Peregrine Systems Ltd v Steria Ltd.

On 26 February 2004, His Honour Judge Richard Seymour QC handed down a long judgment in this case, following a trial in the Technology and Construction Court: [2004] EWHC 275 (TCC). The issues between the parties raised by way of claim and counterclaim were many and various. The result of the trial was a comprehensive victory for the claimant, Peregrine Systems Limited (Peregrine), and a defeat for Steria Limited (Steria). On appeal to this Court, Steria relies on a notice containing 23 grounds of appeal. It seeks to revisit most if not all of the trial issues. In the event, and for reasons which I shall explain in due course, we have heard submissions under only two headings, one chosen by each party. In these circumstances, and having regard to the fact that the background to the case is set out in detail in the judgment of the trial judge, I do not propose to refer to more of that background than is necessary for an understanding of the issues which are now to be considered.

Steria is a subsidiary of a French company. It is a provider of managed information technology services, which involves the provision of support services for the computer systems operated by its customers. It runs a customer call centre at Risley, a data centre service desk at Sunbury and a call centre at Hemel Hempstead which provides assistance to its own employees in meeting the needs of customers. The call centre at Risley comprises a number of service desks, each one dedicated to meeting the needs of a particular customer in accordance with the terms of the particular service agreement. There are twelve such service desks. The operation of call centres such as those run by Steria depends upon the use of appropriate computer software.

Peregrine is a subsidiary of an American company. It is a supplier of software, in particular software designed to facilitate the operation of call centres by providers of managed information technology services.

By an agreement in writing dated 29 March 2002 and called a Managed Services Provider Licence Agreement, Peregrine granted to Steria perpetual, non-exclusive licences to use software packages called ServiceCenter, AssetCenter, InfraTools and GetIT. The agreement contained two schedules. The first, “Schedule A”, listed the software and the modules included within it. It described the sums payable by Steria. The total shown was £1,100,000 of which £300,000 was said to be “ROI (Licence Fees)”. ROI means return on investment. The payment terms were described as follows:

“ Steria agrees to pay Peregrine…..£800,000 (exclusive of appropriate VAT) according to the following payment schedule:

£100,000 on or before July 1, 2002

£700,000 on or before February 28, 2003

The payments are irrevocable and non-cancellable.

When the ROI milestones (which shall be agreed between the parties and documented in writing by April 30, 2002, in accordance with a mutually agreed services agreement) are achieved by Peregrine in accordance with mutually agreed performance thresholds set out therein, Steria will within 30 days of the achievement of such milestones pay the remaining licence fees of £300,000 to Peregrine which payment shall in any event not be payable….before 1 January 2003.”

The second schedule bore the title “Technical Services Schedule”. It has particular relevance to the first of the two issues to be considered in this judgment and I shall set out the appropriate part at that stage. It also contained numerous terms and conditions.

The difficulties that arose are referred to in the judgment below. They ripened into the present dispute which takes the familiar form of a claim by a supplier for sums due under the contract and a counterclaim by a customer to the effect that, as a result of misrepresentations and breaches of contract, it was entitled to terminate the contract and claim damages.

On 17 June 2003, Peregrine commenced the present proceedings. It claimed that Steria had wrongfully terminated the agreement on 5 February 2003 and sought damages for breach of contract in the sum of £700,000 plus interest. At trial, Peregrine was granted permission to amend its pleading so as to claim £700,000 as monies due under the contract rather than as damages. The much – amended Defence and Counterclaim of Steria sought to justify the termination of 5 February 2003 on the grounds of repudiatory breaches of contract by Peregrine and/or misrepresentations. It sought the recovery of all sums paid to Peregrine under the contract, together with damages for the wasted time of Steria’s employees and interest. At the conclusion of the trial the judge held that the termination of 5 February 2003 was wrongful and gave judgment to Peregrine in the sum of £732,602.74, inclusive of interest. He dismissed Steria’s counterclaim. He did not consider that Peregrine had committed any breaches of contract, let alone repudiatory breaches or breaches justifying termination pursuant to the express terms of the contract. He further held that if, contrary to his primary finding, there had been misrepresentations or breaches on the part of Peregrine, Steria had lost the right to rescind or terminate the contract by reason of affirmation or waiver.

Permission to appeal was granted to Steria by Carnwath LJ on 7 May 2004. The Appellant’s Notice seeks to advance no less than 23 grounds of appeal, taking issue with virtually the entire judgment at first instance. The appeal was given a time estimate of two to three days. We questioned whether it would be necessary for us to address all 23 grounds of appeal and doubted that the time estimate was sufficient to enable us to do so. Accordingly, at the outset of the hearing we considered with Counsel whether they could point to a small number of issues which might enable us to resolve the appeal without having to go through the full menu set out in the Appellant’s Notice. On behalf of Steria, Mr David Blunt QC suggested that we first consider the question whether Peregrine had been in repudiatory breach of the agreement in relation to tardy performance so as to justify Steria’s termination. On behalf of Peregrine, Mr Lawrence Akka invited us to deal with the issue of affirmation or waiver. We acceded to these proposals and heard submissions upon the selected issues. This judgment is therefore limited to those issues.

The case for Steria is that there was an implied term in the contract requiring Peregrine to complete implementation within a reasonable time. In the final version, it pleaded its case thus:

“Pursuant to the Contract, [Peregrine] was obliged to implement all the software modules listed in Schedule A to the Contract, at all three of Steria’s call centres (Risley, Sunbury and Hemel Hempstead). It was obliged to carry this out within a reasonable time (which Steria will contend meant by the end of December 2002, as stated in the Technical Services Schedule to the Contract)….

Phase 1 concerned the implementation of only some of the modules listed in Schedule A, and only at Risley. Phase 1 should have been completed within a reasonable time of the commencement of the contract. This would have been by 9 August 2002, as stated in the Project Plan produced by [Peregrine] dated 14 May 2002. The implementation of Phase 1 should have been completed at a time that allowed completion of the remainder of the modules at Risley and the implementation at the other two sites by the end of December 2002.”

The judge rejected these contentions in two separate passages of his judgment. In paragraph 80 he rejected this and all the other allegations of implied terms in the contract. In paragraph 72 he rejected the basic premise of Steria’s case, namely that the contract obliged Peregrine to complete the implementation of the software. He said:

“What Peregrine agreed to do was to provide £200,000 worth of implementation services, not to implement the software for £200,000. The implementation services were to be provided as required by Steria, rather than by any particular date, although it was contemplated that they would be provided by the end of December 2002, because that was the ‘Period over which contract is valid’ set out in the TSS.”

This part of the case has become bedevilled by misunderstandings. The original misunderstanding was on the part of Steria which took the view that it had a fixed price contract entitling it to full implementation for £200,000. That position was rightly abandoned before the end of 2002. The second misunderstanding relates to the interpretation of the judge’s rejection of all the pleaded implied terms, including in particular one relating to performance within a reasonable time. The likeliest explanation for that rejection in relation to time is that the way in which Peregrine had put its case had negated the need for such an implied term. It was Mr Akka’s view that the express term relating to “reasonable skill, care and diligence” embraced an obligation to perform contractual tasks within a reasonable time and that any implied term was superfluous. I suspect that this informed the way in which the judge dealt with the matter. Whether or not it was technically correct, it is common ground that, whatever the contract required Peregrine to do, it was obliged to do it within a reasonable time.

That last sentence begs the central question: what did the contract require Peregrine to do by way of implementation? The conclusion of the judge was that Peregrine did not contract to complete implementation but merely to provide £200,000 worth of services, as required by Steria and priced by reference to the Technical Services Schedule. Peregrine had provided those services to that value by 25 November 2002 and Steria received its contractual entitlement. Thereafter, Steria was free to obtain services from whatever source it chose, including Peregrine. Mr Blunt submits that that construction of the contract is wrong. He says that it misconstrues the Technical Services Schedule.

It is important to set the Technical Services Schedule in context. The primary contractual document was the Managed Services Provider Licence Agreement, the first purpose of which was to grant Steria a non-exclusive and non-transferable licence to use the software. Clause 14 of the Licence Agreement was headed “Implementation Services and Training”. It provides that Steria

“may elect to engage the services of Peregrine for optional implementation and training services. Such services are provided on a time and materials basis in accordance with a statement of work and the terms and conditions of a Peregrine technical services schedule….Any Technical Services Schedule duly executed by both parties shall be deemed incorporated by reference in this Agreement.”

The Technical Services Schedule executed by the parties contained four paragraphs in the following terms:

“1.

Description of Work

The following tasks will be performed for Steria by Peregrine:

•

Definition of an Implementation Blueprint. This output of the Blueprint will be a Statement of Work and Project Plan containing detailed estimates for the Peregrine product implementation.

•

Time and Materials Implementation of Peregrine Systems Applications and Modules listed on the Schedule A

2.

Term over which Work is to be performed

Projected start date: 15 April 2002

3.

Period over which contract is valid

Until end of December 2002.

4.

Cost per man day (8 hours per day)

Managing Consultant (£185 per hour) = £1480

Senior Technical Consultant (£170 per hour): =£1360

Technical Consultant (£145 per hour) = £1160

Total amount covered by this Schedule: £200,000.”

Peregrine’s standard terms and conditions were printed on the reverse side of the document.

Mr Blunt seeks to attach particular importance to the second bullet point under Description of Work. He submits that it is consistent only with a contract whereby Peregrine was accepting an obligation to complete the implementation, initially on the time/cost basis set out but, once £200,000 worth of time had been deployed, at such other price as may reasonably be determined. In other words, although it was not a fixed price contract, it was a contract for a fixed task. Mr Akka submits that the judge’s construction is correct and that Steria had simply bought £200,000 worth of services in relation to implementation. It was for Steria to draw down services to that value in accordance with its needs. If it still needed outside assistance with implementation after exhaustion of the £200,000, it could be obtained from Peregrine or from elsewhere when the need arose.

In my judgment the submission of Mr Akka which was accepted by the judge is correct. Looked at in isolation the language used at the second bullet point under Description of Work may favour Steria and lend itself to the construction that it related to the implementation of all the systems applications and modules listed in Schedule A. However, if that were the correct interpretation, there would be no need for what is set out alongside the first bullet point. The language there anticipates an implementation blueprint and “detailed estimates for the Peregrine product implementation” (my emphasis). Moreover, once it is properly conceded (as it is) that the contract was not for full implementation at a fixed price of £200,000, it is less easy to construe it as being for a fixed task. I consider its proper and commercial sense is as the judge decided. The corollary is that, once the £200,000 had been exhausted by 25 November, there was no continuing obligation to do anything further towards implementation within a reasonable time, absent a further agreement of a more demanding kind than actually emerged. It follows that the “killer” point selected by Mr Blunt is founded on a false premise. The contractual obligation for which he contended is not established and the repudiatory breach which he seeks to derive from it does not arise.

It is appropriate to add two postscripts to this first issue. First, even if Mr Blunt’s construction of the contractual obligation had been correct, it does not follow that any breach of it would have been repudiatory. In his submissions he tended to elide the obligation to perform within a reasonable time and the concept of time being “of the essence”. The two things are not the same. If there had been a breach of the obligation to perform within a reasonable time, it would still have been necessary for Steria to establish that it was a repudiatory breach, that is to say one “which will deprive the party not in default of substantially the whole benefit which it was intended he should obtain from the contract” (per Diplock LJ in Hongkong Fir Shipping Co v. Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26,70). To the extent that Mr Blunt submits that, this being a commercial contract, breach of the reasonable time obligation is repudiatory because, in the words of his skeleton argument, “in commercial contracts time prima facie is of the essence”, he is in error see:Chitty on Contracts, 28^th edition, para 22-013: Secondly, Mr Blunt’s approach to what is a reasonable time is founded on an exercise of looking forward from the date of the contract to a completion date contemplated by the parties at that time. This is not the correct approach. The consideration of whether there has been a breach of an obligation to perform within a reasonable time is not limited to what the parties contemplated or ought to have foreseen at the time of the contract. In my judgment, the correct interpretation of authorities such as Hick v. Raymond & Reid [1893] AC 22 is that adopted by His Honour Judge Richard Seymour QC in Astea (UK) Ltd v. Time Group LTD [2003] EWHC 725, [2003] All ER (D) 212, where he said that the question whether a reasonable time has been exceeded is

“a broad consideration, with the benefit of hindsight, and viewed from the time at which one party contends that a reasonable time for performance has been exceeded, of what would, in all the circumstances which are by then known to have happened, have been a reasonable time for performance. That broad consideration is likely to include taking into account any estimate given by the performing party of how long it would take him to perform; whether that estimate has been exceeded and, if so, in what circumstances; whether the party for whose benefit the relevant obligation was to be performed needed to participate in the performance, actively, in the sense of collaborating in what was needed to be done, or passively, in the sense of being in a position to receive performance, or not at all; whether it was necessary for third parties to collaborate with the performing party in order to enable it to perform; and what exactly was the cause, or were the causes of the delay to performance. The list is not intended to be exhaustive. ”

I do not seek to improve upon that formulation. It shows that, even if the contract had required Peregrine to complete the installation within a reasonable time, the fact that the parties had contemplated at an earlier stage that completion would be effected by a certain date would not necessarily mean that a failure to complete by that time would involve a breach of the obligation to complete within a reasonable time.

I now turn to the issue selected on behalf of Peregrine. Mr Akka submits that if Steria were to succeed in establishing the terms and repudiatory breaches for which it contends, it could not justify a purported termination of the contract on 5 February 2003 because of waiver. In a sense consideration of this issue is shrouded in hypotheses and assumptions. We are invited to assume that terms and breaches rejected by the trial judge are made out. Fidelity to that assumption is essential.

In the letter of 5 February 2003 the matters relied upon by Steria as entitling it to terminate were breaches of contract in relation to the ROI exercise, training which should have been provided within 60 days after 29 March 2002 and completion of the first phase of implementation of the software which Steria pleaded should have been completed by 9 August 2002. Of these matters, the judge said (at para 179):

“…..each of the matters alleged in the letter dated 5 February 2003 to justify termination of the agreement had occurred six months or more before the date of the letter. In the interim, Peregrine….had continued work on implementation of the software, Mr Peake [a Steria employee] had been trained, version 5 of ServiceCenter had been supplied and Peregrine had cooperated in Project Enterprise, and Steria had had the benefit of an operational Norwich City Council service desk..”

Although the letter of 5 February had referred to only those three areas of complaint, in the litigation Steria pleaded and sought to rely on additional alleged breaches. They, and the response of the judge to them, are apparent from paragraph 180 of the judgment:

“…..if version 4 of ServiceCenter was not ITIL compliant, that was the position when that software was supplied to Steria in April 2002 and the breach, if there was one, occurred then. Similarly, any breach which was constituted by the fact that Peregrine did not support the software operating on a Linux partition on OS/390 probably occurred when the software was supplied, but at the latest must have occurred when Peregrine made its position plain at the beginning of August 2002. If it was a breach of the agreement for Peregrine not to make a version 5 of ServiceCenter immediately available to Steria once it was on general release, that breach occurred at the beginning of June 2002, following general release of version 5 on 31 May 2002. The complaints about the quality of the documentation produced by Mr Mackay as to the changes which he made during tailoring were really an aspect of the allegation that the first phase of implementation of the software had not been completed, amongst other reasons because appropriate documentation had not been produced. However, if one needs to look at the question as a separate item, the documentation in the final form ….was sent to Steria at the end of November 2002, two months before the letter dated 5 February 2003. If Peregrine was in breach of the agreement in not undertaking a review of Steria’s business practices or in not providing Steria with information as to the unit prices which Peregrine would charge for additional software licences, it would seem that these also were aspects of the alleged failure to complete the implementation of the first phase of the software. However, if they fall to be considered separately, it seems that Steria’s case was that the review of business practices should have taken place before implementation of the software commenced which was in April 2002, and Peregrine’s final attempt to provide pricing information to Steria was made when Louise Maitland sent to Mr. Singleton as an attachment to the e-mail dated 5 December 2002 the document entitled Steria – MSP costing framework, two months before the letter of 5 February 2003.”

Having regard to these findings in relation to the three original complaints and the subsequently formulated ones, the judge concluded (paragraph 181):

“In the result, it seems to me that, had Peregrine been in breach of the agreement in any of the respects contended for on behalf of Steria each such breach had been waived by the time the letter dated 5 February 2003 was sent.”

Strictly speaking, what he held to have been waived was the right to terminate the contract by reason of acceptance of one or more assumed repudiatory breaches.

For the purpose of dealing with this issue on appeal it is not necessary to set out at greater length the particulars of the pleaded terms and breaches which the judge described in detail at various places earlier in his judgment. Of more importance is the material said to have resulted in waiver. Before adverting to it, it is appropriate to record the legal principles. They were succinctly described in this way by Lord Goff of Chieveley in The Kanchenjunga [1990] 1 Lloyd’s Rep 391 at p 398:

“….where with knowledge of the relevant facts a party has acted in a manner which is consistent only with his having chosen one of the two alternative and inconsistent courses of action then open to him – for example, to determine a contract or alternatively to affirm it – he is held to have made his election accordingly….

…..perhaps because a party who elects not to exercise a right which has become available to him is abandoning that right, he will only be held to have done so if he has so communicated his election to the other party in clear and unequivocal terms…… Moreover, it does not require consideration to support it, and so it is to be distinguished from an express or implied agreement, such as a variation of the relevant contract, which traditionally requires consideration to render it binding in English Law.”

Mr Akka submits that it is plain from the documentary and oral evidence that Steria had abandoned whatever assumed right it may have had and that it was not entitled to terminate the contract. Mr Blunt’s response is that, whereas there was some undoubted waiver or affirmation in the early stages – for example, in relation to Linux and ITIL compliance – the history from October 2002 was one of continuing breaches in respect of which Steria was considering its position on the basis of an implied reservation of its rights, including the right to terminate. It was dissatisfied with aspects of Peregrine’s performance and, to the extent that it was prepared to stop short of termination, that was subject to there being no further breaches and to the negotiation of satisfactory new arrangements.

It does seem that in October 2002, the Steria board had reached a level of impatience or dissatisfaction with Peregrine’s performance. It told its management to approach the contract on the basis of “fix it or forget it” and something of that sense was communicated to Mr Gomersall of Peregrine in November. He interpreted it as a negotiating position with commercial implications rather than anything more terminal. He said in evidence:

“The conversations at that time….were properly focused around reprofiling licences. That was the dominant thing of the conversations…and I was confident that we could reach an agreement on that, and therefore whilst there was a threat there it was one that I thought was something that we could deal with and both parties could reach satisfaction.”

When it was put to him that Steria were talking about breaches of contract, his answer was:

“That’s not how I heard it.”

It seems to me that the contemporaneous letters and e-mails (which are extensively set out in the judgment below) are consistent with Mr Gomersall’s evidence.

The evidence of the Steria witnesses is of importance in this regard. When Mr Williamson was cross-examined about the period after the “fix or forget” instruction, which he dated as having been given at the end of October, the relevant questions and answers were as follows:

“Q: But your prime objective, nevertheless, was to get the project back on track and not to cancel it if that was at all possible?

A: That is correct, yes.

Q: ….so your aim presumably was…to try and improve the position and not to pull out of the contract?

A: That is right, yes. We had invested a lot of time and energy in the relationship so we wanted to fix it rather than forget it.

Q: Did you make clear that objective to Peregrine?

A: I believe so, yes.

Q: At this meeting [i.e. 26 November]?

A: Yes.”

It is also apparent from the evidence of Mr Singleton and Ms Osborn that, at that time, Steria were “still looking at proceeding with all of Peregrine”. Indeed, as late as 16 December (when Steria put a written proposal to Peregrine) it was the evidence of Mr Williamson that

“Steria still believed in the long term benefits of the Peregrine solution.”

It is necessary to set this evidence in the context of certain objective facts. The first and most important of these is that Steria continued to use the licensed software until February 2003. In particular, it used ServiceCenter in the performance of its contract with Norwich City Council from July 2002 until February 2003. This was a valuable contract with a potential life of 15 years and an estimated revenue of £60 million over that period. Secondly, Steria continued to avail itself of other Peregrine provisions. It took delivery of version 5 of ServiceCenter at about the beginning of November, and, according to Ms Osborn, was still seeking to avail itself of technical support in relation to it in late November. In relation to training, on 22 November Ms Osborn sent an e-mail to Peregrine saying that Steria would be unable to take up Peregrine’s offer to train Steria employees in December “but we could do it first thing in the New Year”. One Steria employee, Steven Peake, had been trained by Peregrine in connection with version 5 in October. Thirdly, in late November, Peregrine issued a supplementary Technical Services Schedule to Steria in relation to an additional 10 days work anticipated as being necessary before 15 December. Steria did not sign the Schedule. However, Peregrine began to provide, and Steria to accept, the work until all work ceased on 3 December because of a dispute about payment. Although all work ceased, the commercial relationship between the parties continued as I have described, not least the use of ServiceCenter software on the Norwich City Council contract.

Against this background, can it be said that, assuming all the breaches for which Steria contends (apart from the one concerning time for performance which I have rejected earlier in this judgment) the judge was in error when he held that, in any event, Steria had waived any right to terminate? In effect, what Mr Blunt is seeking to rely upon is not an express reservation of the right to terminate but an implied reservation in the context of a further or final allowance of time to see whether a successful solution with Peregrine could be found. In my judgment that analysis cannot be sustained in relation to the evidence in this case. The judge was entitled, and in my view correct , to conclude that Steria, with knowledge of the relevant facts, acted in a manner consistent only with its having elected to affirm the contract. Contracts of this nature and complexity often give rise to dissatisfactions and disputes about the quality of performance. One appreciates that it is not always easy for the customer to take the ultimate step of terminating the contract when repudiatory breaches have occurred (as, for present purposes, we assume they have in this case). On the other hand, it is not possible to rely on an implied reservation of rights when the evidence of what was said and what was done point unequivocally to an election to affirm the contract.

It follows from what I have said that I would dismiss this appeal by reference to the two issues which have been canvassed before us. It is appropriate to add the following points:

I agree.

I also agree.