Pegler Ltd v. Wang (UK) Ltd

Factual and Procedural Background

The Defendant, Company A, supplied computer hardware, software, and associated services to the Plaintiff, Company B, a longstanding manufacturer in the building products sector. Company B sought to modernize its manufacturing and business processes through an integrated computer system to improve efficiency, service, and delivery, following a strategic plan initiated in 1991. After a tender process, a contract was entered into in late 1991 for the supply and implementation of computer systems and related services by Company A.

Company A's performance under the contract was significantly deficient, with delays, incomplete delivery, and poor quality of software and hardware. Company A ceased relevant performance by the end of 1995. Company B formally notified Company A of breaches in 1997 and accepted repudiation of the contract, also terminating it under a contractual clause.

Litigation commenced in 1996 and was consolidated with a related action in 1997. Company A initially denied breach but later admitted liability. The contract incorporated the Invitation to Tender and Company A's Response, which defined phases for delivery and included terms regarding fitness for purpose, quality, and care in services. Company B claimed damages for losses caused by Company A's breaches, including lost sales, staff cost savings, third-party expenditures, and other heads of loss.

Legal Issues Presented

1. Whether Company A breached express and implied terms of the contract concerning fitness for purpose, merchantable quality, and reasonable care and skill in services.
2. The validity and effect of the termination of the contract by Company B, both at common law and under contractual clause 43(a)(i).
3. The interpretation and enforceability of exclusion of liability clauses in the contract, including their application in light of the Unfair Contract Terms Act 1977.
4. The proper measure and quantum of damages recoverable by Company B for the breaches admitted by Company A.
5. Whether rectification of the contract was appropriate to incorporate additional correspondence and clarify terms.

Arguments of the Parties

Plaintiff's Arguments

• Company A failed to supply the system and services in accordance with the contract schedule and to the agreed standards of fitness, quality, and care.
• The exclusion of liability clauses do not exclude Company A’s liability for delays and failures before supply and do not apply to professional services such as project management and consultancy.
• Company B validly terminated the contract under clause 43(a)(i) and is entitled to damages without limitation by exclusion clauses due to the precedence of special conditions.
• Damages should be assessed on the basis of Company B’s actual losses, including lost sales, lost staff cost savings, third-party payments, ongoing and future expenditures, and other heads of loss.
• Rectification is warranted to incorporate the Invitation to Tender, Company A’s Response, and related correspondence into the contract.
• The exclusion clauses relied upon by Company A are unreasonable and unenforceable under the Unfair Contract Terms Act 1977 given the circumstances and bargaining positions.

Defendant's Arguments

• Company A initially denied breach but later admitted liability; however, it contended that Company B’s claims are grossly inflated and that Company B failed to mitigate losses.
• Company A argued that termination under clause 43(a)(i) was not validly exercised due to alleged waiver and estoppel, though these arguments were not pursued at trial.
• Company A contended that exclusion clauses apply to limit or exclude liability, including for consequential losses, and that damages should be reduced accordingly.
• Company A sought rectification of clause 43(a)(i) to clarify its liability is subject to exclusion clauses.
• Company A challenged the quantum of damages claimed, disputing the methodology and evidence supporting claims for lost profits, cost savings, and other losses.
• Company A argued that some claims, such as for contract sales discounts and planned maintenance, were inadequately proven or should be mitigated by Company B’s actions.
• Company A submitted that certain claims involved betterment or should be limited due to the natural life of the software and systems involved.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed and methodical analysis of the contract terms, the parties' conduct, and the applicable legal principles. It found that Company A was in breach of express and implied contractual terms, including fitness for purpose, merchantable quality, and reasonable care and skill in the services provided.

The court accepted that Company B validly terminated the contract both at common law and under clause 43(a)(i), rejecting Company A's waiver and estoppel arguments. It interpreted clause 43(a)(i) as conferring an independent right of redress not limited by exclusion clauses, given the special conditions' precedence.

Regarding exclusion of liability clauses, the court construed them narrowly, holding that they did not exclude liability for delays or failures before supply, nor liability for professional services such as project management and consultancy. The court found these clauses unreasonable and unenforceable under the Unfair Contract Terms Act 1977, given the bargaining positions and circumstances.

The court carefully evaluated the evidence on damages, acknowledging the inherent difficulties in proving losses such as lost profits and cost savings. It preferred contemporaneous documents and expert evidence over later estimations by Company B's directors, applying principles from Hadley v. Baxendale and Victoria Laundry v. Newman Industries to assess foreseeability and reasonableness of claimed losses.

The court accepted Company A's admitted breaches and Company B's entitlement to damages, but made adjustments where claims were inadequately supported or overstated. It rejected arguments that certain losses were permanent, instead accepting a reasonable recovery period.

On rectification, the court granted Company B's application to incorporate the Invitation to Tender, Response to Tender, and related correspondence into the contract, finding that the parties intended those documents to form part of the agreement.

Damages were awarded after detailed analysis of each head of loss, including lost sales and margins, staff cost savings, third-party payments, ongoing and future expenditures, contract sales discounts, planned maintenance, reductions in debtors and inventory, wasted management time, and purchasing cost savings. The court rejected Company A’s betterment claims and found no reduction for group financing arrangements.

Holding and Implications

The court held in favour of Company B, awarding damages in the total sum of £9,047,113.

The court ordered rectification of the contract to include additional documents as intended by the parties. It rejected Company A’s exclusion of liability defenses and found those clauses unenforceable under the Unfair Contract Terms Act 1977. The damages awarded reflect careful consideration of the admitted breaches and the evidence of loss, adjusted for reasonableness and mitigation.

The decision directly affects the parties by confirming Company B's entitlement to substantial damages for Company A's breaches and validating Company B's termination of the contract. The ruling clarifies the limited scope of exclusion clauses in IT supply contracts and emphasizes the court’s willingness to scrutinize such clauses under statutory controls.

No new legal precedent was established beyond the application of established principles to the facts of this case.