basis that the number of DWP data centres shall reduce to two (2) as referred to in Clause A3.1. In the event that the reduction in the number of data centres is not achieved by 31 March 2003 or upon receipt of any prior notification as referred to in Clause 3.1 then ICL and EDS will review and agree a mutually acceptable adjustment to the System Service Charges at Schedule 2 to reflect the level of service being provided.
Schedule 2
Changes to Clause A2 (Calculation of Additional Charges) of the Agreement
The System Service Charge and Total EDS installed minimum guaranteed MIPS detailed in the table at Clause A2 (a) are hereby amended as follows:
| Year |
Total EDS installed minimum guaranteed MIPS in the Agreement |
Amended Total EDS installed minimum guaranteed MIPS |
System Service Charge (£M) in the Agreement |
Amended System Service Charge (£M) |
| 1 |
|
4 |
|
5 |
| 2002/2003 |
5096 |
5096 |
7.97 |
5.75 |
| 2003/2004 |
5053 |
5053 |
7.97 |
5.4 |
| 2004/2005 |
3553 |
3553 |
5.61 |
3.4 |
| 2005/2006 |
2553 |
2553 |
3.78 |
2.68 |
| 2006/2007 |
2053 |
2053 |
2.95 |
2.05 |
The calculation of separate additional charges under Clause A2 (d) is hereby amended as follows:
For each additional MIPS in excess of those shown in Column (4) above:
Year 2003-2004:
| For the VME Software Licence: |
£18.46M |
| |
5053 |
For System Service: First 500 MIPS at no additional charge thereafter for each additional MIPS:
Year 2004-2005:
| For the VME Software Licence: |
£13.29M |
| |
3553 |
For System Service: First 350 MIPS at no additional charge, thereafter for each MIPS:
For 2005/2006:
| For the VME Software Licence: |
£9.99M |
| |
2553 |
For System Service: First 250 MIPS at no additional charge, thereafter for each MIPS:
Year 2006/2007:
| For the VME Software Licence: |
£7.92M |
| |
2053 |
For the System Service: First 200 MIPS at no additional charge, thereafter for each MIPS
Where the additional MIPS calculated by reference to clause A 2 (d) of the Agreement exceed 1000 MIPs ICL and EDS agree to negotiate in good faith the additional charges that will apply."
- On 10 December 2003, Amendment Agreement No 3 was made which amended both the Payment profile and the total minimum guaranteed MIPS as follows:
"SCHEDULE 1
AMENDMENTS TO THE AGREEMENT
1) In consideration of Fujitsu agreeing to the changes to the minimum guaranteed installed VME System MIPS as set out in 2) below, the Payment profile in Clause 2 of the Agreement appearing on the Order Schedule shall be amended so that the Payments are as shown in the third column below
| Year |
Payment due Date |
VME Software Licence Fees Amount to be paid (£) excluding VAT |
| 2000/2001 |
25/03/2000 |
18,110,000.00 |
| 2001/2002 |
25/03/2001 |
18,360,000.00 |
| 2002/2003 |
25/03/2002 |
19,060,000.00 |
| 2003/2004 |
25/03/2003 |
18,480,000.00 |
| 2004/2005 |
25/03/2004 |
13,290,000.00 |
| 2005/2006 |
25/03/2005 |
14,889,555.00 |
| 2006/2007 |
25/03/2006 |
14,659,523.00 |
2) The table in Clause A2 (a) of Amendment No. 2 relating to the minimum guaranteed installed VME System MIPS, shall be amended as follows:
| (1) |
(2) |
(3) |
(4) |
| Year |
|
MOD (AFPPAA & LISA) MIPS |
Total EDS installed minimum guaranteed MIPS |
| 2000/2001 |
5961 |
96 |
6077 |
| 2001/2002 |
5000 |
96 |
5096 |
| 2002/2003 |
5000 |
96 |
5096 |
| 2003/2004 |
5000 |
53 |
5053 |
| 2004/2005 |
3500 |
53 |
3553 |
| 2005/2006 |
3747 |
53 |
3800 |
| 2006/2007 |
3747 |
53 |
3800 |
3) Additional VME Software Licence charges will apply in respect of each additional MIP in excess of the Total EDS installed minimum guaranteed MIPS shown in column four (4). For the avoidance of doubt the System Service Charge (£M) and the method of calculation for additional MIPS shall remain unchanged by the Amendment Agreement."
- When the new Agreements EDS 200, 300 and 400 were concluded, there was also a further amendment to EDS 100, Amendment Agreement No. 5, made on 30 March 2005. This provided as follows:
"THIS AMENDMENT AGREEMENT No 5 is made on the 30th day of March 2005 (the "Effective Date")
….
NOW IT IS HEREBY AGREED as follows
Amendments
The Agreement as amended shall be varied and extended as set out in Schedule 1. If there is any conflict between the terms of this Amendment Agreement and the terms of the Agreement as amended, the terms of this Amendment Agreement shall prevail.
SCHEDULE 1
AMENDMENTS TO THE AGREEMENT
1. SYSTEM SERVICE CHARGES – Guaranteed MIPS
1.1 In consideration of Fujitsu agreeing to the changes to the minimum guaranteed installed VME System MIPS ("Guaranteed MIPS") as set out in Column 3 of the table below, the Payment Profile in Clause 2 of the Agreement (as amended by Amendment No. 2) shall be amended so that the System Service Charges shall be as shown in Column 4 below.
| Column1 |
Column 2 |
Column 3 |
Column 4 |
| Year |
Payment Date |
Guaranteed MIPS |
System Service Charges Amount to be paid (£) excl VAT |
| 2005/2006 |
25/03/2005 |
3800 |
2,680,000 |
| 2006/2007 |
25/03/2006 |
3800 |
3,130,000 |
1.2 Additional System Service Charges will apply in respect of each additional MIPS in excess of the total Guaranteed MIPS shown in Column 3. For the avoidance of doubt the Payments in respect of VME Software Licences and the method of calculation for additional VME Software MIPS shall remain unchanged by this Amendment Agreement.
2. SYSTEM SERVICE CHARGES – Additional MIPS
2.1 The calculation of additional System Service Charges under Clause A2 (d) of the Agreement is hereby amended as follows:
For additional MIPS in excess of those shown in Column 3 above ("Additional MIPS")
Year 2005/2006
An additional charge of £450,000 excluding VAT shall apply, irrespective of the number of Additional MIPS used.
Year 2006/2007
For each Additional MIPS used an additional Payment shall be made by the Customer as follows set out below:
| £2,050,000=£998.54 |
per Additional MIPS |
| |
2053 |
For the avoidance of doubt - £998.54 will be payable for each Additional MIPS identified by the Annual MIP Census over the Guaranteed MIPS of 3800.
For the further avoidance of doubt the additional Payment set out above shall not apply to MIPS identified as being exclusively for use for Business Continuity purposes for DWP."
- On 29 March 2005, a side letter was sent by Fujitsu to EDS concerning the continuation of the BCA for a further period of 12 months until 31 March 2006. This was signed by EDS as agreed on 28 April 2005. The terms of the letter so far as relevant were as follows:
"Re: Business Continuity Contract ref. OHA18730RP dated 11 December 1998 as amended by the Amendment Contract Agreement to FFA-EDS-100 dated 28th March 2002 (the "BC Contract");
Notwithstanding Fujitsu's notice of termination dated 29th September 2004 in relation to the BC Contract and EDS's notice of termination dated 22nd December 2004 in relation to the Development Contract, Fujitsu and EDS have now agreed as follows:
1. The BC Contract
1.1 The notice of termination dated 29th September 2004 is hereby withdrawn.
1.2 The BC Contract shall, with the exception of the licensed Programs at Schedule 2, continue in full force and effect until 31st March 2006 (the "Extended Period") unless terminated by EDS giving to Fujitsu one (1) months written notice. Licensing of the Programs is the subject of a separate agreement (EDS-200) between the parties of even date.
1.3 The following Charges shall apply during the period 1st April 2005 to 31st March 2006:
1.3.1 Payment Profile for Trimetra SY Node Packages and System Service:
£67,500 (excluding VAT) per calendar month, or any part thereof.
Payment in respect of each month shall be payable in advance on 1st of each month."
- Turning to the new Agreements, these were all dated 30 March 2005 which was the Effective Date for the purposes of all three Agreements. EDS 200 dealt with the licensing of software for business continuation purposes and EDS 300 dealt with the licensing of software for live estate purposes. EDS 200 so far as relevant provided as follows:
"WHEREAS:
The Customer has requested and Fujitsu has agreed to provide the Customer with a licence to use certain Products for Business Continuity purposes on the terms and subject to the conditions set out below.
NOW IT IS HEREBY AGREED as follows:
1. Definitions and Interpretation
1.1 For the purposes of this Agreement the following terms shall have the meaning ascribed to them:
"Annual Business Continuity MIPS Census" means the annual calculation by Fujitsu and agreement with the Customer of the actual installed VME MIPS ("Actual BC MIPS") in the Business Continuity Estate on the first working day of March each year during the term of this Agreement.
"BC Contract" means the Business Continuity Contract ref OHA1873ORP dated 11 December 1998.
"Business Continuity" means the continued processing of the DWP applications workload in the event of a failure of the live service, by switching that workload to the Business Continuity Estate.
"Business Continuity Estate" means those DWP estate Fujitsu VME Systems within the Combined Environment capable of delivering to the DWP user application services, excluding development workloads, or validation facilities, for the purposes of providing Business Continuity.
"Combined Environment" means the DWP (formerly DSS), MOD and HMP Quantum estate of Fujitsu VME Systems utilised by the Customer
"DWP" means the Department of Works and Pensions.
"Products" means VME Software Library, being the complete VME Software portfolio, as updated from time to time by Fujitsu, licensed to run on the Combined Environment including all supported Fujitsu VME systems equipment up to and including Fujitsu Nova 400 but excluding third party software.
"VME Systems" means the Fujitsu Trimetra Systems, which are sold in accordance with the relevant Fujitsu Product Description.
This Agreement shall commence on the Effective Date and unless terminated earlier in accordance with the provisions of this Agreement or extended in accordance with the provisions of Clause 2.2 shall continue until 31st August 2010 (the "Initial Finance Period").
……..
2.4 The licence previously granted to the Customer to use the Products under the BC Contract is hereby terminated and upon and subject to the terms of this Agreement, Fujitsu hereby grants to the Customer a licence to use the Products during the Initial Finance Period to enable the Customer to use the Products for Business Continuity purposes.
……
7.1. The Payments to be made by the Customer are set out in the table in Clause 7.5 below and will apply in relation to the Customer's use of the Products for Business Continuity purposes only and in respect of the Minimum Guaranteed MIPS ("Business Continuity Guaranteed MIPS") levels set out in Clause 7.9.
7.3. The Customer may only use the Products for the sole purpose of providing a Business Continuity Service to DWP. Any other use of the Products by the Customer will be strictly conditional upon the Customer notifying Fujitsu in advance in writing of such required use and subject to the Customer's payment of such additional charges as are agreed by the parties.
7.5 The Payments are as follows:
| Year |
Period |
Payment due Date |
Payment excluding VAT |
| 2005/2006 |
01/04/2005 to 14/03/2006 |
- |
£0 |
| 2006/2007 |
15/03/2006 to 14/03/2007 |
25/03/2006 |
£648,684 |
| 2007/2008 |
15/03/2007 to 14/03/2008 |
25/03/2007 |
£512,119 |
| 2008/2009 |
15/03/2008 to 14/03/2009 |
25/03/2008 |
£341,413 |
| 2009/2010 |
15/03/2009 to 14/03/2010 |
25/03/2009 |
£341,413 |
| 2010 |
15/03/2010 to 31/08/2010 |
25/03/2010 |
£117,361 |
7.8 The Payment Period is 53.5 months from the payment start date on 15th March 2006.
7.9. The following Table identifies the Business Continuity Guaranteed MIPS and the periods to which the above Payments apply:
| Year |
Business Continuity Guaranteed MIPS |
| 2006/2007 |
2850 |
| 2007/2008 |
2250 |
| 2008/2009 |
1500 |
| 2009/2010 |
1500 |
| 2010 |
1125 |
| 2010/2011 |
1125 |
- EDS 300 so far as relevant provided as follows:
"WHEREAS:
Fujitsu has licensed the Customer to use certain Products on the Live Estate as defined below.
The Customer wishes to extend the term of its licence to use the Products on the Live Estate and Fujitsu has agreed to extend such licence on the terms and subject to the conditions set out below.
NOW IT IS HEREBY AGREED as follows:
1. Definitions and Interpretation
1.1 For the purposes of this Agreement the following terms shall have the meaning ascribed to them:
"Annual MIPS Census" means the annual calculation by Fujitsu and agreement with the Customer of the actual installed VME MIPS ("Actual MIPS") in the Combined Environment on the first working day of March each year during the continuation of the Agreement.
"EDS 100 Agreement" means Flexible Finance Agreement FFA-EDS-100 dated 29th December 1999 and any amendment thereto.
"MOD" means the Ministry of Defence.
"Live Estate" means those systems within the Combined Environment capable of delivering user application services, development workloads, or validation facilities.
……
2.5 Upon and subject to the terms of this Agreement, Fujitsu hereby grants an extension of the Customer's licence to use the Products for the period specified in Clause 2.1 to enable the Customer to use the Products to provide a service or services in the Live Estate and to enable the Customer at its sole option to include up to a maximum of 400 MIPS capacity to be used for additional United Kingdom Central Government Department workloads on the basis of the charges set out in this Agreement.
In the event that the Customer exercises its right set out in Clause 2.2 above the licence granted in accordance with Clause 2.4 shall be extended until 31st March 2011.
For the avoidance of doubt, the Customer agrees that any failure on the part of Fujitsu to license the Customer to use the Products during the extension period referred to in Clause 2.1 as a result of the termination of the EDS 100 Agreement prior to 15 March 2007 for whatever reason shall not be deemed to be an event of frustration under this Agreement and the Customer agrees that it shall remain liable to make and shall procure that any assignee or person to whom this Agreement is novated remains liable to make the Payments hereunder, including, but not limited to any amount that may become due under Clause 11 of the FF Terms, referred to below, notwithstanding such termination.
……..
Charges
The Payments to be made by the Customer are as set out in the table in Clause 7.2 below and will apply in relation to the Customer's use of the Products on the Live Estate and in respect of the Minimum Guaranteed MIPS levels ("Guaranteed MIPS") set out in the table in Clause 7.4.
7.2 The Payments are as follows:
| Year |
Period |
Payment due Date |
Payment excluding VAT |
| 2007/2008 |
15/03/2007 to 14/03/2008 |
25/03/2007 |
£11,573,310 |
| 2008/2009 |
15/03/2008 to 14/03/2009 |
25/03/2008 |
£7,715,540 |
| 2009/2010 |
15/03/2009 to 14/03/2010 |
25/03/2009 |
£7,715,540 |
| 2010 |
15/03/2010 to 31/08/2010 |
25/03/2010 |
£2,652,217 |
7.4. The following Table identifies the Guaranteed MIPS and the periods to which the above Payments apply:
| Year |
Total Guaranteed MIPS |
| 2007/2008 |
3000 |
| 2008/2009 |
2000 |
| 2009/2010 |
2000 |
| 2010 |
1500 |
| 2010/2011 |
1500 |
- Agreement EDS 400 concerns the system service for both the live estate and the business continuity estate, for which different charging regimes apply. It provides so far as relevant to the current dispute:
"WHEREAS:
A. The Customer wishes to procure certain products and services from Fujitsu to enable the Customer to provide a service or services to the DWP.
B. Fujitsu has agreed to supply the products and services to the Customer on the terms and subject to the conditions set out below.
………
2. Term
This Agreement shall commence on the Effective Date and unless terminated earlier in accordance with the provisions of this Agreement or extended in accordance with the provisions of Clause 2.2 shall continue until 31st August 2010 (the "Term").
……..
4. System Service Charges
4.1 Live Estate – Guaranteed MIPS
4.1.1 The Table below shows the total minimum guaranteed MIPS (the "Guaranteed MIPS") installed in the Customer's Live Estate in the specified years, together with the associated System Service Charges to be paid by the Customer:
| Year |
Period |
Total Guaranteed MIPS |
System Service Charge excluding VAT |
| 2007/2008 |
15/03/07 to 14/03/08 |
3000 |
£2,546,274 |
| 2008/2009 |
15/03/08 to 14/03/09 |
2000 |
£1,782,392 |
| 2009/2010 |
15/03/09 to 14/03/10 |
2000 |
£1,782,392 |
| 2010 |
15/03/10 to 31/08/10 |
1500 |
£641,873 |
4.3 Business Continuity Estate – Guaranteed MIPS
4.3.1 The following table identifies the Guaranteed MIPS for Business Continuity purposes together with the associated System Service Charges:
| Year |
Period |
Total Guaranteed Business Continuity MIPS |
System Service Charge (excl VAT) |
| 2006/2007 |
15/03/06 to 14/03/07 |
2850 |
£569,167 |
| 2007/2008 |
15/03/07 to 14/03/08 |
2250 |
£381,941 |
| 2008/2009 |
15/03/08 to 14/03/09 |
1500 |
£267,359 |
| 2009/2010 |
15/03/09 to 14/04/10 |
1500 |
£267,359 |
| 2010 |
15/03/10 to 31/08/10 |
1125 |
£96,281 |
Business Continuity Estate – Additional MIPS
4.4.1 Additional System Service Charges will be payable by the Customer in respect of each additional MIP in excess of the total Guaranteed MIPS set out in 4.3.1 above.
4.4.2 To calculate the charges for additional MIPS the total number of Actual MIPS shall be compared with the total Business Continuity Guaranteed MIPS. In the event that the total Actual MIPS exceed the total Business Continuity Guaranteed MIPS for the relevant year, additional System Service Charges shall be calculated by applying the following charges for each Additional MIP according to the relevant charge band:
(All Charges shown are exclusive of VAT
|
Total Actual MIPs |
15/03/06 to 14/03/07
|
15/03/07 to 14/03/08
|
15/03/08 to 14/03/09
|
15/03/09 to 14/03/10
|
15/03/10 to
31/08/10
|
15/03/10 to
31/03/11 |
| Guaranteed MIPS |
|
2850 |
2250 |
1500 |
1500 |
1125 |
1125 |
| System Service Charge Bands per additional MIPS |
More than 2850 |
£199.71 |
£203.70 |
£207.78 |
£211.93 |
£99.08 |
£225.18 |
| |
2250 to 2849 |
n/a |
213.8 |
£218.16 |
£222.53 |
£104.03 |
£236.44 |
| |
1125 to 2249 |
n/a |
n/a |
£228.55 |
£233,12
|
£108.99 |
£247.69 |
| For information only System Service Charge Per Guaranteed MIP (based on the Charges set out in Clause 4.3.1) |
|
£199.71 |
£169.75 |
£178.24 |
£178.24 |
£85.58 |
£194.51 |
4.4.3 The Additional System Service Charges shown in the table set out in Clause 4.4.2 above for the period 15 March 2010 to 31 March 2011 shall apply in lieu of the Additional Fee per Additional MIP shown for the period 15 March 2010 to 31 August 2010 in the event that the Customer exercises its right under Clause 2.2 of this Agreement."
Issue 1 Did the contract under which Fujitsu supplied BCE 011 and BCE 012 to EDS incorporate the software licensing and system service provisions of EDs 100?
- The case originally advanced by EDS in its pleadings and in Mr Lazarus' Skeleton Argument was that only the provisions referable to the purchase of equipment in EDS 100 were incorporated in the agreement by Fujitsu to supply BCE 011 and 012. In my judgment that argument, which assumed less prominence in Mr Lazarus' oral submissions, is unsustainable for three reasons. First, as I have said, the Quotation stated expressly that it was "subject to the terms and conditions of FFA-EDS-100". It did not restrict which terms and conditions it was subject to, as it would have had to do for EDS' argument to have any force. Second, the Paying Agency Agreement, which was entered between Fujitsu, EDS and the Hewlett Packard Bank at the same time as the two systems were purchased, made it quite clear that EDS was liable to pay not just the purchase price but also "all sums due under the EDS 100 Agreement". Third and perhaps most importantly, it seems to me impossible to extricate the terms concerning the price from other terms concerning licensing and system service. All these provisions interconnect.
- On the basis that the agreement by Fujitsu to supply the two NOVA systems was subject to all the terms and conditions of EDS 100, the question then arises what terms are relevant for present purposes. It seems to me that, since these were NOVA systems, they were covered by Amendment Agreement No. 2. BCE 011 and 012 were indeed purchased on the basis of the price of £4,000 per MIP set out in Clause A3.2 of that Amendment Agreement. However, that Amendment Agreement dealt not just with the purchase price for such systems but also the terms for licensing and systems service of NOVA systems.
- Paragraph 2 of Schedule 2 set out the basis for charging for both software licensing and systems service for any additional MIPS above the guaranteed minimum. These figures were subsequently amended by Amendment Agreement No 3 which applied as at August 2004 when the agreement to supply BCE 011 and 012 was made, so that the guaranteed minimum MIPS were 3,800 for each of the years 2005/2006 and 2006/2007 and the charges for any actual MIPS above those minima were adjusted accordingly.
- Nothing in either of these Amendment Agreements applicable to NOVA systems refers expressly to the use to which EDS might put the systems, in the sense that there are no provisions which deal in terms with whether the software licensing and systems service charges will fall to be reduced in the event that the relevant NOVA system or some part of it is to be used for business continuity purposes rather than as part of the live estate. It is no doubt for that reason that in the past, the parties had reached some express agreement for a reduced rate of licence and systems service charge at 50% of actual MIPS. As I have said, they did not do so on this occasion, no doubt because the relationship between them was in a state of flux and they were negotiating terms of the relationship going forward to 2010, which terms, if they thought about BCE 011 and 012 at all (and the only sign that they may have done is the internal e-mail from Ms Tokley to Ms Doran of 11 January 2005 which I quoted above) would encompass those two machines. However, until those new agreements were entered into and did cover these two mainframes, it seems to me that they were covered under EDS 100 and subject to the regime of that agreement as regards both software licensing and systems service.
- Mr Lazarus for EDS urges me not to conclude that EDS 100 applied in relation to charging for software licensing and system service on two main grounds. First he contends that when the agreement in relation to BCE 011 and 012 is looked at against the commercial background and not in isolation, the Court should reach a different conclusion. In that context he relies upon a passage in the recent judgment of Moore-Bick LJ in Ravennavi SpA v New Century Shipbuilding [2007] EWCA (Civ) 58; [2007] 2 Lloyd's Rep 24. At paragraph 12, Moore-Bick LJ said this:
"Unless the dispute concerns a detailed document of a complex nature that can properly be assumed to have been carefully drafted to ensure that its provisions dovetail neatly, detailed linguistic analysis is unlikely to yield a reliable answer. It is far preferable, in my view, to read the words in question fairly as a whole in the context of the document as a whole and in the light of the commercial and factual background known to both parties in order to ascertain what they were intending to achieve."
- I certainly accept that EDS 100, as amended from time to time, is not an agreement the terms of which can be said to dovetail neatly, so that the principle stated by Moore-Bick LJ applies. However, as I see it, the difficulty which Mr Lazarus' argument faces is in relation to the application of the principle to the facts of this case. The matters on which he relies by way of background are as follows. First he says that the EDS 100 umbrella agreement was used for the supply of equipment which did not require licensing, such as fibre channels. This is no doubt correct but does not take matters much further since BCE 011 and BCE 012 did not fall into that category. On any view, they were mainframe systems which did require licensing for the software to be used on them.
- Second, he relies on the fact that there was no discussion of the revenue implications of the terms of EDS 100 if the provisions of the agreement as regards software licensing and system service applied without some reduction. It is no doubt the case that, for whatever reason, the parties did not consider those implications when the agreement in relation to BCE 011 and 012 was entered, as they had in the past, for example in relation to the NOVA systems at Bicester where BC use attracted a 50% charge. However, that is not in itself a reason for rewriting the terms of EDS 100.
- That last point tied in with the second ground for contending that the Court should not apply the terms of EDS literally, which was commercial absurdity. Mr Lazarus relied upon the acceptance by Mr White in cross-examination that it would have been commercially absurd for EDS to agree to pay £2.1 million per annum for software licensing on systems which it was only intending to use for business continuity. Mr Lazarus then relied on the well-known passage in the speech of Lord Diplock in The Antaios [1985] 1 AC 191 at 201:
"While deprecating the extension of the use of the expression "purposive construction" from the interpretation of statutes to the interpretation of private contracts, I agree with the passage I have cited from the arbitrators' award and I take this opportunity of re-stating that if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense."
- This is a powerful argument and I certainly agree that the position in which EDS had placed itself, because no-one had thought about the financial implications of EDS 100 as regards licensing and system service was one which was commercially absurd and on any view a bad bargain, although the provisions of EDS 100 as regards actual MIPS are pretty clear and are not tied in terms to use on the live estate. It can also be said with considerable force that Fujitsu itself did not think that the software licensing and system service provisions of EDS 100 applied to BCE 011 and 012, as evidenced by the 2005 MIPS census agreed in January 2005. Even when its mistake (if it was a mistake) was discovered 12 months later, Fujitsu originally thought, not that it was contractually entitled to be paid on the basis of 100% of actual MIPS, but that the 50% agreed in relation to other business continuity use was a suitable precedent for agreeing that rate.
- The problem which EDS inevitably faces in relation to that evidence is that it is all conduct subsequent to the making of the agreement for the supply of the two NOVA mainframes and, as English law currently stands, inadmissible as an aid to construction of that agreement. Had the new agreements EDS 200, 300 and 400 and related agreements not been made at the end of March 2005 and had only EDS 100 applied, difficult questions might arise as to whether there was an estoppel by convention which precluded any claim by Fujitsu based on 100% of actual MIPS.
- Since, for reasons which I will develop below, I consider that the charging for software licensing and system service on BCE 011 and 012 are governed by the various agreements entered into at the end of March 2005, it follows that even if the terms of EDS 100 as regards those matters did apply, they only did so from September 2004 when the two mainframes were installed until the new agreements came into force at the end of March 2005. Because they were not covered by the March 2004 census, no charges would have been incurred in any event under EDS 100 until March 2005 when the March 2005 census took place. Any entitlement to charge for 100% of actual MIPS on the basis of the March 2005 census (which of course did not happen because the census as originally agreed did not include BCE 011 and 012) was overtaken by the subsequent agreements which came into effect at the end of March 2005.
- It follows that there is no need to consider any question of estoppel and, in a very real sense, this first issue is academic. Nevertheless, to the extent that the issue arises, I am not convinced by Mr Lazarus' arguments that I should disregard the provisions of EDS 100 and somehow conclude that, just because through inadvertence EDS had made a bad bargain, EDS should be relieved from it, at least as a matter of contract, as opposed to estoppel. The furthest I would be prepared to go if the issue were determinative is to say that, in the light of the definition of "System Service" in clause A2.2 of Amendment Agreement No. 2 (which seems to contemplate 24 hour service cover for NOVA systems), Fujitsu might not be entitled to recover the system service charge for BCE 011 and 012, since it appears that they were only provided with service cover from 9 to 5 on weekdays. However, this was not a matter which was explored in the evidence, so I say no more about it.
Issues 2 and 3: Irrespective of the answer to the first issue, were software licensing in 2005/6 and 2006/7 and system service in 2006/7 governed by EDS 100 or by EDS 200 and 400 in relation to BCE 011 and BCE 012 and were software licensing and system service in 2006/7 governed by EDS 100 or by EDS 200 and 400 in relation to DCI 165?
- It is convenient to consider issues 2 and 3 together. I will address first the question of software licensing. In my judgment, the definitions of "Business Continuity" and the "Business Continuity Estate" in EDS 200 are wide and clearly encompass all mainframes used for business continuity purposes, including BCE 011 and 012. Although it is correct that the first sentence of clause 2.4 refers to the revocation of the licence previously granted under the BC Contract (which was only referable to the SY systems leased under the BCA), EDS 200 overall is not restricted to the systems previously leased under the BCA. If it were, then the definition of the Business Continuity Estate would be limited to those systems.
- Accordingly, I consider that the licence granted by the second sentence of clause 2.4 applies to all use of the software ("the Products") for business continuity purposes, including use of that software for those purposes on BCE 011 and 012. That licence is granted during the "Initial Finance Period". Although this phrase is somewhat inapposite, it is clearly defined as being from the Effective Date of EDS 200 i.e. 30 March 2005 until 31 August 2010. Nonetheless, Mr Michael Douglas QC for Fujitsu contends that EDS 100 still applies to the licensing of BCE 011 and 012 until EDS 100 expires on 15 March 2007 i.e. for 2005/2006 and 2006/2007.However, I agree with Mr Lazarus that EDS 100 is not to be construed as some overarching agreement trumping any other and that the various agreements have to be considered together. When they are, it seems to me that the clear provisions of clauses 2.1 and 2.4 of EDS 200 as regards licensing for business continuity purposes do not leave it open for EDS 100 to continue to "govern" BCE 011 and 012 as regards software licensing.
- Mr Douglas had a fall-back alternative case to the effect that even if EDS 200 applied as regards software licensing for the 2006/2007 year, it did not apply for 2005/2006 to which EDS 100 continued to apply. In support of that contention, he relies upon the provisions of clauses 7.5 and 7.9 of EDS 200, which do not contain any charges (or any Business Continuity Guaranteed MIPS upon which such charges could be based) for licensing in the 2005/2006 year.
- However, what clause 7.5 does contain in its table is an entry for the period 1 April 2005 to 14 March 2006 of £0 for the payment due for that period. In my judgment, far from that demonstrating that EDS 100 somehow continues to apply to the licensing of BCE 011 and 012, it demonstrates the precise opposite. For whatever reason, the commercial bargain struck between the parties was that EDS 200 would govern the licensing of software for business continuity purposes on whatever systems fell within the Business Continuity Estate (which as I have said, included BCE 011 and 012) and that for the first period of the agreement, from the Effective Date until 14 March 2006, no payment would be due.
- The point can be tested by reference to the SY systems originally leased under the BCA. These are clearly licensed from 1 April 2005 only under EDS 200, both because the first sentence of clause 2.4 terminates the previous licence and because the extension of the BCA until 31 March 2006 agreed in the side letter dated 29 March 2005 excludes the licensing provisions in Schedule 2 of the BCA. Thus, those remaining SY systems are licensed under EDS 200 but nothing is payable for the first year until 14 March 2006. Given that the definitions of Business Continuity and Business Continuity Estate also cover BCE 011 and 012 and that the licence granted by the second sentence of clause 2.4 is in respect of all software used for business continuity purposes and thus includes BCE 011 and 012, similarly nothing is payable in respect of the use of the software on those NOVA systems in the first year from 1 April 2005 until 14 March 2006.
- For the second year from 15 March 2006 to 14 March 2007, the total payable for the use of the software on systems for BC purposes (including BCE 011 and 012) is the sum of £648,684 set out in clause 7.5 of EDS 200, always assuming that the actual business continuity MIPS did not exceed the guaranteed MIPS for that year of 2850 set out in clause 7.9, which I understand they did not.
- Similar considerations apply in my judgment to system service which is dealt with by EDS 400. On the basis that, for the reasons I have given already, BCE 011 and 012 fell within the Business Continuity Estate the system service for 2006/2007 and subsequent years falls to be paid for under the regime set out in clauses 4.3 and 4.4 of EDS 400 (referring to the Business Continuity Estate) rather than under clauses 4.1 and 4.2 which deal with the Live Estate. Accordingly, for the period from 15 March 2006 until 14 March 2007, the total payable for system service for the Business Continuity Estate (including BCE 011 and BCE 012) is the sum of £569,167 set out in clause 4.3.1 of EDS 400, again always assuming that the actual business continuity MIPS did not exceed the guaranteed MIPS for that year of 2850.
- Unlike the equivalent table in clause 7.5 of EDS 200, the table in clause 4.3.1 of EDS 400 did not include any entry for the period from 1 April 2005 to 14 March 2006, the first period after the Effective Date. As regards the SY systems leased under the BCA, the side letter dated 29 March 2005 makes it clear that the BCA is extended for the purposes of rental and system service until 31 March 2006, with a fixed sum of £67,500 payable per calendar month or part thereof for both rental and system service.
- As regards other systems used for business continuity purposes not covered by the BCA in the past, such as BCE 011 and 012 (and for that matter DCI 165), it may be that the parties did not consider the position as regards them for the 2005/2006 year when they agreed EDS 400. This absence of focus can be explained by the fact that, even if EDS 100 had continued to apply to these systems (and I have concluded that it did not, because of the wide definition of Business Continuity and Business Continuity Estate in both EDS 200 and EDS 400), the system service charge for them would be subsumed within the lump sum payable for additional MIPS of £450,000 set out in paragraph 2.1 of Schedule 1 to Amendment Agreement No.5. This is no doubt the reason why Fujitsu is not pursuing a claim in these proceedings for system service charges in 2005/2006.
- I should deal with a point Mr Douglas made in support of his case that EDS 100 continued to govern charging for BCE 011 and 012. This was that Additional Clause 2 (d) of EDS 100 gave Fujitsu an accrued right to be paid for any additional MIPS over and above the actual MIPS as at 1 March 2005 which was not overridden by EDS 200 to 400. I am not certain that, on analysis, this is any more than another way of putting his primary case that EDS 100 is in effect overarching and not affected by EDS 200 to 400. I have already rejected that argument on the basis that the provisions in EDS 200 and 400 as regards the Business Continuity Estate clearly encompass BCE 011 and 012.
- However, as I see it, this point also faces the insuperable difficulty on the facts that at the time when the March 2005 census was agreed in January 2005, it did not include the 550 MIPS for these two machines and so there was no accrued right such as that for which Mr Douglas contends. I do not see how the subsequent unilateral attempt by Fujitsu in March 2006 to reopen that March 2005 census and include the 550 MIPS of BCE 011 and 012 as part of the Actual MIPS, can create an accrued right as at 30 March 2005 retrospectively, after EDS 200 to 400 have on any view come into effect.
- So far as DCI 165 is concerned, EDS accepts that although that system had only been used for business continuity purposes since July 1999, it had been treated in all the MIPS censuses up to and including that for 1 March 2005 agreed on 13 January 2005 as part of the Live Estate and charged accordingly. EDS is not seeking to undo that position as regards the 2005/2006 year. However, EDS contends that for the 2006/2007 year, DCI 165 falls under EDS 200 and the Business Continuity Estate provisions of EDS 400 for the purposes of assessing software licence and system service charges.
- It will be apparent from my reasoning above in relation to BCE 011 and BCE 012 concerning the width of the definition of "Business Continuity" and the "Business Continuity Estate" in those two agreements, that by parity of reasoning, I consider that those agreements govern such charges for the 2006/2007 year for DCI 165. Put very shortly, those definitions clearly encompass DCI 165 which was only used for business continuity purposes after July 1999. On any view, since EDS 100 does not have overarching effect, it ceased to apply to DCI 165 as at 15 March 2006 and EDS 200 and EDS 400 took over.
- I have reached the conclusion that the answer to the second and third issues is that EDS 200 and 400 apply, by construing those agreements and the other agreements and extensions or amendments to agreements made at around the same time, without regard to the overall commercial background, save in a very general sense. In fact Mr Lazarus, relying again on the passage from the judgment of Moore-Bick LJ in Ravennavi to which I have already referred, also seeks to support his argument as to the correct construction of the various agreements made at the end of March 2005 by reference to a number of matters said to comprise the commercial background or factual matrix against which the March 2005 agreements are to be construed.
- His first two points are inter-related. He submits first that there is a clear continuity in the dealings between the parties that the Business Continuity MIPS are charged at a fraction of those for Live Estate for both software licensing and systems service, and second that there is no evidence anywhere of an intention to depart from that approach in the various new agreements. I certainly see some force in this point in relation to the various BC partitions of the NOVA systems. Where the parties considered expressly the question of licensing and system service charging at the time of contracting, a figure of 50% of actual MIPS was agreed.
- Equally, a comparison between the different charging regimes in EDS 200 and 300 on the one hand and within EDS 400 on the other demonstrates that that approach continues in the new agreements. It can be said with some force that treatment of BCE 011 and 012 on the same basis as regards licence and system service charges as if they were in use as production mainframes, part of the Live Estate, would be anomalous. Although I have reached the reluctant conclusion on the first issue that, no doubt because the parties had simply not thought about licence or system service charges for BCE 011 and 012 when they were supplied, the 100% charges in EDS 100 would have applied, that is no reason for construing EDS 200 to 400 as having the same anomalous effect. On the contrary, where, as I have held, the definition of the Business Continuity Estate in EDS 200 and 400 is clearly wide enough to encompass BCE 011 and 012, the fact that the contrary conclusion would be anomalous is further support for the conclusion as to the construction of the new agreements which I have reached.
- That construction is similarly supported by the other two matters of background upon which Mr Lazarus relies. His third point is that, whether or not caused by a multiplicity of errors on the part of Fujitsu executives, the fact remains that the March 2005 MIPS census when it was agreed in January 2005, before and at the time when EDS 200 to 400 were being negotiated, categorised BCE 011 and 012 as Business Continuity machines falling outside the MIPS census. I agree with him on this point. Although Fujitsu sought to correct the census much later in February 2006, at the time when it was actually agreed, neither party was treating these two machines as live.
- Finally, Mr Lazarus draws attention to other documents (aside from the March 2005 census) prior to the making of the new agreements which draw the clear distinction between live machines on the one hand and business continuity machines located at Swindon, including BCE 011 and 012 on the other. He referred in particular to two documents which passed from Fujitsu to EDS before the new agreements were concluded. First, the DWP Strategy Plan prepared by Fujitsu in a version dated 21 March 2005. Like earlier versions of this and similar documents, this identified BCE 011, BCE 012 and DCI 165 as part of the "Business Continuity Service placement" at the Business Continuity Centre in Swindon. Second, he relied on the Service Manual dated 10 March 2005. this drew a distinction for system service between the "Production and Business Continuity Mainframe Systems" at the various data centres (including DCI 165 at Swindon) which received 24 hour cover all year round and the Business Continuity Systems at Swindon which only received cover from 9 to 5 on weekdays.
- This point is probably clearer and stronger in relation to the Strategy Plan, but both documents demonstrate an overall distinction which places BCE 011 and 012 as part of the Business Continuity Estate (whatever Fujitsu may be seeking to contend after the event) immediately prior to the conclusion of the various agreements on 29 and 30 March 2005.
- Thus, in my judgment, the matters of background upon which Mr Lazarus relies do support the construction of EDS 200, 300 and 400 which I have concluded is the correct one, although I would still have reached the same conclusion even without those matters.
Issue 4: Is Fujitsu entitled to recover in relation to BCE 011 and BCE 012 pursuant to an implied term or a quantum meruit on one of the bases pleaded in the Amended Particulars of Claim?
- The fourth issue can be dealt with very briefly. In view of my conclusion on the other issues, particularly that EDS 200 and the Business Continuity part of EDS 400 apply by their express terms to licence and system service charges for the three systems in dispute, there is no scope for either of these alternative ways in which Fujitsu puts its case and Mr Douglas did not press his submissions on this issue in closing. Clearly, there would be no room for any implied terms as contended for, as they would contradict the express terms of the various agreements which I have found to be applicable. Equally, with a contractual regime in place which governs the charging for licensing and system service, there is no scope for any claim in quantum meruit.
Conclusion
- It follows that the various ways in which Fujitsu seeks to recover licensing and system service charges in respect of BCE 011, BCE 012 and DCI 165 above and beyond what EDS has already paid all fail and the claim must be dismissed.
