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Home > Our Insights > Information Technology (IT) Contracts: 3 Key Lessons for Customers and Service Providers in Atos v Sapient
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Information Technology (IT) Contracts: 3 Key Lessons for Customers and Service Providers in Atos v Sapient

Published:

March 30, 2017

Author(s):

  • David Wallace, Associate at McInnes Cooper
  • Peter L'Esperance, Articled Clerk at McInnes Cooper

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There are very few examples of a Canadian court interpreting and opining on the provisions of an information technology contract. So the Ontario Superior Court of Justice’s recent decision in Atos v. Sapient, addressing a dispute concerning an information technology outsourcing project, provides interesting insight into the issues that both customers and service providers should consider when negotiating, drafting and performing IT contracts specifically, and commercial contracts generally. Here are three key lessons we can learn from the Court’s decision.

  1. What we learned about a “Material Breach”. 

As is typical, the contract in Atos gave the customer the right to terminate the contract upon the occurrence of a “material breach”. The contract didn’t define the term “material”, so the Court examined other provisions of the contract along with the parties’ behaviour after the alleged “material breach” to interpret what “material” meant. Another provision of the contract required the customer to make certain notifications to a third party if any breach of the contract would “affect [its] ability to perform its obligations [to such third party] in a material respect.” Therefore, the Court decided that “material breach” meant “a non-trivial breach that affects or may affect [the customer’s] ability to perform its obligations [to third parties] in a material respect.” The Court further noted that the customer had never treated the service provider as if it were in material breach of the contract.

The lesson: clearly and precisely define what constitutes a “material breach” in commercial contracts. In the absence of such a definition, courts will look to other provisions of the contract, including those that deal with how the parties are to behave vis-a-vis third parties after a “material breach” has occurred, and the parties’ actual behaviour after the alleged “material breach” for guidance in determining whether the conduct met the intended “materiality” threshold.

  1. What we learned about “good faith” terminations.

The Court rejected the customer’s claim that the service provider’s failure to meet a specific milestone entitled the customer to exercise its discretionary right to terminate. The Court cited the customer’s failure to reference this ground for termination in its termination letter to the service provider. The Court also decided that the discretionary nature of the customer’s right to terminate (upon the failure to meet this particular milestone) meant the customer must exercise it in good faith, and concluded the customer didn’t: the customer invoked the service providers’ non-performance of the milestone after the termination; it failed to invoke the informal dispute resolution process under the contract; and evidence (emails among the customer’s executives produced at trial) disclosed the customer’s motives in terminating the contract centred on improving its own financial position rather than responding to the service provider’s alleged breach.

The lesson: ensure contracts contain clear and specific instructions on the type of information that must be included in a notice/letter from one party to the other to validly terminate the contract. If any contractual right of a party is discretionary (for example, uses permissive rather than mandatory language, like “may” rather than “shall”), parties must exercise such contractual rights in “good faith”. And it’s not all about what’s actually written in the contract; how the parties behave is relevant to determining whether they acted in “good faith”. The court will examine the parties’ behaviour – including their non-privileged email communications – before and after the termination to determine if they acted in “good faith” (though contracting parties are free to act in their own self interest and pursue whatever advantages may flow to them from the contract – as long as they do not lie or mislead the other party in doing so). 

  1. What we learned about “limitation of liability” provisions.

Under current legal principles, a breach of contract allows an innocent party to collect the payments it would have otherwise received under the contract (less the costs they would have incurred carrying out their obligations under it). In Atos, the service provider sued the customer for “lost profits” as a result of the customer’s wrongful termination of their contract. In its defence, the customer pointed to a clause of the contract specifically excluding “lost profits” as a prong of liability, a standard term in most IT outsourcing contracts: “…neither [party] will be liable to the other to the other for indirect, special, consequential or punitive damages or for loss of profits”. The Court decided that excluding liability for “loss of profits” would mean effectively excluding the default remedy for a breach of contract under current legal principles, so it interpreted this provision as excluding liability only for “indirect”, and not “direct”, damages. Consequently, the reference to “loss of profits” in the provision limited the customer’s liability to “indirect” or “consequential” loss of profits, but didn’t protect it from liability for “direct” forms of damage – like the service provider’s lost profits as a result of the customer’s breach.

The lesson: regardless of what limitation a contract’s terms place on each party’s liability, their ability to “contract out” of fundamental legal remedies for breach of contract might not be enforceable. So including in a typical contract clause excluding the breaching party’s liability for the innocent party’s loss of profits might not protect it from liability for the innocent party’s direct financial consequences.


Please contact your McInnes Cooper lawyer or any member of the Technology Team @ McInnes Cooper to discuss this topic or any other legal issue.


McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

© McInnes Cooper, 2017. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.

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    On March 5, 2015, the Canadian Radio and Television Commission (the CRTC, the main agency charged with administering and enforcing most of CASL)…

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    Publications
  • Changes to Canada’s Trademarks Law: The Good, The Bad & The Ugly

    Jan 26, 2015

    NOTE: Substantial changes to Canada’s Trade-Marks Act took effect on June 17, 2019 Soon, there’ll be big changes to Canada’s Trademarks…

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    Publications
  • Privacy in Basic Cell Phones: SCC Continues Trend of Privacy Protection in R. v. Fearon

    Dec 11, 2014

    On December 11, 2014 the Supreme Court of Canada continued its trend to recognize privacy rights – and develop the law to protect them –…

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    Publications
  • Canada’s Anti-Spam Legislation (CASL) Software Installation Sections: 10 FAQs

    Dec 11, 2014

    On January 15, 2015, the software provisions of Canada’s Anti-Spam Legislation (CASL) will take effect.  CASL’s anti-spam sections, touted…

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    Publications
  • Complying with Canada’s Anti-Spam Legislation (CASL): A blueprint for the construction industry

    Dec 1, 2014

    The construction industry - project owners, contractors, subcontractors and trades - might be relaxing, ignoring the hype around Canada’s…

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    Publications
  • Thou Shalt Not Lie: SCC Recognizes New Duty of Honesty in Contract Law in Bhasin v. Hrynew

    Nov 14, 2014

    On November 13, 2014, the Supreme Court of Canada (SCC) effected a significant development in Canadian contract law by recognizing the…

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    Publications
  • Complying With Canada’s Anti-Spam Legislation (CASL): Protecting Directors & Officers from Personal Liability

    Oct 14, 2014

    CASL’s anti-spam sections came into force on July 1, 2014. Every organization that CASL affects should now be complying with it – and their…

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    Publications
  • The Top 5 Corporate Governance Best Practices That Benefit Every Company

    Sep 16, 2014

    Many believe that only public companies or large, established companies with many shareholders need to be concerned about, or can benefit from,…

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    Publications
  • Complying With Canada’s Anti-Spam Law (CASL) – Foreign Organizations Doing Business in Canada Need to Pay Attention

    Aug 1, 2014

    Most Canadians have heard about Canada’s Anti-Spam Legislation (CASL): we’ve been bombarded with “CASL Compliant” emails asking us to…

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    Publications
  • SCC Protects Internet Users’ Expectation of Privacy In Online Activities in R. v. Spencer

    Jun 16, 2014

    On June 13, 2014 the Supreme Court of Canada decided that Canadians have a reasonable expectation of privacy in their online activities, and…

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    Publications
  • Counting Down to Canada’s Anti-Spam Legislation (CASL) – The Last Minute Guide to Preparing For CASL

    Jun 12, 2014

    The countdown to CASL is almost over: there are only 13 business days until the anti-spam provisions of CASL – and most of the penalties for…

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    Publications
  • Joining the Crowd – NS & NB Consider Crowdfunding

    Jun 11, 2014

    Note: For an update on Crowdfunding, read: New Kid on the Block – Crowdfunding Joins Traditional Equity-Based Funding Options for Start-ups…

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    Publications
  • Counting Down to Canada’s Anti-Spam Legislation (CASL) –10 Steps to Prepare for CASL

    May 8, 2014

    On July 1, 2014 – less than two months from now - the anti-spam sections of Canada’s Anti-Spam Legislation (CASL) take effect. Individuals…

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    Publications
  • Counting Down to Canada’s Anti-Spam Legislation (CASL) – Does CASL Make You A “Spammer”?

    Apr 15, 2014

    The countdown to CASL is on: on July 1, 2014, the anti-spam sections of Canada’s Anti-Spam Legislation (“CASL”) take effect. Individuals…

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    Publications
  • Cloud Computing: A Privacy FAQ

    Mar 19, 2014

    As organizations turn to cloud computing services, ensuring compliance with legislation and reducing privacy risks is key. In Canada, there is…

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    Publications
  • Counting Down to Canada’s Anti-Spam Legislation (CASL): 10 Reasons Why You Should Care About The Upcoming CASL Right Now

    Feb 28, 2014

    On July 1, 2014, the anti-spam sections of Canada’s Anti-Spam Legislation (aka “CASL”) will take effect. CASL is: Broad. It applies…

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    Publications
  • Counting Down to Canada’s Anti-Spam Legislation (CASL) – What You Need to Know Now

    Feb 28, 2014

    On July 1, 2014, the anti-spam sections of Canada’s Anti-Spam Legislation (aka “CASL”) take effect. CASL will apply to just about every…

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    Publications
  • Privacy in Computer Contents: Supreme Court of Canada Picks Up Where It Left Off in R. v. Vu

    Nov 8, 2013

    On November 7, 2013, the SCC decided police require specific authorization in a search warrant to search the data in a computer because of the…

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    Publications
  • Legal Update: Risky Trading – Insiders and Potential M&A’s

    Nov 1, 2013

    Recent decisions of securities regulators and amendments to Canadian securities laws demonstrate regulators' lowered tolerance for insiders who…

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    Publications
  • General Security Agreements – Tips and Traps

    Aug 28, 2013

    A general security agreement (GSA) is the most common form of personal property security used in the Atlantic Provinces to secure commercial…

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    Publications
  • Franchise Questions: What do I need to know about moving into new markets?

    Jun 7, 2013

    In Franchise Canada’s Spring 2013 “Viewpoints” feature, McInnes Cooper franchise lawyer Michael Melvin answers this question for…

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    Publications
  • Legal Update: Cloud Computing and Privacy FAQ

    Apr 7, 2011

    Note: Click here to read an updated version of this Legal Update in Cloud Computing: A Privacy FAQ as seen in as seen in CCCA Magazine, Spring…

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    Publications
  • A Closer Look at the Regulations Under the New Brunswick Franchises Act

    Oct 1, 2010

    McInnes Cooper franchise lawyer Michael Melvin highlights some of the significant features of the Disclosure Documents Regulation and the…

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    Publications
  • What are electronic disclosure documents and why and how may they be used?

    May 31, 2010

    In Franchise Canada’s May/June 2010 “Ask A Legal Expert” feature, McInnes Cooper franchise lawyer Michael Melvin answers this question for…

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    Publications

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