Excluding liability and fiduciary/good faith duties
FUJITSU SERVICES v IBM UNITED KINGDOM [2014]
In a dispute over a partnering sub-contract, the Technology and Construction Court (TCC) was asked to look at whether liability for loss of profit was effectively excluded and whether a fiduciary duty as well as a duty of good faith existed in an IT services sub-contract.
Facts:
- The DVLA entered into a long-term agreement with PwC for certain IT services (PACT Agreement). On the same day PwC entered into a sub-contract with Fujitsu (F) for the day-to-day running of the DVLA's IT systems and specific projects commissioned by the DVLA (Sub-Contract). Very soon afterwards, IBM by means of acquisition of PwC’s consulting business, replaced PwC as the party to the PACT Agreement and the Sub-Contract.
- F alleged that IBM failed to sub-contract certain services contrary to agreed contractual workshare provisions and also to implement the change control procedure for new projects in accordance with the Sub-Contract, which required IBM to seek F's consent to material changes to the PACT Agreement.
- F maintained that it had no direct means by which to ascertain what services were being requested or carried out under the PACT Agreement. It was therefore reliant on IBM to obtain work under the PACT Agreement, to notify it of such work and to sub-contract the share of work to which it was entitled.
- Additional breaches of contract or alleged fiduciary duties were said to have arisen from an alleged breach of duty on the part of IBM not to take steps, the effect of which would be to limit the amount of work available under the PACT Agreement or sub-contracted to F.
- F estimated that it had suffered a revenue loss of some £36.8 million due to being wrongfully deprived of work under the Sub-Contract. It brought claims for loss of profit in relation to the workshare and change control breaches and, as an alternative, a claim for an account of profits wrongfully made by IBM.
Decision:
- The preliminary issues (to be decided ahead of the full trial due in 2015) were:
- Issue 1: whether IBM's liability was excluded by a contractual exclusion of liability for loss of profit;
- Issue 2: whether IBM's liability was capped by the contractual limits of liability;
- Issue 3: whether IBM owed the alleged fiduciary duties;
- Issue 4: whether IBM owed the alleged duty of good faith.
- The TCC rejected all of F’s arguments except it found that the exclusion clause did not exclude a remedy for an account of profits but this would in any event be subject to the limits on liability. It made the following comments, taking each preliminary issue in turn.
- Issue 1: whether IBM's liability was excluded by a contractual exclusion of liability for loss of profit - yes
- Clause 20.7 of the Sub-Contract had fairly typical exclusions and stated: “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 TCC said that the language of clause 20.7 was “clear and unambiguous” and that any liability on IBM’s part for damages for loss of profit based on the workshare and change control claims fell within this exclusion. The words of the exclusion had to be read in the context of the whole exclusion clause, the contract as a whole, the material background and circumstances at the time the Sub-Contract was entered into. In doing this, there was nothing to point to any different construction; moreover it was supported by the fact that:
- it was a detailed contract negotiated by commercial parties of equal bargaining power at arms' length and with the benefit of legal advice;
- there were detailed provisions governing the parties' rights to remedies;
- clear express words were used to rebut any presumption that the parties did not intend to abandon their remedies for loss of profit;
- the exclusions applied equally to both parties.
- In short, the parties were taken on the facts and in the context of the Sub-Contract to have meant what they said.
- The TCC rejected F’s argument that interpreting clause 20.7 so as to exclude liability for loss of profit would mean the central element of the parties' deal was turned into a mere ‘statement of intent’.
- Another reason why F’s contention failed was because it still had the right to claim as a debt for non-payment of an invoice. Clause 20.7 expressly referred to exclusions of certain types of ‘loss’ and a debt was not within such categories of loss.
- F also tried to maintain that the exclusions in clause 20.7 only applied in so far as the types of losses listed constituted indirect or consequential loss or damage. However, the TCC said that it would need to be clear if this was the intention; the fact that loss of profit can be direct or indirect is well-known.
- Issue 2: whether IBMI's liability was capped by the contractual limits of liability – yes
- The relevant liability provisions were:
“20.4 … PwC's liability to [F] arising … under or in relation to this Sub-Contract … shall be subject to the following limits:
… c) … PwC's aggregate liability to [F] arising under this Sub-Contract in each Contract Year shall be limited to £5 million for all events or failures;
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 … to £10 million for all events or failures”. - If liability for the loss of profit claim was not effectively excluded, it would have been caught by these limits. In relation to the alternative claim for an account of profits, the TCC said that if such liability was not excluded by clause 20.7, it would be subject to these caps.
- The relevant liability provisions were:
- Issue 3: whether IBM owed the alleged fiduciary duties – no
- F alleged that IBM owed it certain fiduciary duties (or duties akin to fiduciary duties). Fiduciary duties are those owed by one person to another by virtue of a position of special responsibility. Fiduciary duties are commonly owed by solicitors to their clients, partners to their fellow partners in a partnership and by directors to their companies. They include a duty not to profit at the expense of the beneficiary, a duty not to place oneself in a position where your own interests conflict with those of the beneficiary, a duty of loyalty and an obligation of confidentiality.
- IBM referred to clause 2.1:
“… PwC has agreed to work with the DVLA in a partnering relationship under the PACT Agreement … Accordingly, [F] and PwC shall comply with the partnering principles set out in Schedule 2 in the operation of their own partnering relationship …”.
- Amongst other things, Schedule 2 stated that the parties were: “to have regard to the partnering principles set out in Annex A”.
- The TCC said it “must be careful not to distort the parties' contractual bargain” and found that IBM did not owe F the alleged fiduciary duties because:
- the parties' relationship did not fall into an established category of fiduciary relationship;
- the Sub-Contract expressly stated that the parties did not enter into any partnership or agency relationship but remained independent contractors. In terms of the ‘partnering’ requirements, the Sub-Contract only required the parties "to have regard to" the principles set out in Annex A;
- this was an arms-length, commercial relationship between a contractor and a sub-contractor and the rights and obligations were consistent with that relationship. The defining characteristic of a fiduciary relationship, namely an overriding obligation of loyalty, did not exist.
- Issue 4: whether IBM owed the alleged duty of good faith - no
- F maintained IBM owed F an express, as opposed to an implied, duty of good faith and it relied on clause 19.4 which provided that: “PwC warrants and represents that … it will … supply and render appropriately experienced, qualified and trained personnel to discharge any obligations PwC has to the Services under this Sub-Contract, and that such personnel will discharge such obligations with all due skill, care and diligence in accordance with Good Industry Practice ...”.
- Good Industry Practice was defined as: “the exercise of that degree of skill, diligence, prudence and foresight which would reasonably and ordinarily be expected at such time from a skilled and experienced (a) provider of information, communication and technology services and information systems and/or (b) provider of expertise in change management and business processes; seeking in good faith to comply with its contractual obligations …”.
- The TCC said clause 19.4 did not give rise to an express duty of good faith on the part of IBM in the performance of its duties under the Sub-Contract and that in a contract like this, there would need to be clear words to do so.
- In relation to the Annex A principles, one of these was for dealings between the parties to be “open, honest, clear and reliable”. However, the TCC commented that the parties had seemingly chosen deliberately to step back from an express agreement that they would owe each other a duty of good faith; a choice which the TCC said it should respect.
Points to note:
- Although the decision does not create any new law, it confirms the Courts will give effect to exclusion and limitation clauses provided that they are clear and unambiguous. It seems an exclusion of liability for an ‘account of profits’ in a relationship such as this needs to be separate from a ‘loss of profit’ exclusion.
- Fiduciary duties are not implied lightly into commercial agreements not least because independent contracting parties do not normally undertake to subordinate their own commercial interests to those of the other.
- ‘Having regard to’ certain principles may not be as effective as a concrete obligation to abide by those principles.
- There is no general duty to perform contracts in good faith under English law. However, parties may agree an express term of good faith and the Courts may imply limited duties of good faith into commercial contracts in certain circumstances. However, this case demonstrates that they remain reluctant to do so. The TCC was not prepared to construe an obligation to carry out duties in accordance with ‘Good Industry Practice’ and a requirement on the parties to work together in an open and honest way as akin to an express duty of good faith.