The recent case of Fujitsu Services Ltd v IBM United Kingdom Ltd 1 has emphasised the need for contracting parties to take time and care over the wording used in the contract, ensuring the practical impacts have been thought through and the intention expressed clearly. In ordinary circumstances, the courts will accept that the parties have “meant what they said”.
This is the first in a series of two articles considering this case, looking at clauses which seek to exclude and limit liability within a contract for the supply of services. The second article will consider whether a fiduciary duty or a duty of good faith arises in such a contract.
IBM United Kingdom Ltd (“IBM”) has a contract with the DVLA to provide certain information technology (“IT”) and business process changes services. IBM took over the contract from PricewaterhouseCoopers (“PwC”) shortly after the contract commenced in 2002 (as IBM had purchased PwC’s consultancy business). Some of the IT services under the contract were sub-contracted to Fujitsu Services Ltd (“Fujitsu”) under a sub-contract of the same date. The contract is due to run until September 2015.
Fujitsu claims that IBM has breached both the sub-contract and an alleged fiduciary duty, such that services which it was entitled to perform have not been available or sub-contracted to it. It has estimated losses to its revenue in the region of £36.8m.
The court had been asked to determine four issues in a preliminary ruling, prior to a full trial due to commence in February 2015. In this first article in the series, I am looking at the (two) questions relating to exclusions and limitations of liability.
The focus of the debate was whether a clause in the sub-contract which excluded certain heads of liability had effect so as to exclude Fujitsu’s claims for loss of profit; in other words any profit Fujitsu would have made if the work had been sub-contracted appropriately.
The questions also considered whether the clause would exclude claims for an account of profits (any profit IBM made by not sub-contracting appropriately), and whether the liability cap stated in the contract would limit any of Fujitsu’s claims. These questions were answered more easily, so are only covered briefly below.
A contract should be interpreted to reflect the intention of the parties at the time they entered into the contract. The court needs to consider what a reasonable person would have understood the parties to mean based on the wording used in the contract. The reasonable person is assumed to have all the background knowledge reasonably available to the parties at the time the contract was made.
The wording of a contract can sometimes be construed in more than one way, and the court must decide in context on which interpretation reflects the intention. Even where the wording appears to provide an obvious meaning, if the result of it is very unreasonable, the court may give the clause a less obvious interpretation. This is on the basis that the more unreasonable the result, the more unlikely it is that the parties intended it. However, the context of the circumstances would need to justify such an interpretation; a court cannot re-write the parties’ chosen wording simply because it is “somewhat unexpected, a little unreasonable, or not commercially very wise” 2.
A clause of the sub-contract expressly stated that neither party should be liable to the other for loss of profits (as well as other heads of loss). Fujitsu put forward several arguments that this provision should not be interpreted so as to exclude its lost profits from IBM’s failure to sub-contract services to it, including the following.
The judge therefore determined that, in the context, the parties can be taken to have meant what they said in the contract. All relevant circumstances provided support for this, including that it was a detailed, negotiated contract between two sophisticated parties. Fujitsu’s claims for loss of profit were therefore excluded under the exclusion clause.
Covering off the other parts of the questions on liability limitations and exclusions (which were determined somewhat more quickly within the judgment):
Contracting parties should also be aware of other legislation governing ‘unfair’ contract terms. Where one party to a contract is in a weaker position (specifically a consumer or a party contracting on the other party’s standard terms of business), unreasonable terms can be deemed unenforceable. This legislation is very relevant in the context of clauses seeking to exclude or limit liability. This provides another reason that such clauses should be carefully considered in the context of the likely losses, in order to determine what is reasonable and, therefore, enforceable.
Olivia Whitcroft, principal of OBEP, 9 May 2014
1  EWHC 752 (Judgment 21 March 2014)
2 Skanska Rashleigh Weatherfoil Ltd v Somerfield Stores Ltd  CILL 2449
This article provides general information on the subject matter and is not intended to be relied upon as legal advice. If you would like to discuss this topic, please contact Olivia Whitcroft using the contact details set out here: Contact Details