Express yourself – excluding liability within a services agreement

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 intended meaning was for the ‘loss of profit’ exclusion to carve out sums which would have been payable if IBM had not breached the contract. However, the court noted that the exclusion was mutual (i.e. applied equally to both parties) and there was no reason to suggest that this one-sided interpretation was intended.
• If the clause were interpreted so as to exclude all loss of profits, it would render the contract a mere ‘statement of intent’, as IBM would have no liability for its obligations, including obligations to pay for work sub-contracted to it. The court disagreed; the exclusion does not “empty the contract of content”. A claim for damages (for lost profits) could be distinguished from a claim for a debt owed (for example, for services performed), and there were other obligations on IBM and remedies available to Fujitsu.
• The exclusion clause should be interpreted as only excluding loss of profits insofar as it was indirect or consequential. This would mean that a loss of profits flowing directly from IBM’s breach of contract would not be excluded. The exclusion clause within the sub-contract listed ‘indirect or consequential loss’ as well as loss of profits within the excluded items. Fujitsu argued that loss of profits should be interpreted as a sub-category of ‘indirect or consequential loss’, referring to previous case law where the court had construed similar clauses in different ways. The court disagreed and, comparing it with the other cases, considered this argument was not justified in the context of the contract as a whole.

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):

• Fujitsu’s claim for an account of profits, was not, however, excluded by this clause; but
• the liability cap would apply to any losses which were not excluded.

This case emphasises the importance of carefully considering and clearly expressing terms to reflect the intention. Whilst the clauses in question relating to exclusions and limitations of liability, the same holds true in relation to all terms of the contract. However, limitation of liability clauses can be particularly important; beautifully crafted obligations can be of limited benefit if liability for breaching them is subsequently excluded! A few tips for those entering into contracts for the supply of services:

• When drafting or reviewing clauses which seek to exclude or limit liability, carefully consider the likely losses and the consequences of the exclusions. In my experience, certain heads of loss (such as loss of profit, business, data, reputation…) are often listed as ‘standard exclusions’, without proper consideration always being given to what effect they may have in context. For example, if, like Fujitsu, you are a service provider relying on work being given to you under the contract, excluding all liability for loss of profits may take away some of your key remedies for breach. If you are a customer procuring services for the storage of data, a blanket exclusion of liability for ‘loss of data’ is likely to be inappropriate.
• After careful consideration of the losses and consequences, tailor the drafting of the exclusion clause to say what you intend. If this is expressed clearly, the court will (hopefully) give the intended effect to the wording as drafted.
• Be aware that, if the intention is not absolutely clear, the court can construe exclusions of liability in different ways. In particular, if the obvious meaning is very unreasonable, an alternative meaning may be applied. For example, if a term effectively excludes all potential liability of one party under the contract, the court may presume that this was not intended.

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.

• “How IT contractors are affected by Fujitsu v IBM” published by Contractor UK (www.contractoruk.com)