Interpreting Technology Contracts: Clarity is King

Mark Crichard and Ben Nicholson look at the lessons that can be taken from a recent High Court dispute involving Fujitsu and IBM

Thankfully technology disputes don't reach the courts that frequently.  When they do, therefore, it is particularly interesting to note how the courts interpret the underlying contracts.  The recent Technology and Construction Court decision in Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] EWHC 752 (TCC) provides a valuable insight into just that and highlights some of the particular challenges involved in drafting contracts which involve elements of work sharing or partnering.   

Facts 

PwC entered into an agreement with the DVLA, in late 2002, to provide IT services for a ten-year period. Intriguingly the contract was referred to as the 'Partners Achieving Change Together Partnering Agreement'. On the same day, a sub-contract was entered into between PwC and Fujitsu in relation to those services.

Shortly afterwards, the relevant business unit of PwC was purchased by IBM, leading to IBM taking over the main agreement with the DVLA.

The sub-contract was subsequently amended more than once and both the main contract and sub-contract were then extended (in the latter case to 2015). 

In broad terms the split of roles under the sub-contract led to Fujitsu being responsible for day-to-day management, support and maintenance of the IT with IBM retaining responsibility for IT transformation and strategy.

Importantly, the sub-contract contained clauses and partnering principles which stated that the parties were to work together and share certain categories of work. Fujitsu alleged that IBM had not properly sub-contracted work and had not followed the change procedure, requiring IBM to notify and seek Fujitsu's consent to material changes to the prime contract with DVLA. Fujitsu claimed approximately £36.8 million from IBM for loss of revenue.

In this instance the Technology and Construction Court had been asked to rule on a number of key preliminary issues, in advance of the full trial (which is scheduled for early 2015). 

The Sub-contract and the Court's Conclusions

Exclusion of liability 

A key aspect of Fujitsu's claims was that it sought damages in the form of lost profit (arising from alleged breach of contract and/or breach of fiduciary duty) and, in the alternative, an account of profits wrongfully made by IBM (again, arising from alleged breach of contract and/or breach of fiduciary duty).

The Hon Mrs Justice Carr DBE therefore had to interpret a not unusual exclusion clause in the sub-contract which read:    

'Neither Party shall be liable to the other under this Sub-Contract for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage…

The court held that this clause excluded IBM's liability to Fujitsu for lost profits. In reaching that conclusion, the court noted that: 

*           the agreement was detailed and had been entered into on an arm's-length basis 

*          the clause used express and clear words (rebutting any presumption that the parties did not intend to abandon their remedies for loss of profit) 

*           the clause applied to categories of loss suffered by both parties. 

In doing so the court rejected Fujitsu's claim that the clause effectively removed its remedies for failure by IBM to fulfil its work sharing obligations. However, applying the same rules of interpretation, the court did conclude that the exclusion clause did not cover (ie exclude liability for) a claim for an account of profits (wrongfully obtained by IBM), as that did not amount to a 'loss' of profits.

Having said that, it is interesting to note that the court went on to conclude that any claim for account of profits (or for lost profits if such claim had not been excluded by the 'loss of profits' exclusion clause) would nevertheless have fallen within the overall financial limit of liability in the sub-contract, the relevant clause relating to which read: 

'20.4 Subject to Clauses 20.6 and 20.8, PwC's liability to Fujitsu arising under any indemnity or otherwise under or in relation to this Sub-Contract, whether in contract, tort, by statute or otherwise and whether or not arising from any negligence on the part of PwC or any of their agents or employees shall be subject to the following limits:

... 

c) subject to Clauses 20 4(d) and 20.8, in respect of any Claims or losses arising PwC's aggregate liability to Fujitsu arising under this Sub-Contract in each Contract Year shall be limited to £5 million for all events or failures giving rise to such Claims or losses;  

d) notwithstanding the cap set out in Clause 20.4(c), PwC's overall aggregate liability for all Claims or losses arising under this Sub-Contract shall be limited, subject to Clause 20.8, to £10 million for all events or failures giving rise to such Claims or losses.' 

Fiduciary duties 

Fujitsu argued that the sub-contract imposed a fiduciary duty on IBM. The court disagreed. The core of Fujitsu's argument was that it claimed that IBM was not entitled: 

 'when dealing with arrangements which affect[ed] the Sub-Contract or under it ... to put [its] interests ahead of [FSL's] or to act in such a manner as to disadvantage [FSL] at [FSL's] expense',  

and that IBM had: 

            'a duty to act in good faith for the benefit of both parties in dealings which relate[d] to or under the [PACT Agreement] which can affect or do affect [the] Sub-Contract or are capable of affecting the Sub-Contract or capable of affecting [FSL's] expectations under the Sub-Contract.'  

In reaching a decision, the Hon Mrs Justice Carr DBE said that it was clear that the courts 'must be careful not to distort the parties' contractual bargain by the inappropriate introduction of equitable principles….  Fiduciary duties do not commonly arise outside the settled categories of fiduciary relationships, not least because independently contracting parties do not undertake normally to subordinate their own commercial interests to another'.

The court was again influenced by the fact that the sub-contract was a detailed, negotiated and 'arm's-length' agreement with clear obligations, none of which pointed to any need to impose a fiduciary relationship. It also took into account the fact that the sub-contract expressly stated that it was not intended to create any partnership, joint venture or agency relationship. 

Duty of good faith 

The sub-contract contained relatively common warranties, from IBM, that it would (in carrying out its side of the sub-contract) deploy appropriately qualified and experienced personnel and that such personnel would discharge their obligations 'with all due skill, care, and diligence in accordance with Good Industry Practice'.

Fujitsu argued that this should be interpreted to mean that IBM owed it a duty of good faith in the performance of its (IBM's) obligations under the sub-contract.

The court did not agree.  Following other recent cases the court confirmed that, if the parties intended there to be an express duty of good faith, then express, clear wording should have been included.   

Comment 

Although the decision does not create any 'new law', it does provide both a good summary of the law on the interpretation of exclusion clauses and on when the courts might (or might not) imply a fiduciary duty or a duty of good faith. 

In general terms it confirms that the courts will interpret limitation clauses strictly, provided that they are clear and unambiguous, especially in the context of negotiated arm's-length contracts. It also confirms that the courts remain very reluctant to import or imply fiduciary duties and duties of good faith into commercial contracts; normally express contractual wording will be required in order for such duties to arise.    

Mark Crichard is a Partner and Ben Nicholson is a Trainee Solicitor, technology and outsourcing group, at RPC: www.rpc.co.uk

 

Published: 2014-04-15T17:21:10

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