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Profit and Loss

Carr J passed down an interesting decision in the High Court in late March in a trial of preliminary issues in a seemingly long standing dispute between Fujitsu and IBM.

As a trial of preliminary issues, not all the background facts have yet become clear.  We do know however that IBM provides IT and business change services to the DVLA under a ten year head contract, with a sub-contract under which Fujitsu provides aspects of those services through IBM to the DVLA.

Fujitsu claims that insufficient work was sub-contracted to it, and that it therefore did not make the revenue and the profit that it expected, and was entitled to, had the terms of the sub-contract been honoured.

This trial of preliminary issues addressed some specific aspects of s claim:

(a) did the sub-contract language exclude liability for loss of profits, and/or account of profits;

(b) does Fujitsu have an equitable claim (ie. not under the sub-contract) for breach of fiduciary duty; and

(c) do 'Good Industry Practice' obligations give rise to an express duty of good faith.

The trial did not look at whether IBM’s behaviour was in fact a breach of any particular obligations.

Excluding loss of profits and/or account of profits

Clause 20.7 of the sub-contract 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…."

As might be expected, the judge found this to be a clear and unambiguous exclusion of these liabilities – both direct and indirect forms - which employed the clear express words required to rebut the starting presumption that neither party intends to abandon the remedies that the law provides.  Here, a modern, lengthy and detailed clause between two sophisticated parties and negotiated at arms’ length was, to be straightforwardly interpreted.

The old chestnut that language along these lines might limit loss of profits, revenue, etc. only to the extent that such losses were indirect was not found to be the case here.  Carr J held it obvious that one would need clear language if the parties wished for loss of profit to be excluded only to the extent it was indirect, and pointed out the inconsistency that such a construction would make the words “loss of profits, revenue, business, goodwill” (and other clauses of the agreement) redundant.

Fujitsu then put forward an innovative argument: that this liability exclusion may limit loss of profits, but does not limit a claim for account of profits  – a claim for the profits that IBM made, which would have been made by Fujitsu had the breach not occurred.  IBM contended that this was the mirror image of a claim for loss of profits (and so was excluded), but the judge held otherwise – the remedy for an account of profits claim would be for a different financial reward, and different amount, than a loss of profit claim.

Such a claim is highly exceptional.  The judgment refers to the extraordinary circumstances of Attorney-General v Blake in which the UK Government brought a claim for the royalty profits arising from the sales of memoirs of a double agent traitor in breach of the Official Secrets Act.  The judge held that the exceptional nature of such a claim made it quite unlikely that the parties addressed their minds at all to a need to exclude liability for an account of profits, and so we cannot construct the liability clause as having such an exclusion.

While these facts assist Fujitsu in establishing that such a claim has not been excluded, it does not mean that the exceptional circumstances required to succeed in bringing such a claim have been established.  This decision may now help Fujitsu in any settlement negotiations prior to the trial, but it may count for nought come the full judgement.

Does Fujitsu have an equitable claim for breach of fiduciary duty?

Carr J set out the basis of traditional judicial reluctance to establish fiduciary duties, quoting Ross River v Cambridge wider duties will not lightly be implied, in particular in commercial contracts negotiated at arms" length between parties with comparable bargaining power, and all the more so where the contract in question sets out in detail the extent, for example, of a party's disclosure obligations”.

This case did not fall within the established categories (solicitor-client, etc.), and the boilerplate expressly eschews the existence of any partnership, JV, agency, etc.  It was observed that many commercial contracts involve trust and reliance as central matters, however this is not enough to establish a fiduciary duty.  To do so would be to distort the true bargain of the parties.

As such, no claim for breach of fiduciary duty existed.

Do ‘Good Industry Practice’ obligations give rise to an express duty of good faith?

As a finale, Fujitsu got creative again. It argued that the ‘Good Industry Practice ’ clause created an express duty of good faith on IBM.  The definition of ‘Good Industry ’ did include an obligation that the IBM personnel seek in good faith to comply with IBM’s obligations. Carr J observed that this was not however an obligation on IBM to act in good faith, and Fujitsu had not brought a claim that IBM breached the warranty that the personnel would “seek in good faith to comply”. Rather the claim was that IBM itself had such a duty, which was not the case.

Summary

This case does not create any legal landmark, but it serves as a helpful refresher on the importance of certain standard clauses being both included and accurately drafted.  While the outcomes (no good faith obligation, no fiduciary duty, no exclusion of direct or indirect loss of profits) are all as we might expect, the drafting in many cases was only a whisker away from giving Fujitsu an avenue to bring a large claim against IBM.  It takes diligent care to make sure that this sort of agreement excludes such claims, and does not create any extraneous duties or relationships – provided that reflects the parties’ intensions.

Fujitsu's profits is a fascinating one.  One hopes that Fujitsu bring this claim to the full trial, and the court can set when such an exceptional claim might succeed in a modern commercial context. It might be too early to start updating liability clauses to exclude claims for an account of profits, but we will be keeping an eye out for developments.

Such a judgment on account of profits will be of most interest to IT suppliers/outsourcing providers who enter into subcontracts, consortia agreements, and other partnering agreements with other suppliers and providers.

For further information, please contact Rich Folsom - Commercial Technology associate