24 April 2014

A dispute arose in relation to IT and business process services provided to the DVLA by IBM. IBM subcontracted the day-to-day activities in relation to the IT infrastructure to Fujitsu whilst retaining responsibility for IT transformation and strategy. Fujitsu alleged that IBM was in breach of contract for failing to allocate services to them in accordance with the subcontract workshare arrangements and for failing to operate the change control mechanisms properly. Unsurprisingly, IBM denied breach of contract and also relied on an exclusion clause that neither party would be liable to the other for “loss of profits, revenue, business, goodwill, indirect or consequential loss or damage.”

The ultimate aim in interpreting a commercial contract is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person with all the background knowledge would have understood the parties to have meant. Most importantly, “parties to commercial contracts are entitled to apportion the risk of loss as they see fit”. However, when interpreting limitations on liability, there is a rule that parties to a contract cannot mean that an exclusion clause has such a wide ambit that it makes the contract empty of content. That would reduce the contract to a mere declaration of intent. If a very wide exclusion clause is applied and has the effect that a party could never be sued in any circumstances, that leads to the conclusion that there was no contract between the parties, since on one side there is no enforceable obligation. That makes no sense in circumstances in which the parties clearly understood that they had entered into a contract with mutually enforceable obligations. The courts therefore strive to find some more limited meaning to the clause.

The judge looked at the construction of the exclusion clause and concluded that it was clear – the workshare, change control and money value claims were for loss of profits and excluded. She reached that conclusion on the wording of the clause, supported by the surrounding circumstances. She did take into account the fact that the subcontract was a modern, lengthy and detailed contract negotiated by two highly sophisticated commercial parties of equal bargaining power at arms’ length with the benefit of legal advice. The contract contained detailed provisions on remedies and the exclusion of loss of profits applied equally to both IBM and Fujitsu. She went on to say that the loss of profits exclusion did not exclude an account of profits claim, they are not mirror images and provide different remedies.

The workshare arrangements were an important part of the sub contract and Fujitsu’s case was that IBM was in breach of its workshare obligations by failing to allocate work to them. Fujitsu argued that the loss of profits exclusion for that breach had the effect of depriving a central part of the parties’ bargain of all contractual force and turned it into a mere statement of intent. The judge disagreed, Fujitsu was left with a debt claim for work done under the workshare arrangements and, more importantly, there were contractual mechanisms in one of the schedules for reviewing the management of the services and the workshare arrangements. Fujitsu argued that those governance provisions and the remedies identified by the judge were not adequate but, unfortunately for them, that was not the question – the question was whether excluding loss of profits deprived the contract of all contractual force, which it did not.

Despite the fact that Fujitsu seemed to be left with little in the way of remedies, the court’s approach was to find some meaning or content in the arrangement. Even though a claim in damages for a breach was excluded, the bargain made by the parties was upheld. The availability of non-monetary remedies and/or an account of profits were enough for the argument that the contract was a mere declaration of intent to fail.

Keith Beattie is a partner in our Commercial team advising on major projects and the drafting of commercial contracts.

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