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:

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:

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:

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

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

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

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):

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:

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 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:

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.