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Limitation and exclusion of liability in a long-term IT contract

Print publication

09/05/2014

Background
The DVLA entered into an agreement with PWC for the provision of IT consultancy services in 2002. PWC in turn entered into a sub-contract with Fujitsu. IBM acquired PWC’s consultancy business and replaced PWC as party to the main and sub-contract.

Fujitsu brought proceedings against IBM, claiming that IBM had breached the sub-contract including obligations of fiduciary duty and good faith, alleging that IBM had failed to allocate work to it as required by the sub-contract and that it had failed to implement the contractual change control procedures. Fujitsu claimed that as a result it had lost revenue of approximately £36.8 million. IBM denied breach and the existence of fiduciary and good faith duties and also relied upon an exclusion clause which purported to exclude all of its liability for loss of profit/revenue in the event of breach.

The issues
Given that the effect of the exclusion clause would be to eliminate a significant element of Fujitsu’s claim for damages, the Court decided to deal with this point and certain other issues on a preliminary basis at an early stage of the proceedings namely:

whether IBM’s liability to Fujitsu was excluded by a provision in the sub-contract which stated that “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…”. Fujitsu argued that applying the usual legal principles of contractual interpretation the clause should not be interpreted as excluding loss of profit/revenue claims particularly in circumstances where otherwise IBM would suffer no financial detriment for its breach and the contract would be made a mere “statement of intent”
whether IBM’s liability was capped by a clause which limited its liability to £5 million in any one Contract Year (as defined) and £10 million in aggregate
whether the exclusion clause should be restricted to only apply to claims for indirect loss of profit
whether IBM owed a duty of good faith or any other fiduciary duty to Fujitsu.

  • Judgment
    any liability on the part of IBM for damages was excluded. The language of the clause was clearly to the effect that damages for loss of profit/revenue would be excluded. Although it had to be read in the context and the surrounding clauses of the sub-contract, there was nothing that indicated anything other than a simple application of the words to the facts of the case. The contract had been negotiated by sophisticated commercial parties, at arm’s length and of equal bargaining position and the exclusion clause was a provision from which they could both potentially benefit given that it had mutual effect
  • the fact that the exclusion clause restricted the scope of Fujitsu’s remedy in damages did not mean that the Court should strain to interpret it to allow a loss of profit claim contrary to the express wording. In appropriate circumstances Fujitsu could have remedies for declaratory relief, specific performance or debt and the contract was not therefore a mere statement of intent. In any event the parties were free to agree what they wanted in relation to liability and the Court should be slow to intervene in that discretion
  • the caps on liability were also effective and the exclusion clause should be construed so that it applied to both direct and indirect loss of profit. A claim for account of profits by Fujitsu (made on a restitutionary basis) did not fall within the definition of loss of profit
  • the contractual obligation to have regard to “good industry practice” and for the parties to work together on an “open, honest, clear and reliable” basis did not constitute an express duty of good faith. As the judge noted, “In a detailed contract like the Sub-Contract, one would expect clear words if there was to be an express duty of good faith”. He added that the courts must be wary of interfering with the parties’ commercial bargain. For similar reasons fiduciary duties could not be implied into an arms length commercial relationship.

Implications
The High Court’s robust interpretation of the clause excluding loss of profit provides some clarity for commercial parties seeking to rely upon exclusion clauses particularly where the effect is to seriously restrict the damages that can be claimed. In the recent case of Kudos Catering (UK) Limited v Manchester Central Convention Complex Limited, the Court of Appeal had pulled out all the stops to interpret an exclusion clause which excluded all claims for loss of profit claims against its express meaning where its effect was to prevent the claimant claiming any damages for breach. The Court of Appeal was influenced by the concept that it cannot have been the intention of the parties to remove any sanction or compulsion of the parties to comply with the contract. Here, the High Court refused to follow this line of argument and denied there was any legal concept that exclusion clauses cannot render a contract a mere statement of intent. One of the reasons given was that Fujitsu could indeed still adequately enforce the contract through remedies such as specific performance and injunction.

However, Fujitsu was probably correct in stating that in practice these remedies would be extremely difficult to obtain. The more convincing reason for the High Court’s decision is a libertarian view that the parties should be free to agree what they want without the Court’s interference or imposition of its own view of commerciality – particularly in a case of a contract between large commercial entities providing complex services. Fundamentally, the exclusion clause was part of a mutual agreement and had been agreed for good commercial reasons and the parties had chosen to consciously release the other from potentially significant liabilities and rely on trust.