How IT contractors are affected by Fujitsu v IBM

It concerns two of the technology sector’s giants, but a recent court case has implications for the smallest IT suppliers, including freelance computer contractors, writes Olivia Whitcroft, principal of data and technology law specialist OBEP.

That’s because the principles in question in Fujitsu Services Ltd v IBM United Kingdom Ltd[i] equally apply to one-person IT consultancies, where they are on a contract for the supply of services.

In short, the case emphasises the need for contracting parties to take time and care over the wording used in the contract, ensuring the practical impacts have been thought through and the intention expressed clearly. IT contractors should be aware that, in ordinary circumstances, the courts will accept the parties have “meant what they said” (as the judgment states at the end of paragraph 38).

Background to the case

IBM United Kingdom Ltd (IBM) has a contract with the DVLA to provide certain 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.

Questions put to the court

The court had been asked to determine certain issues in a preliminary ruling, prior to a full trial due to commence in February 2015. In this first of two articles for ContractorUK, I will explore the questions relating to exclusions and limitations of liability.

The focus of the debate was whether a clause in the sub-contract which excluded certain types 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.

Interpretation of a contract

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, in the words of a 2007 judgment, it is "somewhat unexpected, a little unreasonable, or not commercially very wise".

The exclusion clause in the sub-contract between IBM and Fujitsu

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 types 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. These included that the parties intended a carve-out (for sums which IBM should have paid if it had sub-contracted properly) or more limited exclusion (for indirect or consequential losses only), and that if the clause were interpreted to exclude all loss of profits, IBM would have no liability for its obligations.  

However, the court disagreed, and determined that these arguments were not justified in the context of the contract as a whole. There was no reason to suggest the (less obvious) interpretations put forward by Fujitsu were intended, and the clause did not exclude all of IBM's liability (for example its obligation to pay for services performed as a debt).  Fujitsu's claims for loss of profit were therefore excluded under the exclusion clause.

The court was also asked to consider 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 (again, based on the wording of the contract):  the exclusion clause did not cover claims for an account of profits, but the liability cap would apply to any losses which were not excluded.

Top Tips for IT contractors

This case emphasises the importance of carefully considering and clearly expressing contract terms to reflect the intention. Whilst the clauses in question relate to exclusions and limitations of liability, the same holds true in relation to all terms of the contract. Here are a few tips for IT contractors entering into contracts for the supply of services:

  • Before entering into the contract, carefully consider the likely losses and impacts should you or your customer breach the terms of the contract. Have a think how terms which limit or exclude specific losses or liabilities could impact the remedies available to you or your customer.
  • If you are presented with a draft contract which does not contain any provisions to limit your liability, you may wish to add appropriate wording to give you some protection should you be in breach. This may include a liability cap, and exclusions of certain types of losses which the customer could suffer. You may wish to ensure your liability does not exceed any insurance cover which you have.
  • When drafting or reviewing exclusion clauses, ensure you consider whether they are appropriate to the context, and tailor the drafting to say what you intend. In my experience, certain types of loss (such as loss of profit, business, data, reputation…) are often listed as 'standard exclusions', without proper consideration always being given to their effect. For example, if, like Fujitsu, you are 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. On the other hand, if you are providing services for the storage of data, a blanket exclusion of liability for 'loss of data' is likely to be inappropriate from your customer's perspective.
  • 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.

And finally…

As a final thought, if you are the 'weaker' party to a contract and have not been given the opportunity to negotiate it, the court may be more likely to give a less obvious interpretation to wording which is written, and other legislation governing 'unfair' contract terms may give you further protection. While this may give some comfort to IT contractors in this position, it should be of more comfort if the contract clearly sets out what is intended in the first place!

Editor's Note: Further Reading - How IT contractors are affected by Fujitsu V IBM - part two

Wednesday 28th May 2014
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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