On March 7, 2006, the French Supreme Court (“Cour de Cassation”) handed down a decision in a case concerning contractual liability under an IT outsourcing agreement.
In this case, a healthcare insurance company initiated a project aiming to refresh and outsource its IT system. The project required a software application to be migrated from one operating system to another and then for that application to be run under an outsourcing agreement. For this project, the client entered into two separate agreements: (i) a services agreement with an IT services provider for the software migration phase and (ii) an outsourcing agreement with an outsourcer. Under the outsourcing agreement, the outsourcer was also responsible for performing certain integration tasks during the software migration phase.
The migration phase suffered some delay and, in the customer’s opinion, the deadline for the beginning of the outsourcing was not going to be met. However, the outsourcer was of the opinion that the renewed IT system would be running on the contractual due date. The customer maintained its position and the outsourcer eventually concluded that the agreement had effectively been terminated by the client. The customer and the outsourcer went to Court, the customer claiming damages for the delay of the outsourcer in performing its obligations and the outsourcer arguing that the termination of the agreement by the client was wrongful and claiming payment of outstanding contractual invoices.
The customer’s claims were dismissed by the Court of First Instance, which considered that the agreement had been wrongfully terminated by the client, that the customer had no right to damages and it had to pay the outsourcer the outstanding contractual invoices. This first instance decision was confirmed by the Paris Court of Appeal and then approved by the Supreme Court.
In this case, the judges had to deal with two key legal concepts under French law which are the “obligation de moyens/obligation de résultat” and the “obligation de coordination”. What makes this decision particularly interesting is that these concepts are very rarely considered in the context of litigation over IT projects.
"Obligation de moyens" / "obligation de résultat"
Under the outsourcing agreement, the outsourcer was bound by an “obligation de résultat”. Under French law, there are broadly two types of contractual obligation: “obligations of result” (“obligation de résultat”) i.e. obligations to achieve a certain result (often known as output based obligations) or “obligations of means” (“obligation de moyens”) i.e. obligation to dedicate a certain amount of resource to achieving a particular result (often known as input based obligations).
If a contractual breach is committed in respect of an “obligation of result”, the customer has only to demonstrate that the contractual result has not been achieved. In such a case, the supplier is then deemed liable for a breach of contract, except if the supplier can prove that its obligations under the agreement were not fulfilled because of force majeure event or an act or omission of the customer.
If a contractual breach is committed of an “obligation of means”, the burden of proof rests with the customer, who must prove that the supplier has acted wrongfully by not performing its obligations with the necessary degree of care and diligence. Whether an obligation is an “obligation of result” or “obligation of means” depends partly on the uncertainty of the result to be achieved and partly on the intention of the parties.
In this case, the Court decided that the intention of the parties was that the outsourcer was bound by an “obligation of result” and the customer’s position was that the outsourcer had breached this obligation.
The judges considered that the contractual delay was not attributable to any breach by the outsourcer of its obligations, but that in itself, is not legally sufficient to release a supplier from liability for failure to achieve an “obligation of result”.
The judges found that the acts of the customer itself and the third party IT services provider had contributed to the failure of the outsourcer’s “obligations of result”. In particular:
- the migrated software developed by the third party IT services provider, which the outsourcer required to fulfil its obligations, had been accepted by the customer with a four month delay; and
- the customer had also been late in delivering certain items to the outsourcer.
On this basis, the judges found that the outsourcer was not liable for the breach of the “obligation of result”.
Having failed on the grounds of the “obligation of result”, the customer’s secondary argument was that the outsourcer was also subject to a “coordination obligation”. It is very common in French IT contracts to impose on the supplier an obligation to act as a “maître d’oeuvre” or sort of project manager with obligations to provide advice as well as obligations to co-ordinate and project manage the services.
In this case, the agreement stipulated that the outsourcer had such “coordination obligation” for the integration phase of the migrated software.
The judges found the outsourcer not liable for breach of the “coordination obligation”, relied on the factual context of performance of the services. In this respect, they relied on the following facts in particular:
- the outsourcer was neither in a position to follow up the services performed by the third party services provider nor had any means to control the way in which these services were performed;
- the customer was the only party able to have a global view of all its contracting parties (the third party services provider and the outsourcer);
- and both the third party services provider and the customer were kept perfectly and regularly informed of the progress of the project.
Concerning this “coordination obligation”, the Supreme Court added that it could only be interpreted as constituting an “obligation of means”. The judgment is not clear whether this decision (i) was limited to the particular facts of the case or (ii) had wider application so that any “coordination obligation” in a contract would always constitute an “obligation of means”, at least in the absence of a clause to the contrary in the relevant agreement.