How IT contractors are affected by Fujitsu v IBM - part two
The implications for IT contractors of a recent court case go beyond exclusions and limitations of liability, and stretch into the scope of duties that may arise where there is a contract for the supply of services in place, writes Olivia Whitcroft, principal of data and technology law specialist OBEP.
Here, in this second of two articles considering the case, Fujitsu Services v IBM United Kingdom Ltd, I will explore these additional implications for IT contractors – namely, whether a fiduciary duty can arise in a services relationship and how a duty of good faith may be expressed in the contract.
Firstly though, some background. As explained in the first article (How IT contractors are affected by Fujitsu v IBM), 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.
The court was asked to determine certain issues in a preliminary ruling, prior to a full trial due to commence in February 2015. As readers of my initial piece will know, the court was tasked with scrutinising the application of contractual exclusion and limitation of liability clauses, in addition to the following questions, which will be the focus of this follow-up piece:
- whether IBM owed any fiduciary duty to Fujitsu (a sub-contractor for the supply of services to IBM's client), 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.
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. The court gave three reasons for its conclusion.
- First, the relationship between the parties did not fall within a well-established category of fiduciary relationship (such as between solicitor and client, or partners in a partnership).
- 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. Certain principles set out how the parties were to work together and co-operate, but 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. 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.
Duty of good faith
Fujitsu also argued that the express 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.
- While the parties had agreed to have regard to the principle of working together on an open, honest, clear and reliable basis, this was not an express agreement to owe each other a duty of good faith.
Top Tips for IT contractors
As noted in my first article for ContractorUK on this case, the judgment 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 an established fiduciary duty would normally arise. Indeed, for IT contractors, arguing otherwise may indicate an employment relationship rather than that of a client and independent contractor. Obligations to act in good faith or in the best interests of another party in relation to certain obligations may, however, be contained within the contractual terms.
So a few tips for IT contractors:
- IT contractors should ensure they are clear on the practical interpretation of wording describing the nature of the relationship and the scope of duties (of each party); at the time they enter into a contract with a client. Creating interpretations only once a dispute arises may not have the desired result.
- The individual behind an IT contractor's service company frequently has a more personal relationship with a client than that between a larger organisation providing services and its client. It would not be unusual for a client to want such individual to undertake its actions in good faith and/or in the best interests of the client. An IT contractor should ensure it has a full understanding of the scope of such obligations within its contract.
- Equally, an IT contractor may wish to seek similar obligations from its client. For example, it may wish its client to act in good faith in providing information or facilities relevant to the contractor’s project/assignment. If so, this should be clearly stated in the contract.
Guidelines or principles on working practices to which the parties must 'have regard' are not the same as strict contractual obligations. While there can be benefits to a 'guideline' approach in some scenarios, it may not create sufficiently clear contractual obligations which can be enforced. Key responsibilities on which the IT contractor wishes to rely should therefore be expressed in clear and precise wording within the contract. In short, express yourself!