Facts
The claimant, Pegler, ran the business of manufacturing
brassware, such as taps and mixers, radiator valves and plumbing
fittings. It had a business that in 1990 enjoyed a good
reputation for the quality of its products but it had problems with
poor service and delivery. The incoming managing director in
1991 decided to implement a strategy that would turn this situation
around. Part of this strategy included the acquisition and
deployment of a new computer system. Taken together, it was
envisaged that real growth could be achieved.
In April 1991, Pegler issued an ITT to various suppliers,
including the defendant, Wang. Wang responded in May 1991 and
the contract was awarded to Wang in August and a written agreement
was entered into in December of that same year. The total
price for the supply of hardware, software, bespoke software
programming and services was £1,198,130. The ITT and written
Response were incorporated into the contract.
The judge described Wang’s performance as
“disastrous”. By the end of 1995, Wang had ceased to
offer any relevant performance, but there had been major problems
before then. Pegler commenced proceedings in February 1996
claiming damages. Pegler gave notice of specified breaches in
February 1997 and required a remedy to them. In April 1997,
Pegler accepted Wang’s repudiatory breach of the contract by
letter.
Wang admitted liability and also admitted some express or
implied terms of the agreement – including fitness for purpose and
merchantability (as it then was) of the system and its various
parts, and that services would be provided with reasonable care and
skill. It was also admitted that the various parts of the
system were to be delivered in line with the agreed schedule of
dates. It was further admitted that Wang failed to provide
the contractual minimum 5 years of maintenance or to provide advice
on business processes (Wang having closed its Business Management
Services London office in 1994).
Pegler claimed damages to the tune of £22,898,472, which Wang
contested. Wang also sought to rely on certain limitations
and exclusions of liability contained in the agreement executed by
the parties.
Judgment
The main body of the contract was extensively modelled on Wang’s
standard terms and conditions. Schedule A incorporated the
ITT and Wang’s response. Schedule B included “special terms”
modelled on Pegler’s standard terms. These “special terms”
were expressed by the contract to prevail in the event of any
conflict. It was these “special conditions” that included the
specifics of Wang’s obligations to deliver and the (admitted)
obligations as to description, merchantable quality and fitness for
purpose.
Wang relied in particular on two exemption clauses. The
first excluded liability for “indirect, special and
consequential” loss, including “loss of anticipated
profits or of data” and the second barred actions more than 2
years after the cause of action had occurred. Judge Bowsher
cited The Glendarroch [1894] P 226, 231, per Lord Esher,
to the effect that one claiming the benefit of an exclusion of
liability has the burden of showing he comes within it.
Moreover, the court will not give an exemption condition a meaning
which effectively absolves a party from all duties and liabilities
(Suisse Atlantique v NV Rotterdamsche Kolen Centrale
[1967] 1 AC 361, 432).
Judge Bowsher found that, on a true construction, the clauses as
drafted only applied to the actual supply and events happening
thereafter, not, as Wang contended, to delay in supplying or
complete failure to supply. Furthermore, the clause as
drafted did not apply to the services aspect of the contract –
project management, consultancy, business process management, all
of which Wang contracted to supply. Finally, “indirect,
special or consequential loss” referred to the second limb of
Hadley v Baxendale (1854) 9 Ex 341 – this was clear by the
qualification “even if Wang has been advised of the possibility
of such potential loss”. Pegler was claiming under the
first limb of Hadley v Baxendale – the limb concerned with
loss arising naturally in the ordinary course of things. Loss
of profits can either be in the first or second limb – see
Victoria Laundry v Newman Industries [1949] 2 KB 528,
536.
With regard to the contractual limitation periods, it was held
that the breaches were continuing ones – the cause of action arose
on the first day of delay and then continued with every day of
delay. As a matter of construction therefore, an action had
to be commenced within two years of the cessation of the duty to
perform – either by performance of termination of the contract.
Judge Bowsher went on to consider the Unfair Contract Terms Act
1977 – although his earlier findings on construction meant that it
was unnecessary to do so. Pegler did not deal as a consumer,
although Pegler contended that it did deal on Wang’s “written
standard terms of business” and thus came within section 3 of
UCTA.
On the evidence, Judge Bowsher found that Wang was prepared to
negotiate on some matters – delivery, performance, passing of risk,
but not on the question of its standard exclusion clauses.
(The only exception had been Wang’s willingness to substitute the
price of the contract for £250,000 in the limitation regarding loss
of or damage to tangible property). Judge Bowsher said that a
standard term remains such even though the party putting it forward
is willing to negotiate small changes to it.
On the question of reasonableness, section 11(5) UCTA requires
the party claiming it to prove it. The relevant date for
assessing reasonableness is the date of making the contract –
section 11(1) UCTA. The guidelines in Schedule 2 to UCTA only
apply to sections 6 and 7, but are applied by extension to the
question of reasonableness generally – see Stewart Gill Limited
v Horatio Meyer & Co Limited [1992] 1 QB 600, 608, per
Stuart-Smith LJ.
Looking at the relevant considerations, Judge Bowsher found as
follows:
- Pegler was substantial but had “burnt its boats” in negotiating
terms by striking a deal in principle, and allowing work to start
before discussing standard terms, thus there was not equality of
bargaining power
- the evidence before the court was that such exclusions
were standard and so Pegler could not have got a different deal
elsewhere
- Pegler was advised by solicitors throughout the deal, although
privilege in the advice was not waived
- Pegler was “oversold” the system as Wang had claimed a far
greater fit to its requirements than the system actually had, which
Wang knew all along, leading to Pegler being let down
disastrously.
With all this in mind, it was unreasonable in UCTA terms for
Wang to rely on exclusions and limitations in respect of breaches
of contract, when their own misrepresentations about what they were
selling made their own lapse not unlikely.
As for the rest, the judgment considered at length the evidence
in the case and consisted of the judge’s findings of fact.
Seen against a claim of £22,989,472, the judge awarded damages as
follows:
- Lost sales and loss of ability to increase margins: this was
largely caused by Wang’s failure to deliver SOP (sales order
purchasing) on time, leading to a limitation on the ability of
Pegler to respond to increasing competition. An interesting
legal point arose concerning the market surveys regarding quality
of service submitted in evidence by Pegler. These are not
uncommon in the context of patent and passing off actions. In
this case, the argument was not over their admissibility, but over
weight. It was clear that the judge was prepared to allow
such evidence proper weight, but he observed the differences
between this case and intellectual property cases. In IP
cases, the survey is directed to a general perception of the public
regarding a product or product names. In this case, the
survey only put before the judge the evidence of 10 anonymous
witnesses on matters largely of opinion. There was not even
any attempt to identify the position of the interviewees or their
seniority in the target organisation. In the absence of
evidence showing the reliability of the report, the judge
disregarded such evidence in this case.There was some interesting
law here.
- Lost opportunity to make staff cost savings: the claimant
was awarded £1,661,390.
-
Amounts paid to third parties: this included sums paid to third
parties for substitute software and consultancy services. The
judge awarded £150,218.
-
Ongoing expenditure: this comprised sums paid for microfiching
and for DTP services. The claimant was awarded £46,290.
-
Further expenditure to be incurred: this included items such as
a replacement system and KPMG’s consultancyPegler claimed to be
able to buy what Wang had failed to deliver. The judge
disagreed and looked to construction law and said that a claimant
may be entitled to (a) the cost of reinstatement (replacement
system) (b) the difference in cost of the actual work done and the
work specified and (c) the diminution in value of the work due to
the breach of contract. Reinstatement must be reasonable –
see Ruxley Electronics Limited v Forsyth [1996] AC 344,
and it is up to the claimant to show that he comes within the
prima facie rule that the cost of repair should be
allowed.When looking at the replacement system in fact acquired by
Pegler, Wang claimed that some of the functionality in the new
system amounted to betterment. The burden of showing
betterment is on the defendant (Oswald v Countrywide Surveyros
Limited (1996) 50 Con LR 1,6). Wang had not produced
sufficient evidence of what else Pegler might have done.
Furthermore, the fact that a party buys a substitute product and
thus gets something with a longer life span, or which is more
modern, or has additional features than the original would have had
does not lead of itself to an allowance for betterment –
Harbutt’s Plasticine v Wayne Tankship [1970] 1 QB
447. A further point was that in considering IT systems, it
is common for systems with time to include more functionality and
also to decrease in price in real terms, but this alone would not
found a claim for betterment.Pegler was awarded £1,770,316 under
this head.
-
Contract sales discounts: this arose because Pegler was unable
to monitor discounts given to customers over time, thus leading to
excessive discounts being given. The judge awarded £205,279
under this head.
-
Planned maintenance: Pegler claimed the losses arising from not
being able to apply maintenance effectively to its plant.
Pegler was awarded £2,354,800.
-
Reduction in home trade debtors: Pegler claimed it was denied
the chance to implement a system to track debtors
effectively. The judge awarded £36,120.
-
Reduction in inventory: Pegler claimed it was unable to
reduce its inventory by the failure to deliver Sales Order
Processing. The judge awarded £185,500.
-
Wasted management time: there was a dearth of written records
justifying Pegler’s claim, but the judge adopted a “broad-brush”
approach and awarded £534,000, half of what Pegler had claimed.
-
Purchasing: Pegler claimed it was unable to reduce the cost of
purchasing as a result of the non-delivery of the system. The
judge awarded £1,463,200.
Commentary
IT lawyers looking at it will be most interested in it for the
further light it throws on UCTA. Possibly the most
significant fact about this judgment does not appear in the
judgment at all: it is that Wang went into voluntary liquidation
shortly after the judgment was given, blaming the amount awarded as
the cause of its decision to wind the company up.
Of course, Judge Bowsher’s comments on UCTA are obiter,
they were not necessary for the decision, which was based on a
construction of the relevant clauses. Curiously, he did not
cite South West Water at all, although the main thrust of
his comments on UCTA is to the same effect. Both cases raise
the thorny question of when a party deals on the other’s “written
standard terms of business” so as to bring a contract within
section 3 of UCTA. Both decide that “composite” contracts
made up of terms taken from both parties can be still dealing on
the other’s written standard terms of business. In both
cases, it was the fact that the clauses of limitation and exclusion
were drawn from the supplier’s standard form that meant they fell
within section 3 UCTA.
Is this a fair reading? The Law Commission (Law Com. No
69) considered this in introducing the Bill at paragraphs 151-157
of the report. The Law Commission rejected lack of negotiation as
the key identifier of standard form contracts. Often, there
is negotiation about such matters as price, but this is not
accompanied by any opportunity to negotiate the exempting
terms. Even where there is such an opportunity offered, this
may not be real, and the terms can still be proffered on a “take it
or leave it” basis. The result was that the term was not
defined in the Act, and the Law Commission left it to the
Courts.
The Scottish equivalent in UCTA refers to a “standard form
contract” at section 17, which might be thought to be some support
for the view that the type of deal caught is one where a complete
contractual document is put forward on a “take it or leave it”
basis. However, after the decision of Lord Dunpark in
McCrone v Boots Farm Sales Limited [1981] SLT 103, this is
not the case. Lord Dunpark explained his reasoning as
follows,
“If the section is to achieve its
purpose, the phrase “standard form contract” cannot be confined to
written contracts in which both parties use standard forms.
It is, in my opinion, wide enough to include any contract, whether
wholly written or partly oral, which includes a set of fixed terms
or conditions which the proponer applies, without material
variation, to contracts of the kind in question.”
What if the supplier scratch drafts an exclusion clause, but it
contains words which are equivalent to its standard exclusions and
limitations? For example, say a supplier excludes liability
for consequential loss (as defined to include loss of profits and
other specific types of loss) as part of its standard terms of
business. If it includes such an exclusion, but using
different wording in the scratch draft, is it still within
UCTA? The authorities are not of direct assistance here, but
there is a sense in which, taking these judicial interpretations of
UCTA, it can be seen how the Act could be applied to this
situation. While the particular words might be different, the
terms on which that supplier generally does business are
standard. If the courts follow Lord Dunpark’s purposive
interpretation of UCTA, there is no reason why such an exclusion of
consequential loss should not also be considered as falling within
section 3 UCTA.
Why are the courts so hostile to clauses of exclusion and
limitation? Is there anything to be said in their
favour? Other than jurisprudential works on freedom of
contract generally or histories of the common law, there is little
literature which looks at the particular question why such clauses
might be considered a good thing. This is regrettable, as the
immediate assumption of many people is that any limitation clause
operates to the detriment of the user. A beginning of the
answer to this thorny question is suggested by the fact that Wang
went so quickly into liquidation.
The fact is that the justice of the situation may require a
broader view than is perhaps taken at the moment. It is
common to have regard to just the particular supplier and user,
while little account is taken of the supplier’s other
customers. Do they not also have a right to expect
performance of their contracts? Why should the interests of
one user be promoted over and above the others – why should Pegler
(in this case) be able to put Wang out of business, and thus
prevent it from fulfilling its other contracts to all its other
customers?
Seen in this light, a user should positively insist that there
should be limitations of liability in its supplier’s
contracts. Otherwise, it risks the supplier going under
before completion of its own contract with the supplier.
In fact, an analysis of what should be a “reasonable” level of
liability would require at the minimum an examination of the
supplier’s total level of business, the risks in its different
products and projects, and the potential total financial exposure
faced by the supplier from all its contracts. It is then also
necessary to take into account the supplier’s assets (including
insurance) available to meet all the supplier’s potential
liabilities as so calculated. Only such a thorough
examination would result in a decision that was “just” to all
parties, not just the two parties before the Court.
It is unlikely that a Court would want to undertake such an
examination. Indeed, it could be a far-reaching survey of the
supplier’s entire business. However, the fact is that people
daily expect that organisations have effectively limited their
liability – customers, investors, purchasers of shares or
businesses. All this certainty has now disappeared with the
recent decisions on UCTA. It remains to be seen how the
courts in future will apply the law, and how many more cases brush
aside limitation clauses only to bring about the collapse of
business itself.
