Information Technology – Wrongful Termination of Contract

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In the recent case, Peregrine Systems Limited v Steria Limited [2005] , a customer wrongly terminated an IT contract with its software supplier and as a result had to pay the supplier £700,000 plus interests – the outstanding balance due to the supplier under the contract.

The defendant, Steria, terminated the agreement with Peregrine Systems alleging that it was entitled to terminate the contract between the parties as a result of delays and commercial misstatements. Steria also claimed damages from Peregrine.

In return, Peregrine brought proceedings against Steria for money owed under the contract. Initially, the Court held that Peregrine had not committed any breach of contract and that there had been no misstatements. The Court also held that Steria had in any event lost the right to terminate the contract because Steria had, by its conduct, affirmed the contract by continuing to use the software. Steria appealed these decisions.

The Court of Appeal decided against Steria on both as follows:

Due to the wording of the contract Peregrine was only obliged to provide £200,000 worth of services and was not required to fully implement the software. Once Peregrine had provided £200,000 worth of services, there was no obligation to do anything more to complete the project within a reasonable time;

A supplier having to perform “within a reasonable time” does not necessarily mean that the customer can end the contract if this is not done;

Steria had not properly communicated its dissatisfaction to Peregrine; and

Steria continued to use the software and so acted in a manner implying Steria’s wish to affirm the contract.

Comment: This case highlights the importance of contractual parties clearly setting out their rights and responsibilities when entering into an IT contract. Furthermore, parties should act properly when dissatisfied with goods or services and analyse contractual documentation carefully before deciding to terminate an IT contract.

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© RT COOPERS, 2005. This Briefing Note does not provide a comprehensive or complete statement of the law relating to the issues discussed nor does it constitute legal advice. It is intended only to highlight general issues. Specialist legal advice should always be sought in relation to particular circumstances

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Source by Rosanna Cooper