Implied terms and exclusion clauses: another useful reminder

09 September 2014

Fujitsu Services Ltd v IBM United Kingdom Ltd serves as a useful reminder of the court's approach to implying terms into a contract (here, implied fiduciary duties and implied duties of good faith) and the construction of exclusion clauses. It is of particular relevance to organisations entering into partnering arrangements, for example in the context of jointly bidding for work, and long term commercial contracts.

The facts:

PricewaterhouseCooper's (PwC) consulting business was appointed as the main contractor by the Driver and Vehicle Licensing Agency (DVLA) for provision of IT services. Fujitsu, who had assisted with PwC's contract proposal to the DVLA, was appointed by PwC as its sub-contractor. PwC's consulting business was later acquired by IBM, who took over both the main contract and the sub-contract.

Under the sub-contract, IBM agreed to sub-contract a certain share of IT infrastructure maintenance work to Fujitsu. A dispute subsequently arose, with Fujitsu alleging that IBM had failed to sub-contract work for the DVLA to it in accordance with the sub-contract which included, amongst other provisions, partnership principles. A trial on the following preliminary issues was held before Mrs Justice Carr in the Technology & Construction Court:

  1. Did a fiduciary duty arise under the sub-contract?
  2. Did a duty of good faith arise under the sub-contract?
  3. How should the exclusion clause in the sub-contract be construed?

The court's findings:

1. Fiduciary duty

Fujitsu alleged that IBM was under an implied fiduciary duty and as a result it was not entitled, when dealing with arrangements which affected the sub-contract, to put its interests ahead of Fujitsu's or to act in such a manner as to disadvantage Fujitsu.

Mrs Justice Carr disagreed that any such implied duty existed. She held that:

  • While the existence of a contract did not bar the co-existence of fiduciary duties, such duties, if they existed, had to fit the contractual framework. The courts had to be careful not to distort the parties' contractual bargain by the inappropriate introduction of equitable principles. In a commercial context, wider duties would not lightly be implied.
  • Fiduciary duties did not commonly arise outside the settled categories of fiduciary relationships, and the relationship between IBM and Fujitsu did not fall into any of those categories. Moreover, Fujitsu was an independent contractor and neither party had the authority to bind the other.
  • The fact that the original proposal to the DVLA had been a joint one between Fujitsu and PwC did not go anywhere near creating a fiduciary relationship. This was particularly so where the sub-contract was (a) silent as to the existence of fiduciary duties; (b) provided that the parties only had to "have regard" to agreed partnership principles; and (c) prevented the possibility of any such duties arising by expressly excluding any partnership relationship - or indeed any other type of association.
  • The sub-contract represented an arms' length commercial contractual relationship between a contractor and a sub-contractor, and the rights and obligations were consistent with that relationship. The fact that Fujitsu was reliant on IBM for work allocation did not extend the nature of the relationship. The placing of faith by one party in the other was not enough in itself to give rise to a fiduciary relationship.

2. Duty of good faith

Fujitsu argued that IBM was under duty of good faith in the performance of its duties under the sub-contract. Fujitsu relied upon partnership principles set out in the sub-contract and a warranty that IBM would discharge its obligations regarding the services in accordance with good industry practice.

Mrs Justice Carr disagreed that such an implied duty existed. She held that there was no direct provision in respect of a good faith obligation. In a detailed contract such as the sub-contract, if there was to be an express duty of good faith, clear words to that effect would be expected.

Here, the parties only had to have regard to the partnership principles. Further, the reference to "good industry practice" in the warranty that Fujitsu sought to rely upon did not assist. This was designed to be a reference to the obligations of personnel, not IBM; the warranty did not need to give rise to any obligation of good faith to be effective, and in fact made such a duty otiose.

3. Exclusion clause

The exclusion clause in the sub-contract provided that neither party would be liable to the other for loss of profits, revenue, business, goodwill, indirect or consequential loss or damage. Fujitsu contended that a central part of the bargain between the parties would be deprived of all contractual force if the effect of the exclusion clause was to exclude liability for IBM's breach of its obligation to allocate work.

Mrs Justice Carr disagreed, holding that:

  • It was clear from the language of the exclusion clause in the sub-contract (including when read in the context of the sub-contract as a whole, the material background and the circumstances) that the parties had intended to abandon their remedies for loss of profits. The exclusion of liability for loss of profits was not commercially unreasonable or inconsistent with business sense, and the court should be very slow to intervene with its own view of commerciality. The arguments around the intent of the bargain did not assist Fujitsu in circumstances where the wording was plain and the exclusion clause of a mutual benefit.
  • Further, the sub-contract did not exclude liability for all types of breach, merely specific types of loss. In particular, Fujitsu could still claim declaratory relief, debts for non-payment of invoices for work undertaken by it pursuant to the sub-contract and account of profits made by IBM. With this latter head of loss the court held that in the absence of express wording, it could not have been the parties' intention that IBM could profit from a breach of contract.

Comment

This case provides a helpful reminder of the court's approach to construction and provides some useful guidance to drafters of long term commercial contracts and partnering arrangements. In particular:

  • Fiduciary duties will not lightly be implied into a commercial contract, whether partnering arrangements or otherwise. This is particularly so where the contract expressly excludes the formation of partnership, joint venture, employment and agency relationships.
  • This case is another example of the uniformed approach being taken by the courts to good faith obligations - that unless there is express, clear wording in a contract providing for such an obligation, the courts will not readily imply a good faith obligation.
  • If partnership principles and obligations to use good faith are intended to be enforceable it is important to include clear and express wording; providing that the parties will merely have regard to partnership principles is unlikely to be enough.
  • The court's interpretation of the loss of profits exclusion in this case is interesting and serves as a reminder of how courts can use interpretation as a means of doing justice in a particular case. Here the court narrowly construed the loss of profits exclusion so that it operated to exclude Fujitsu's claim for profits, but not: (a) unpaid invoices (which arguably constitute historic profits); or (b) an account of any profits wrongfully made by IBM as a result of a breach of contract.
  • General exclusion wording may not therefore operate to exclude all losses that a party may think it does. Parties looking to exclude liability for a particular loss ought to include express wording covering such a loss in their exclusion clauses. In the absence of such wording, the court may not deem the parties to the contract as having intended to exclude liability for such a loss. Here, the loss of profits exclusion did not operate to exclude liability for recovery of outstanding invoices/debts or an account of profits. In Kudos Catering, the exclusion of liability clause did not operate to exclude liability for a failure to perform.
  • However, parties aiming to ensure losses are more comprehensively excluded should be wary of the risk of the other party being able to argue the bargain is deprived of all contractual force, and that the exclusion clause should not therefore apply to the particular losses. With a comprehensive exclusion clause, there is also an increased chance of an injunction being awarded by the courts on the basis that damages are not an adequate remedy.

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