Tony Conaghan and Georgia Campbell

IBM & Queensland Health – The payroll saga continues!

Tony Conaghan and Georgia Campbell

8 December 2015

IT

The Queensland Supreme Court handed down its judgment on 7 December 2015 in the case of IBM Australia Ltd v State of Queensland [2015] QSC 342, finding in favour of IBM. The decision turned primarily on the drafting of the ‘release’ clause in a contract between IBM and the State of Queensland. It highlights the importance of careful drafting of compromise terms, such as releases of claims.

Background

In 2007, the State of Queensland engaged IBM to design and implement a centralised system for government services and a contract was signed. Subsequently, after the centralised system concept was abandoned, the initial contract was revised so that IBM was only engaged to provide a new payroll system for Queensland Health.

However, when the new payroll system went live in March 2010, it did not perform as intended and although a new and functioning system was eventually introduced, it was much costlier to run. So the State issued a Notice to Remedy Breach to IBM, which set out various alleged breaches. It later issued another notice, which asserted that IBM had failed to remedy the breaches outlined in the previous notice. IBM denied these breaches.

Subsequently, the parties entered into negotiations and in September 2010, IBM and the State entered into a Supplemental Agreement which contained releases by each of the parties in relation to, among other things, any actions, claims, or proceedings.

Nonetheless, the State later commenced proceedings against IBM for damages resulting from the alleged breaches. IBM subsequently brought an application against the State, seeking orders that:

  • a declaration be made that, pursuant to the Supplemental Agreement, the State could not prosecute the damages proceedings;
  • a permanent injunction be granted restraining the State from prosecuting the damages proceedings; and
  • a declaration be made that IBM is entitled to be indemnified by the State for costs associated with the damages proceedings.

Issues

The Court had to determine how the terms of the Supplemental Agreement should be interpreted and whether or not the Supplemental Agreement prevented the State from prosecuting damages proceedings.

Decision

Justice Glenn Martin of the Queensland Supreme Court held that, on the proper construction of the Supplemental Agreement, IBM was released from the claims made by the State, and so it was unnecessary to grant an injunction. The parties are to make submissions on costs.

Reasoning

The main focus of the dispute was the interpretation of the release contained in Clause 5.1 of the Supplemental Agreement. It provided:

“the State releases the IBM Parties from all Claims … and agrees that the IBM Parties may plead this agreement to bar any Claim and the State agrees that it will not sue those parties in any jurisdiction in respect of the Claims and agrees that such covenant will not be terminated.”

IBM argued that the damages proceedings instituted by the State fell within the scope of this release. The State argued that IBM had made misrepresentations before entry into the 2007 contract and that the release did not cover liability for conduct which occurred before that contract was made.

Martin J found that in order to decide whether or not the release prevented the State from prosecuting damages proceedings against IBM, it was necessary to consider whether the causes of action against IBM fell within the definition of “Claim” under the Supplemental Agreement.

“Claim” was defined in Clause 7.3(a) as:

“… any action, claim, proceeding, allegation, suit, arbitration, complaint, cost, debt due (including proof of debts), entitlement (whether actual or contingent), demand, determination, inquiry, judgment, verdict or otherwise, whether such matters arise at common law, in equity, pursuant to statute, pursuant to contract, in tort or otherwise that the State had, has or might have had against an IBM Party in respect of IBM’s obligations and acts or omissions prior to 1 September 2010 …”

Martin J referred to various authorities on the construction of releases and surmised that the only potential ambiguity that arose from this definition related to the phrase “in respect of.” This phrase had to be read in context. The use of the words “obligations and acts or omissions” in the definition alluded to a broad range of conduct, and when this was coupled with the long list of sources from which a claim may arise, and the lack of time limits, there appeared to be no reason to confine the meaning of “in respect of.”

Accordingly, given that all of the allegations forming part of the State’s claim fell within the definition of “Claim”, and that the damage suffered by the State was allegedly caused by IBM’s conduct, Martin J found that the damages proceedings would be classified as “in respect of” IBM’s acts or omissions.

Further, because the clauses referred to disputes which could arise in the past, present or future, this included conduct which occurred before the 2007 contract was made.

Therefore, IBM was released from the claims made by the State in the damages proceedings.

Appeal

It is unknown whether the State proposes to appeal.

Impact of the Decision

The decision reaffirmed established principles in relation to the interpretation of contracts and releases. It also highlighted the importance of careful drafting because had the Supplemental Agreement not contained a release clause, the State may have been able to pursue IBM for damages.

If you have any questions about IT contracts, please contact Tony Conaghan.