Express yourself Part 2 – fiduciary duties and good faith

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 the first article I looked at the court’s decision on the application of the exclusion and limitation of liability clauses (covering the first two of the four issues). The court determined that the parties could be taken to have meant what they said in the provisions excluding certain types of losses, including loss of profits.

The other two questions put to the court were:

• whether IBM owed any fiduciary duty to Fujitsu, breach of which would give Fujitsu additional potential claims separate to damages for breach of contract; and
• whether IBM owed a duty of good faith to Fujitsu under the express terms of the contract.

Where a party owes a fiduciary duty to another party, its obligations go beyond what is written in any contract between the parties. The duty indicates a relationship of trust and confidence, and generally requires the party owing the duty to act in the interests of the other party.

Certain types of relationship are well-established as giving rise to fiduciary duties. This includes the relationship between a solicitor and a client, between a principal and an agent, between partners in a partnership.

In this case, Fujitsu argued that IBM owed it a fiduciary duty (or business duties akin to fiduciary duties), which IBM had breached by not sub-contracting or making available sufficient work to it, resulting in loss of income.

However, the court disagreed, and found that the fundamental characteristics of a fiduciary duty were missing in the nature of the overall relationship and the terms of the contract. Previous case law made it clear that a court should be careful not to inappropriately introduce duties of this kind into agreed contractual arrangements. In a commercial context “wider duties will not lightly be implied”. The court considered that introducing a fiduciary duty would distort the agreed terms between the contractor (IBM) and sub-contractor (Fujitsu) for the supply of services.

The court gave three reasons for its conclusion:

• First, the relationship between the parties did not fall within a settled category of fiduciary relationship (such as solicitor and client, as referred to above).
• Secondly, the contract expressly stated that IBM was to act as an independent contractor, and that certain types of relationship (which might otherwise give rise to additional duties) were not intended, including an agency relationship, a joint venture, or the relationship of employer/employee. The parties had “gone out of their ways” to take steps to exclude the possibility of fiduciary duties arising.

  Certain ‘partnering principles’ contained in the contract did not change this. The parties need only “have regard to” these principles which set out how the parties were to work together and co-operate. They were “aspirational and motivational” in nature, and did not create fiduciary duties.

• Thirdly, the parties had entered into an arms’ length commercial contract; there was no obligation of loyalty or for IBM to act on behalf of Fujitsu, nor did IBM have control of Fujitsu’s property or affairs. The fact that Fujitsu needed to rely on and trust IBM on certain matters did not imply that IBM had a fiduciary duty.

The court noted that its conclusion was the same whether or not IBM owed Fujitsu a duty of good faith (see next paragraph). In other words the presence of a duty of good faith does not imply that there is also a fiduciary duty.

Fujitsu also argued that the express² terms of the contract included a duty on IBM to act in good faith towards it (which might also have been breached).

With an analysis of the precise wording used, the court held that there was no such express term. In particular:

• The term ‘good faith’ was used within the definition of ‘Good Industry Practice’ (“…seeking in good faith to comply with contractual obligations…”). However, the requirement to act in accordance with ‘Good Industry Practice’ was placed on personnel of IBM and not on IBM itself as an organisation.
• Referring once again to the ‘partnering principles’, the parties had agreed to “have regard to” the principle of working together on an “open, honest, clear and reliable” basis. However, this was not an express agreement to owe each other a duty of good faith.

As noted in the first article in this series, this case emphasises the importance of carefully considering and clearly expressing contract terms to reflect the intention.

The commercial relationship between two independent parties for the supply of services is not the sort of relationship under which a fiduciary duty would normally arise. Therefore, if the parties wish to introduce a duty of ‘good faith’, or an obligation to act in best interests of the other party, or another duty of trust or confidence, this should be clearly stated in the express contractual terms. The contract should also be clear on the specific obligations or activities to which such duties apply.

A couple of additional tips:

• Care should be taken in the precise wording and construction of clauses containing the relevant duties or describing the nature of the relationship, in consideration of their impact in practice. The wording will determine the scope of duties and the remedies for breach in practice. Whether you are a customer or provider, it is preferable to be clear on the interpretation at the time you enter into the contract, rather than trying to create interpretations once a dispute arises.
• Guidelines or principles on working practices to which the parties must ‘have regard’ are not the same as strict contractual obligations. Whilst there can be benefits to a ‘guideline’ approach in some scenarios, I sometimes see this type of wording being used as a way to include a loosely-drafted schedule without adapting the wording to be more clear and precise. A disadvantage is that it may not create sufficiently clear contractual obligations which can be enforced.

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