Copyright and freedom of expression are balanced in Copyright Directive, says CJEU advisor
Out-Law Guide | 02 Nov 2007 | 8:31 am | 12 min. read
Pegler Limited V Wang (UK) Limited 2000
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.
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  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  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  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  1 QB 600, 608, per Stuart-Smith LJ.
Looking at the relevant considerations, Judge Bowsher found as follows:
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:
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  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  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.
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  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.
Copyright and freedom of expression are balanced in Copyright Directive, says CJEU advisor