In Disclosure and Barring Service v Tata Consultancy Services Ltd, [2025] EWCA Civ 380, England’s Court of Appeal set out factors to be considered when deciding whether a contractual clause is a condition precedent, including the precise words used and their contractual context. Here, the Court of Appeal concluded that the words used in the clause in question were sufficiently clear to amount to a condition precedent, since they were expressed clearly in the conditional and left the reader in no doubt that the steps in the clause must be fulfilled before the particular options in another clause could be exercised. The provision was not simply a procedural step, but an important element of the contract machinery.
Background
The Appellant, Disclosure and Barring Service (DBS), had entered into an agreement with Tata Consultancy Services Limited, the Respondent (TCS) in respect of an IT modernisation project (Agreement). TCS brought a claim against DBS for £125 million odd and DBS defended and counterclaimed for over £100 million. The court below decided a large number of issues, eventually leading to a net payment by DBS to TCS of just under £5 million. The appeal before the Court of Appeal concerned an issue of construction, namely whether clause 6.1 of the Agreement created a condition precedent, breach of which prevented DBS from being able to recover £1.592 million by way of what were called Delay Payments (akin to liquidated damages).
Clause 6.1 of the Agreement provided: “6. DELAY DUE TO CONTRACTOR DEFAULT 6.1 If a Deliverable does not satisfy the Acceptance Test Success Criteria and/or a Milestone is not Achieved due to the CONTRACTOR’s Default, the AUTHORITY shall promptly issue a Non-conformance Report to the CONTRACTOR categorising the Test Issues as described in the Testing Procedures or setting out in detail the non-conformities of the Deliverable where no Testing has taken place, including any other reasons for the relevant Milestone not being Achieved and the consequential impact on any other Milestones. The AUTHORITY will then have the options set out in clause 6.2.”
Judgment of Court below
The court below found that TCS’s potential entitlement to claim both loss and expense pursuant to the Agreement and general damages at common law for delays was subject to their compliance with the regime set out in the Agreement and that DBS’s right to claim Delay Payments pursuant to the Agreement was conditional on DBS’s compliance with clause 6.1. It also rejected the claim because DBS had failed to comply with clause 6.1, In particular, they had failed to serve any Non-conformance reports (NCRs) at all.
Issue on Appeal
The issue on appeal was whether clause 6.1 had the effect of making the prompt issue by DBS of an NCR a condition precedent to recovering Delay Payments.
The Law
The Court of Appeal said that it is a futile exercise to try to articulate an exhaustive checklist of the factors to be considered in any investigation into whether a particular clause is a condition precedent or not, but from the case authorities, it identified the following general principles:
- Whether or not a party has to comply with one or more stated requirements before being entitled to relief will turn on the precise words used, set within their contractual context.
- To be framed as a condition precedent, a clause needs something that makes the relief conditional upon the requirement.
- As with exclusion clauses or clauses which seek to limit liability, clear words will usually be necessary for a clause to be a condition precedent. That said, it is not necessary for the clause to say in terms “this is a condition precedent”.
- In addition to conditionality, it will usually be necessary for the link between the two steps to be expressed in the language of obligation (i.e. shall) but that will not on its own be sufficient to amount to a condition precedent.
- It is not necessary for the step one condition to be expressed in a finite number of days or weeks. More flexible periods – “timely”, “within a reasonable time” etc have been included in clauses which courts have found to be a condition precedent.
Did Clause 6.1 of the Agreement create a condition precedent?
The Court of Appeal held that the words of clause 6.1, when seen in their context, were clear, namely that on the occurrence of one or both of two different events (“if”), DBS “shall promptly issue” an NCR. Those two events were i) where a Deliverable does not satisfy the Acceptance Test Success Criteria; ii) where a Milestone is not achieved due to TCS’s default. The words of clause 6.1 made plain, the Court said, that the NCR is not just a procedural box-ticking exercise: it provides that the NCR will categorise the Test Issues as described in the Testing Procedures or set out in detail the non-conformities of the Deliverable where no Testing has taken place. It will also include any other reasons for the relevant Milestone not being achieved, and the consequential impact on any other Milestone. Clause 6.1 went on to state that DBS “will then have the options set out in clause 6.2”, one of which (clause 6.2.3) was to require Delay Payments.
The Court of Appeal said that on their face, therefore, the words in clause 6.1 meant that, on the happening of one or both of those events, a detailed NCR must be provided promptly by DBS and then – and only then – can the clause 6.2 options, including the levying of Delay Payments, be exercised. On the face of it, the clause was therefore a condition precedent, and DBS’s failure to comply, by failing to provide any NCRs at all, meant that they were not entitled to exercise the option at clause 6.2.3. The NCR was a significant step in the process, the Court said, because it was required whether or not a Milestone had been achieved: it was also required in circumstances where the Deliverable had been tested, but where there were test issues preventing some or all of the acceptance test criteria from being achieved. The NCR had to identify those issues: the reasons why it had failed the testing.
Similarly, an NCR was required where a Milestone had not been achieved and no testing had yet taken place; it had to set out in detail the nonconformities of the Deliverable, any other reason for the Milestone not being achieved, and the consequential impact on any other Milestones. The NCR therefore served to make plain to both parties what the particular problems were in order that both parties might work together to see how they might be resolved. The Court said that “then” at the end of clause 6.1 clearly envisaged the happening of one or both of the events at the start of 6.1 and the performance of the critical next stage, namely the provision of an NCR. The entitlement on the part of DBS to levy Delay Payments was therefore an entitlement which only arose if the steps under 6.1 had been taken. If DBS had failed to provide an NCR, the entitlement did not arise.
Comments
In construction contracts, it is common to require one party to satisfy a certain condition before it is entitled to do something. For example, a requirement to issue a certificate of non-completion before the employer is entitled to levy liquidated damages for delay in completion of the project. Another example is the requirement to give notice to the Architect before the contractor is entitled to claim an extension of time or loss and/or expense. It is sometimes not clear whether such condition should be regarded as a condition precedent. There are cases in which the courts have found that certain conditions did not constitute condition precedents on the ground that no specific time for compliance with the condition was stated.
In this particular case, the Court of Appeal of England held that more flexible periods such as “timely” or “within a reasonable time” may be sufficient to satisfy one of the criteria for determining whether a requirement in the contract is a condition precedent. This appears to be less stringent than that required in previous cases.
For further information, please contact:
Justin Yuen, Partner, Deacons
justin.yuen@deacons.com
