Court upholds contract terms – a bad bargain however clearly drafted will remain a bad bargain


28 August 2014

The recent case of Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] EWHC 752 (TCC) is about one party’s efforts to defeat a clearly worded exclusion clause.  It highlights the Courts’ willingness to implement a clearly drafted contract even if it underlines the bad bargain one party has potentially entered into.  It also acts as a timely reminder of the importance of reviewing, before the contract is entered into, the commercial worst case scenario and comparing that against what the current draft provides by way of protection and apportionment of risk.

What?

In Fujitsu Services Ltd v IBM United Kingdom Ltd, IBM contracted with the DVLA to provide IT and business process change services that would be requested as and when needed. Fujitsu was to provide aspects of those services (including day to day management, support and maintenance of IT infrastructure) under a sub-contract with IBM.  Both contracts were entered into in September 2002 for a period of ten years.

Fujitsu alleged that IBM had essentially deprived it of work, in breach of contract, by failing extensively to sub-contract a share of certain types of services to it and in failing to implement change control procedures in respect of changes to IBM’s main contract. These breaches were also alleged to amount to breaches of fiduciary duty.  Fujitsu claimed that these breaches had caused it loss of revenue of over £36 million.  IBM denied any breach and denied liability by reference to exclusions and limitation of liability clauses.  Whether liability was excluded or limited, as well as whether IBM owed any fiduciary duties or a duty of good faith, were taken to trial as preliminary issues.

The basic exclusion was as follows: “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.”

In an attempt to defeat the clear contractual wording of the exclusion clause, Fujitsu argued that if the exclusion was held to apply, it would reduce the sub-contract to a mere “statement of intent”, devoid of any contractual force and incapable of imposing any sanction for IBM’s alleged non-performance (which, it was alleged, the parties could not objectively have intended).

The Court found that the wording of the basic exclusion was clear and unambiguous.  However, the basic exclusion was also 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.  The starting presumption for the Court was that neither party would intend to abandon any remedies arising by operation of law and clear words must be used to rebut that presumption.

The Court found that there was nothing in the context or surrounding clauses that pointed to any different construction than a simple application of the words of the exclusion clause to the facts of the case.  Given the length and detail of the sub-contract, the sophistication of the parties, the equality of bargaining power, the mutuality of the clause, the availability of other remedies (e.g. for delay, unpaid debt), the fact that both parties had received legal advice and that the full exclusion clause was tailor-made, the relevant circumstances supported a straightforward application of the clause.  The sub-contract was not deprived of all contractual force.  Fujitsu’s position was not assisted by the fact that an alternative, commercially sensible meaning could not be identified.

Fujitsu also sought to argue that the basic exclusion excluded only indirect and consequential losses, e.g. indirect loss of profit, such that direct loss of profit would fall outside of the exclusion.  This too did not find favour with the Court.

Fujitsu lastly argued that liability for a breach of fiduciary duty was not excluded by the basic exclusion, because it was not a liability under the sub-contract, but a liability in equity.  This also found no favour with the Court, essentially because liability was not excluded by reference to any specific cause of action.

Fujitsu’s losses were therefore excluded.  The Court’s construction was expressed to be what a reasonable person, being someone with all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time the contract (and amendment) was entered into would have understood the parties to have meant.

Duty of “good faith”?

Fujitsu also argued that the sub-contract contained an express duty of “good faith”, which had been breached. Fujitsu relied on Clause 19.4(f) of the sub-contract which stated that IBM would discharge its obligations in accordance with “good industry practice”. The sub-contract separately defined good industry practice as IBM acting as “a skilled and experienced provider of [IT services] … seeking in good faith to comply with its contractual obligations”. The Court rejected this argument for three reasons.

Firstly, there was no direct provision that the parties would act in good faith.  The Court compared the above clause to the clause in Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch) which set out clearly, “in all matters relating to this Agreement the parties will act with the utmost good faith towards one another and will act reasonably and prudently at all times”. The Court explained that in a contract such as the sub-contract, one would expect to find “clear words” and that the words in the sub-contract were not clear.

The second reason was that the sub-contract contained a warranty that IBM would perform its obligations. The Court held that a duty to act in good faith was otiose where there was a warranty that IBM would perform its obligations.

Finally the language of Clause 19.4(f) did not support the existence of an express duty of good faith.

So what?

The link between the commercial deal, worst case scenarios, and the contractual protections and apportionment of risk is critical and that importance is underlined clearly by the reasoning set out in this judgment.  It is a collective commercial and legal assessment that is required, early in the contract formation phase, in order to ensure that these issues are properly understood and provided for in the contract.

 

James Hyde

Partner
+44 (0) 845 498 4066
+44 (0) 796 965 3306
jameshyde@eversheds.com

 

 

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James Hyde
James Hyde, Partner
e: JamesHyde@eversheds.com
t: +44 113 200 4066
m: +44 796 965 3306