Fujitsu Services Ltd v IBM United Kingdom Ltd

This is a trial of preliminary issues arising out of a claim brought by Fujitsu Services Limited (“FSL”) against IBM United Kingdom Limited (“IBM”). The dispute between the parties relates to the provision of information technology (“IT”) services to the Driver and Vehicle Licensing Agency (“the DVLA”). IBM provides IT and business process change services to the DVLA under a main contract (“the PACT Agreement”). FSL provides aspects of those services under a sub-contract with IBM (“the Sub-Contract”). Both contracts were entered into on 12^th September 2002 for a period of ten years. Pursuant to extensions, they remain ongoing contracts, now due to expire on 12^th September 2015.

The Sub-Contract has been the subject of material amendment since 2002. References below to “the Original Sub-Contract” are references to the Sub-Contract as entered into in 2002 and references to “the Amended Sub-Contract” are references to the Sub-Contract as amended on 26^th June 2008. Where is it not necessary to distinguish between the two, I refer simply to “the Sub-Contract”.

Under the PACT Agreement the DVLA can request various IT and business process change services from IBM. In broad terms IBM sub-contracted the day-to-day management, support and maintenance of IT infrastructure to FSL, whilst itself retaining responsibility for IT transformation and strategy.

Under provisions the precise scope and effect of which are in dispute, IBM agreed to sub-contract to FSL specified shares of certain types of those services. FSL contends that it has no direct means by which to ascertain what services are being requested or provided under the PACT Agreement and is thus reliant on IBM to obtain work under the PACT Agreement, to notify it of such work and to sub-contract to FSL the share of work to which FSL is entitled. It contends that IBM owes FSL a duty to act in good faith and fiduciary duties.

FSL alleges that in breach of contract IBM has failed extensively to sub-contract to FSL services in accordance with the Sub-Contract, and in breach of contract has failed to implement the change of control procedures in the Sub-Contract requiring IBM to notify and seek FSL’s consent to material changes in the PACT Agreement. FSL contends that these alleged breaches also amount to breaches of alleged fiduciary duty. Additional breaches of contract or alleged fiduciary duties are said to have arisen upon an alleged breach of duty on the part of IBM not to take steps the effect of which would be to limit the amount of work available under the PACT Agreement or sub-contracted to FSL.

On the basis of limited disclosure to date, FSL estimates, by reference to an illustrative period of two six month periods only, that it has suffered a revenue loss of some £7.6 million over those periods as a result of having been deprived wrongfully of work under the Sub-Contract. On an extrapolated basis and by reference to an illustrative period from 1^st July 2008 to the date of commencement of proceedings on 3^rd May 2013, FSL estimates that it has then suffered a revenue loss of some £36.8 million over that period as a result of having been deprived wrongfully of work under the Sub-Contract. These are of course revenue (and not loss of profit) figures only and in any event are by no means agreed.

IBM denies any breach of contract or fiduciary duty substantively (either because the terms or duties alleged did not exist and/or because if they did, there has been no breach). It also denies any liability to FSL by reference to contractual exclusion and limitation of liability clauses and by reference to the Limitation Act 1980 (as amended).

The matter is fixed currently for full trial commencing 23^rd February 2015 with a six-week time estimate.

The issues for my determination, as ordered by consent on 19^th July 2013, are framed as follows :

The selection of the issues for preliminary ruling no doubt arises out of paragraph 2 of the Defence which reads as follows :

“[FSL’s] claim has no real prospects of success. It ignores a contractual exclusion clause that specifically excludes liability for losses of the type that [FSL] seeks to recover. It also relies on fiduciary duties that IBM does not owe.”

The general background is largely undisputed. In 2001 the DVLA wished to contract with an appropriate supplier so as to transform its business processes and consolidate and improve its information systems and its information, communications and technology systems. Together with PricewaterhouseCoopers (“PwC”), FSL (then named International Computers Limited) submitted a proposal to provide the services required. Following competitive tendering processes, PwC, assisted by FSL, submitted a final offer in March 2002.

On 12^th September 2002 the Secretary of State for the Department of Transport, acting through the DVLA, entered into the PACT Agreement with PwC, which contract was referred to as the “Partners Achieving Change Together Partnering Agreement”. PwC was to identify and implement business process change, consolidate and improve its information, communication and technology systems, and to provide maintenance, operation, support and maintenance services in relation to such systems.

On the same day PwC entered into the Sub-Contract, referred to as the “Sub-Contract for the PACT Services”. On 2^nd October 2002 IBM purchased the consultancy business of PwC. IBM replaced PwC as party to the PACT Agreement and the Sub-Contract. As already indicated, the original term of the Sub-Contract was ten years. The Sub-Contract was amended from time to time including in 2008, and has been extended to expire in 2015.

The services to be provided by FSL under the Sub-Contract related to the day- to-day running of DVLA’s IT systems and also to specific projects commissioned by the DVLA. As to the day-to-day running services, FSL relies on certain workshare provisions in the Sub-Contract, in particular clause 2.8 and latterly also Schedule 23 (“the workshare arrangements”). As for project work, the DVLA usually initiates requirements by service of a “Request for Change” document (or similar).

For the purpose of this trial only, the parties are agreed that the following (contentious) facts (pleaded at paragraph 3 of the Particulars of Claim) should be assumed as true :

“[FSL] has no direct means by which to ascertain what services are being requested or carried out under the PACT Agreement. [FSL] is therefore reliant on IBM to obtain work under the PACT Agreement, to notify it of such work and to sub-contract to [FSL] the shares of work to which it is entitled.”

It is necessary to set out parts of the preamble and the more relevant terms of the Original Sub-Contract at some length :

“…. INTRODUCTION

The main material amendment introduced in 2008 related to the workshare arrangements. Amended clause 2.8 read as follows :

“Committed Workshare

Schedule 23 contains detailed workshare provisions and definitions, including intended allocation percentages by reference to different types of work, and provision for the management of workshare referred to in more detail below.

It is convenient to break FSL’s claims down under three heads as follows :

On each head of claim, whether for breach of contract or other duty, the damages claimed are for loss of profit. Thus by way of example, on the workshare claim FSL pleads its claim for damages as follows :

“70.1

By reason of IBM’s breaches of the workshare provisions referred to at paragraph 51 above (and/or by reason of IBM’s related breaches of its fiduciary or contractual duties referred to at paragraph 53 above) [FSL] has been deprived of services which it would otherwise have performed at a profit. [FSL] claims the sums it would otherwise have been paid for undertaking that work, and will give credit as necessary for any costs and expenses it would have incurred in doing so.”

On each head of claim FSL also seeks :

It is important to note that there is no claim for breach of warranty or representation under clause 19 of the Sub-Contract. There is no claim for breach of clause 6 of the Sub-Contract. There is no claim for rectification of either clause 20.4 or 20.7 of the Sub-Contract.

Finally, FSL seeks declaratory relief in relation to disclosure from IBM in relation to change control procedures. The parties are agreed that that claim does not fall within the ambit of this preliminary issue ruling.

The relevant principles of construction are well known. The general legal principles can be summarised as follows :

As for exclusion and limitation of liability clauses specifically, it is generally for the party seeking to rely on the exemption or limitation of liability clause, here IBM, to show that the clause, on its true construction, covers the obligation or liability which it purports to restrict or exclude. If there is an exception to the exemption, then the burden rests upon the claimant to establish that his case falls within the exception. But the form is not conclusive and the matter is in every case a question of construction of the instrument as a whole (see generally paragraphs 14-018 and 14-019 of Chitty on Contracts (31^st edition)).

There is no reason to approach the exercise of construing an exemption or limitation of liability clause in any way different to any other term in a contract. In Tradigrain SA v Intertek Testing Services (ITS) Canada Ltd [2007] EWCA Civ 154 Moore-Bick LJ stated at paragraph 46 :

“It is certainly true that English law has traditionally taken a restrictive approach to the construction of exemption clauses and clauses limiting liability for breaches of contract and other wrongful acts. However, in recent years it has been increasingly willing to recognise that parties to commercial contracts are entitled to apportion the risk of loss as they see fit and that provisions which limit or exclude liability must be construed in the same way as other terms : see for example Photo Production Ltd v Securicor Ltd….”

Simon J. endorsed this approach recently in Bikam OOD Central Investment Group SA v Adria Cable Sarl [2012] EWHC 621 (Comm) at paragraphs 34 to 36.

In Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 850-851 Lord Diplock stated:

“… An exclusion clause is one which excludes or modifies an obligation, whether primary, general secondary or anticipatory secondary, that would otherwise arise under the contract by implication of law. Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within the limits that the agreement must retain the legal characteristics of a contract; and must not offend against the equitable rule against penalties; that is to say, it must not impose upon the breaker of a primary obligation a general secondary obligation to pay to the other party a sum of money that is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained by him in consequence of the breach of the primary obligation. Since the presumption is that the parties by entering into the contract intended to accept the implied obligations exclusion clauses are to be construed strictly and the degree of strictness appropriate to be applied to their construction may properly depend upon the extent to which they involve departure from the implied obligations. Since the obligations implied by law in a commercial contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the court’s view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another, is a relevant consideration in deciding what meaning the words were intended by the parties to bear. But this does not entitle the court to reject the exclusion clause, however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only.

My Lords, the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses, mainly in what today would be called consumer contracts and contracts of adhesion. As Lord Wilberforce has pointed out, any need for this kind of judicial distortion of the English language has been banished by Parliament’s having made these kinds of contracts subject to the Unfair Contract Terms Act 1977. In commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.”

In Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd [1974] AC 689 at 717 Lord Diplock stated:

“It is, of course, open to parties to a contract for sale of goods or for work and labour or for both to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law or such remedy may be excluded by usage binding upon the parties…. But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption.”

FSL relies heavily on what it describes as a “statement of intent” rule of interpretation. In Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 Lord Wilberforce stated at 432:

“One may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of all contractual force: to do so would be to reduce the contract to a mere declaration of intent. To this extent it may be correct to say that there is a rule of law against the application of an exceptions clause to a particular type of breach.”

In Tor Line AB v Alltrans Group of Canada Ltd [1984] 1WLR 48 Lord Roskill adopted a similar approach (in particular at 58H to 59A), as did the Court of Appeal in Kudos Catering Ltd v Manchester Central Convention Complex Ltd (supra) at paragraph 19 :

“In my view therefore the Agreement is, if the judge’s construction of Clause 18.6 is adopted, effectively devoid of contractual content since there is no sanction for non-performance by the Respondent. It is inherently unlikely that the parties intended the clause to have this effect. The parties thought that they were concluding a mutually enforceable agreement… .”

Finally, in AstraZeneca UK Limited v Albemarle International Corporation [2011] 2 C.L.C. 252 Flaux J stated, albeit in the context of a very different type of contract and exclusion clause, at paragraph 313:

“In construing an exception clause against the party which relies upon it …the court will strain against a construction which renders that party’s obligation under the contract no more than a statement of intent and will not reach that conclusion unless no other conclusion is possible. Where another construction is available which does not have the effect of rendering the party’s obligation no more than a statement of intent, the court should lean towards that alternative construction.”

I turn first to consider the exclusion in the opening lines of clause 20.7 which, as set out above, provide :

“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….” (“the basic exclusion”)

I see no reason for approaching the basic exclusion (or any other part of clause 20.7) in any way different to any other term in the Sub-Contract, in line with Tradigrain SA v Intertek Testing Services (supra).

Applying the principles referred to above, I have reached the clear conclusion that on a proper construction of clause 20.7 any liability on the part of IBM for damages (or equitable compensation) on the workshare, change control and money value claims falls within the basic exclusion. I consider the account claims separately below.

First, the language of clause 20.7 is on its face clear and unambiguous. Liability for loss of profits is excluded. The workshare, change control and money value claims are claims for loss of profits.

The fact that the language is clear and unambiguous is of course not, without more, the end of the question. The words of the basic exclusion must be read in the context of the whole exclusion clause, the contract as a whole, the material background and circumstances as at the time the Sub-Contract was entered into. There is a necessary process of construction, as highlighted in Kudos Catering Ltd v Manchester Central Convention Complex Ltd (supra) (at paragraph 22) and a starting presumption that neither party intends to abandon any remedies arising by operation of law. Clear express words must be used in order to rebut this presumption, as highlighted in Modern Engineering (Bristol) Ltd v Gilbert-Ash (Northern) Ltd (supra).

But there is nothing in the context or surrounding clauses of the Sub-Contract that point to any different construction than a simple application of the words to the facts of the case.

On the contrary, a consideration of all the relevant circumstances provides support for a straightforward application :

The weakness in FSL’s position to the contrary is demonstrated readily by FSL’s inability to identify any commercially sensible formulation of what the parties must, on FSL’s case, have meant.

The parties’ arrangements in relation to indemnities and liabilities in clause 20 are notable for their symmetry : each of the parties provided indemnities to the other; the liability of each to the other was restricted on terms as to financial limits; and of course by clause 20.7 the liability of each was excluded on specific terms.

Yet all that FSL could offer by way of intended meaning was (at paragraph 19 of its written skeleton argument) that the parties intended to carve out from the basic exclusion sums that “would be payable but for IBM’s breach of the express terms of the contract”. When pressed by the Court in oral submission, FSL narrowed the scope of its proposed carve-out as follows :

“Neither Party shall be liable to the other under this Sub-Contract for loss of profits, revenue other than as payable pursuant to clause 6.2 [and Schedule 23]. …”

I put to one side for present purposes the fact that, as will be apparent below, the workshare claim is not one that falls to be paid under clause 6.2 of the Sub-Contract (and no claim is brought for non-payment under clause 6.2 of the Sub-Contract), and the fact that Schedule 23 did not come into existence until 2008.

Against a background of mutual release of liability for loss of profit, revenue, goodwill and indirect or consequential loss or damage, it is in my judgment impossible to say that such an entirely one-sided result was the one intended by the parties at the material time. IBM too was giving up potentially very significant claims. Thus, any claim for loss of profits by IBM resulting from a failure by FSL to deliver a project on time would be excluded by clause 20.7. Putting it another way, FSL’s suggested construction cannot be said to be one that a reasonable person as envisaged in Rainy Sky SA v Kookmin Bank (supra) would have understood the parties to have meant.

In reaching my primary conclusion on construction of the basic exclusion, I have taken careful account of the arguments advanced by FSL.

As a general point, FSL contends that because the risk in question was not a risk “at large”, but rather one internal to and under the control of IBM, it does not fall readily for exclusion. There is nothing in this point. Clause 20.7 remains an exercise of risk allocation between the parties.

Beyond that, FSL’s contentions can be divided conveniently under the following headings :

FSL points to the fact that the Sub-Contract represented a long and substantial commitment for the parties. The workshare arrangements constituted a fundamental part of how the Sub-Contract was to operate. FSL contends that if the effect of clause 20.7 is to exclude liability for breach by IBM of its obligations to allocate work to IBM, then a central element of the parties’ bargain is deprived of all contractual force, or turned into a mere statement of intent. The contract should be construed so as to avoid such an absurd result, in line with Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale (supra) and the other authorities following as cited above.

The proper construction of a contract or clause will turn in each case on its own words and relevant context. The authorities relied on by FSL, in particular AstraZeneca UK Ltd v Albemarle International Corp (supra), are each very different on their facts. So, for example, the exclusion clause (clause M) in AstraZeneca was ambiguous and rudimentary. (In fact it was only a single sentence at the end of a wider clause headed “Claims”.) The contract as a whole was far less sophisticated and much shorter than the Sub-Contract. Flaux J described it (at paragraph 277) as “abound[ing]” with “somewhat loose language”. That comment was made in the specific context of clause M. Additionally, the construction of the exclusion clause which Flaux J rejected would have deprived Albemarle of all of its “real loss” (see paragraph 310). As set out below, IBM’s construction of clause 20.7 does not do this. Flaux J also made it clear that the approach that he adopted could only apply if another construction was available.

I do not consider it helpful to refer to a “statement of intent” rule as such. The considerations raised in the authorities referred to immediately above are but part of the normal process of commercial contractual construction. But in any event, in my judgment, the “statement of intent” rule, if such it be, is of little assistance in circumstances where, as here, the wording is plain, the exclusion clause of mutual benefit and detailed in its form. As quoted above, Lord Diplock in Photo Production Ltd v Securicor Transport Ltd (supra) made it clear that in commercial contracts it is wrong to place a strained construction on words in an exclusion clause which are clear.

Even if there were scope in principle for the court to strain its construction in favour of FSL on the wording on the Sub-Contract, a consideration of the “statement of intent” approach does not assist FSL. The effect of clause 20.7 on the construction advanced by IBM is not to empty the contract of content.

FSL’s claim was launched on the premise that the effect of clause 20.7 on IBM’s construction was to exclude liability on the part of IBM from all of its workshare related obligations, including the obligation to pay sums due as charges in respect of work allocated under the workshare arrangements (see paragraphs 5.2 and 5.3 of the Reply).

This premise was false. A claim for debt for non- payment of an invoice under clause 6 would not fall within the exclusion in clause 20.7, and IBM has not contended otherwise. Clause 20.7 expressly refers to “loss” (of profits, revenue, business, goodwill). A debt is not such a loss. The distinction between a claim for damages and a claim for debt is explained clearly in Jervis v Harris [1996] Ch 195 at 202 F-H :

“The law of contract draws a clear distinction between a claim for payment of a debt and a claim for damages for breach of contract. The distinction and its consequences are set out in Chitty on Contracts, 27th ed. (1994), vol. 1, p. 1046, paragraph 21-031. As there stated, a debt is a definite sum of money fixed by the agreement of the parties as payable by one party to the other in return for the performance of a specified obligation by the other party or on the occurrence of some specified event or condition; whereas damages may be claimed from a party who has broken his primary contractual obligation in some way other than by failure to pay such a debt.

The plaintiff who claims payment of a debt need not prove anything beyond the occurrence of the event or condition on the occurrence of which the debt became due. He need prove no loss; the rules as to remoteness of damage and mitigation of loss are irrelevant; …”

Thus liability on a claim for sums actually due and payable to FSL under clause 6 and Schedule 13 of the Sub-Contract in respect of work actually allocated under the workshare arrangements and performed is not excluded by clause 20.7. A reasonable person as identified in Rainy Sky SA v Kookmin Bank (supra) would not have understood the basic exclusion to have covered a claim in debt. FSL has confused the primary obligations (to allocate the work, carry out the work and pay for the work) with the secondary obligation to pay damages if the work is not allocated.

Once this is understood, the contention that the effect of clause 20.7 as contended for by IBM denudes the contract of any force falls away. Its effect is not to deprive the workshare related arrangements, let alone the contract as a whole, of effect or to render the contract merely a statement of intent. The Sub-Contract is an ongoing contract that does not exclude liability for all types of breach, merely specific types of loss.

Moreover, on IBM’s construction of clause 20.7, substantive rights and remedies remain available to the parties, including the obligation on either party to perform its obligations under the Sub-Contract.

So, for example, there are detailed governance provisions in Schedule 2 of the Sub-Contract. By Part 4 of that schedule there is provision for review meetings to take place (at least monthly) for the purpose of reviewing the overall management of the Services and Service Delivery by FSL, and to review any other commercial issues or other issues arising with the Sub-Contract, with an obligation on IBM to inform FSL at those meetings of any material issues or series of issues which together are or may become material and which might affect FSL’s rights under the workshare arrangements in the Sub-Contract. There is also agreement that IBM and FSL will work together in the “identification, qualification, prioritisation and proposition of proposals for Future Services”.

In Schedule 23 (and so only as from 2008) the following was also provided :

“…2.3 the workshare will be actively managed to achieve the intended allocations. If deviations cannot be resolved, the parties agree that there will be an escalation procedure to the IBM Lead Executive and the [FSL] Account Director. In case no resolution can be achieved the Dispute Resolution process defined in Schedule 20 shall be followed…

2.5

Management of Workshare

The parties shall agree a Management Group to direct and manage the workshare within the PACT Sub-contract and the governance of projects undertaken. The Management Group will be agreed between the Parties and will have defined operational and reporting responsibilities…”

Schedule 20 in both the Original and the Amended Sub-Contract contained agreed dispute resolution procedures.

Beyond these contractual mechanisms, in the event of the need to resort to the courts, FSL could also bring a claim for declaratory relief in respect of its entitlement under the workshare arrangements and/or a claim for specific performance and/or injunctive relief.

Much was made by FSL of the limitations of the above rights and potential remedies. It submitted that :

Putting to one side the fact that FSL’s approach ignores FSL’s rights under clause 6 as identified above, the question is not whether FSL would have adequate remedies but whether or not IBM’s construction of clause 20.7 would deprive the contract (or, if one assumes in FSL’s favour that a narrower approach is permissible, the workshare arrangements) of all contractual force. It does not.

I refer again to the provisions of Schedules 2 and latterly 23 of the Sub-Contract. It is also fanciful in my judgment to suggest that declaratory relief against IBM would not amount to an effective remedy. The obtaining of declaratory relief is an important remedy. The suggestion that an organisation such as IBM would simply ignore the ruling of a court as to how the workshare arrangements were to be operated is not realistic. Indeed, FSL by this very claim makes a claim for declaratory relief (for the provision by IBM of documentation and information). As for the granting of specific performance orders or negative injunctions, whatever difficulties and uncertainties there might be in an application for such relief, it cannot be said that such relief could not be sought and would be doomed to failure. This much is apparent from cases such as Bath and North East Somerset District Council v Mowlem plc (supra). Everything would turn on the facts and circumstances pertaining at the time.

FSL also contends in this context that the construction contended for by IBM leads to consequences which cannot be permitted. If it is right that FSL is only entitled to payment for work actually carried out under clause 6, then if IBM fails wrongfully to allocate work, by its own breach of contract it prevents that which would have become a debt payable (and so recoverable) from ever becoming more than inchoate. The result of a failure by IBM properly to allocate work is that FSL’s loss becomes IBM’s corresponding gain. It is said that it cannot have been the parties’ intention that IBM should be able to profit from its breach of contract. Thus clause 20.7 should not cover primary losses (or corresponding gains) which are the immediate financial consequence, as between the parties, of a breach of the workshare provisions.

Reliance is placed on Alghussein Establishment v Eton College [1988] 1 WLR 587 and CEL Group Ltd v Nedlloyd Lines UK Ltd and another [2004]1 Lloyd’s Law Reports 381 for the proposition that a construction ought to be placed on clause 20.7 that prevents IBM from profiting from its own wrong.

The former involved very extreme and different facts. A tenant was not allowed to rely on his own wilful default to obtain the contractual benefit of a new lease under the agreement between the parties. Lord Jauncey stated (at 594D) :

“A party who seeks to obtain a benefit under a continuing contract on account of his breach is just as much taking advantage of his own wrong as is a party who relies on his own breach to avoid a contract and thereby escape his obligations.”

The latter concerned the implication of a term, to make business sense in the context of that case, to the effect that the defendant would do nothing of its own motion to bring to an end its own requirements for road haulage services.

These matters do not advance materially FSL’s position. IBM is not seeking to obtain a benefit under a continuing contract on account of its own breach. Clause 20.7 is predicated on the assumption of liability on the part of IBM (or FSL). Nor is this a case of seeking to imply a term preventing IBM from acting in a particular way. CEL does not extend or take further the “statement of intent” approach relied on by FSL already addressed above.

In its written opening FSL contended that the workshare claim fell within clause 6 of the Sub-Contract in the same way as a claim for debt for non-payment of an invoice under clause 6. There could be no logical basis for different treatment of a claim to pay for work done under clause 6 and a claim for a failure to allocate work. I would reject this argument. It confuses a claim to recover for a failure to pay for work done and a failure to provide work. Thus, the fact that liability on the part of IBM is not excluded under clause 20.7 for a debt arising out of non-payment for services that have been provided by FSL in no way undermines an unqualified application of the wording of the basic exclusion.

In oral submission, FSL moved the focus of its submission in relation to clause 6 to a contention that there was an entitlement to a claim for damages for failure to allocate work in accordance with the workshare provisions under clause 6. Thus IBM’s construction of clause 20.7 is in direct conflict with an express obligation on IBM in the Sub-Contract.

FSL contended that the obligation in clause 6.2 to pay FSL for the “Services” extended to an obligation for services not yet provided but which FSL was entitled to be allocated. Reliance was placed on the definition of “Services” which was “all and any of the services which are to be performed…and any other services to be provided by [FSL].” A breach of the workshare arrangements in Schedule 23 was described as being “a concomitant breach of clause 6”.

Clause 6.2 does not give FSL an entitlement to payment in respect of services that have not yet been provided (which would be a most surprising position in any event). The obligation to pay is expressly an obligation to pay for “the provision” of the Services, not for an agreement to provide the Services. FSL’s position is misconceived. It is also one that ignores the provisions of Schedule 13 of the Sub-Contract under which FSL is only entitled to payment in a sum which is the result of the parties’ agreement in relation to each individual new service. I note finally and again that FSL does not bring any claim under clause 6. Indeed, clause 6 is not quoted or referred to in any of the statements of case.

FSL also contends that, on a proper construction, clause 20.7 excludes or limits liability for “loss of profits, revenue, business, goodwill” only in so far as the same constitute indirect or consequential loss or damage within what is conventionally described as the second limb of the rule in Hadley v Baxendale [1854] 9 Ex 341. FSL contends that loss of revenue, business and goodwill are losses aiming at indirect or consequential, not direct, losses, and the reference to loss of profits is equivocal. Thus the basic exclusion as a whole should be read as limited to indirect losses. FSL accepts that it is only by reference to this contention that the change control and money value claims can escape the clutches of clause 20.7.

FSL relies on two authorities in particular :

a)

Ease Faith Ltd v Leonis Marine Management Ltd [2006] 1 Lloyd’s Law Reports 673. There the exclusion clause provided that neither the tug owner nor hirer should be liable to the other party “for loss of profit, loss of use, loss of production or any other indirect or consequential damage for any reason whatsoever.” The court (at paragraphs 143 and 144) construed the term “loss of profit” as referring to loss of profits generated by future use of the tug by the tug owner or hirer as the case might be;

b)

Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm). There clause 23 of the standard terms to which the contract was to be subject provided that “in no event shall the seller have any liability for any…loss of profit…or any type of special indirect or consequential loss”. The court, obiter, preferred a construction whereby loss of profit was excluded where it was a “special indirect or consequential loss.”

Reference was also made by both parties to BHP Petroleum Ltd & ors v British Steel Plc [1999] 2 Lloyd’s Rep. 583. There the exclusion clause was again materially different to clause 20.7. It provided that there would be no liability for “loss of production, loss of profits, loss of business or any other indirect losses or consequential damages… . ” Rix J said (at 600) :

“In my judgment the best solution is to construe the clause as though it read “for loss of production, loss of profits, loss of business or indirect losses or consequential damages of any other kind” and accept that the parties may have been in error to permit the inference that the former phrases are examples of indirect or consequential loss. At least in that way, each of the phrases is given its authoritative meaning, which is what the parties must be supposed to have given their closest attention to. If, however, only production, profit, or business which is within the second limb of Hadley v. Baxendale is intended to be referred to, then everything in the clause other than “indirect losses or consequential damages” becomes redundant and the previous phrases become dangerously misleading and potentially valueless.”

Thus, despite the presence of the word “other”, liability for loss of production and loss of business was not construed as being limited to liability for indirect or consequential loss. Andrew Smith J in Ease Faith, albeit obiter, cast doubt on the correctness of Rix J’s approach, preferring the approach of Clarke J in Tsavliris v OSA Marine Ltd (19^th January 1996) where the impact of the use of the word “other” was to confine the clause to the exclusion of liability to indirect loss of profit. In any event, given the material difference in the wording of the clause and in particular the presence of the word “other” I do not gain any real assistance from this authority.

In my judgment there is no justification for construing (or re-writing) clause 20.7 in a manner which limits the basic exclusion to indirect and consequential loss.

First, given the obviousness of the point, one would expect it to be made clear if the intention was only to exclude indirect loss of profit. The fact that losses of profit can be direct or indirect is well-known : see for example Deepak Fertilisers and Petrochemicals Corporation v ICI Chemicals & Polymers Ltd and ors [1991] 1 Lloyd’s Law Reports 387. I do not agree that loss of revenue, business or goodwill is necessarily indicative of indirect loss.

Secondly and significantly, FSL’s construction would be inconsistent with and render unnecessary the express exception provided for in clause 20.7(a) (which excludes what would be a claim for direct loss and damage, as probably does clause 20.7(b)).

Thirdly, FSL’s construction would render otiose the words “loss of profits, revenue, business, goodwill”.

FSL’s position is not advanced by reference to Ease Faith Ltd v Leonis Marine Management Ltd (supra) or Proton Energy Group SA v Orlen Lietuva (supra).

Ease Faith confirms that “loss of profit” exclusions have to be construed in context. In appropriate cases, they can be construed so as to mean indirect or consequential loss. In Ease Faith, the decision to construe the reference to loss of profit as meaning loss of profit from the future use of the tug or tow was justified on the basis of the contract as a whole. That construction is not suggested as a relevant one here. As a result the court in Ease Faith did not have to go on to decide the alternative argument based on indirect loss and profit which in any event was being advanced by reference to a materially differently worded exclusion clause. The basic exclusion here conspicuously does not include the word “other”.

Proton Energy Group SA v Orlen Lietuva (supra) cannot assist. Not only were the remarks relied on obiter, but the full wording of the exclusion clause is not apparent. From paragraph 72 of the judgment it appears that the clause recognised that damages may be payable for breach of contract, with a limitation in the amount to the price of the product. If damages for breach of contract would or might be deemed a claim for loss of profit, the ensuing exclusion might well be read as referring to only indirect loss. But this is speculation. The point is that the authority cannot be relied on safely in this context without more.

FSL submits that a liability for breach of fiduciary duty is not a liability “under” the Sub-Contract for the purpose of clause 20.7 and so not excluded. The source of a claim for such liability is equity, not the Sub-Contract. Reliance is also placed on the fact that clause 20.4 limits liability “under or in relation to” the Sub-Contract, indicating that a narrower approach in clause 20.7 is appropriate.

FSL’s position is not sustainable :

If I am wrong in my primary conclusion on construction, and the language of the basic exclusion was on a proper construction capable of more than one meaning, I am not persuaded that the exclusion of liability for loss of profits is in any way commercially unreasonable or inconsistent with business sense. This is a case where a court should be very slow to intervene with its own view of commerciality, given the factors identified in paragraph 38 above – see in particular Skanska Rashleigh (supra).

The workshare arrangements under the Sub-Contract may have been a very important part of the agreement and the Sub-Contract may have been a significant one in terms of prospect and length. But there may have been very good commercial reasons for deciding to exclude liability on both sides from a loss of profits claim for breach of the workshare arrangements as well as for breach of the other significant arrangements in the Sub-Contract.

There was self-evidently (looking at the express terms of the Sub-Contract) goodwill and co-operation between these two large commercial entities at the time that the Sub-Contract was entered into (and amended in 2008). Commercial parties are entitled to and do rely on commercial “mores”; they can choose to rely on trust and to prefer not to expose themselves or each other to litigation in due course - for sound commercial and professional reasons.

Here, each party chose consciously to release the other from potentially very significant liabilities in the event of a breach of contract (or any other breach), subject to certain agreed exceptions.

Given these findings on the basic exclusion, it is necessary to consider whether the claims for damages on the workshare claim fall within any of the exceptions provided for in clause 20.7. During the course of oral submission, FSL accepted that the change control and money value claims could not fall within any of the exceptions.

There is no suggestion that either of the exceptions provided for in clause 20.7(a) and 20.7(d) applies.

The first exception relied upon by FSL is that set out in clause 20.7(b) which, as set out above, provides :

“b)

actual agreed revenue share may be recoverable to the extent expressly agreed between the parties;”.

The phrase “actual agreed revenue share” is not a contractually defined term. FSL contends that the correct analysis is that the workshare provisions in the Sub-Contract should be construed as an “expressly (actually) agreed method of allocating work” under the Sub-Contract. Under clause 2.8 of the Sub-Contract the workshare agreements are described as “Committed Workshare” and in Schedule 23 they are described as “agreed workshare provisions”. Workshare dictates revenue share. Thus the agreed workshare provisions (combined with the agreed charging provisions) lead to an actual agreed sharing of revenue and the workshare claim falls with clause 20.7(b). Liability for actual agreed revenue share would also be liability for a debt and so outwith the basic exception.

In my judgment FSL’s construction is not sustainable. As an instinctive response, the reasonable person as envisaged in Rainy Sky SA v Kookmin Bank (supra) would not equate the workshare arrangements with an express agreement as to revenue share.

Analysis proves that instinct to be correct. FSL’s approach conflates agreement as to how to share work with an express agreement as to revenue share. It requires “actual agreed revenue share” to mean “actual agreed workshare”. The clause does not say that. Actual agreed revenue share and actual agreed workshare are two quite different things.

The far more natural construction of the phrase “actual agreed revenue share” is to place it in the context of the “revenue sharing scheme” in clause 2.5.1(d) of Schedule 13. Clause 20.7(b) may well have been aimed at ensuring that there could be no question but that liability on a claim based on an express agreement reached under clause 2.5.1(d) would not be excluded under the basic exclusion. There is no suggestion that, for the purpose of the workshare claim, there was ever any actual agreement as to revenue share, let alone any express agreement between the parties as to what extent they should recover.

FSL’s necessary submission that the financial consequences of the agreed workshare provisions is a mathematical one is also not correct, as an examination of clause 2.8, Schedules 3 and 13 reveals, in particular Schedule 13. Recognising the difficulties in its path in this regard, FSL submitted in reply that, even if the quantum attributable to the workshare needed to be worked out, there was still an actual agreed revenue share. This too is incorrect. As set out below, there would still be no agreement as to revenue or share. Even if the workshare arrangements dictate revenue, they do not amount to an actual agreed revenue share.

Even on FSL’s case, the workshare arrangements arise under clause 2.8.3 by references to percentages of work to be measured by reference to the cost of time, not by reference to any sharing of revenue. By clause 2.5.1 of Schedule 13 the parties are to agree to the most appropriate payment mechanisms for each future service. By clause 2.5.1(d) they may agree the proportion that each shall receive from the revenue generated for the future service on a case by case basis according to the parties’ respective contributions include resource sharing, funding, risk sharing and any other contribution to be taken into account as agreed by the parties. (The process became more sophisticated in 2008 but the options for payment remained.) Thus the process is entirely consensual and done on a case by case basis. Clause 8 includes provision for monitoring target profit margins and provides that any excess profit shall be shared in accordance with Part 11. Part 11 provides for profit sharing by reference to target profit margins set out in Annex 8 to the Schedule. And clause 11.7 provides that, at the expiry or termination of the Sub-Contract a negative balance on the account means that FSL must pay IBM its share of the profit excess within a month; a positive balance means that FSL is not due anything.

In summary, it is a running account based on target profit margins to be dealt with at the end of the contract. Operation of the workshare provisions does not lead to identification, without more, of how revenue would be shared, if at all, between the parties. The payment mechanism must be agreed in each case. The change control procedure referred to in clause 2.8.2(d) must be invoked. It is not a situation where performance of a piece of work gives rise to an entitlement to a specific sum of money. Put simply, agreement as to workshare is not agreement as to revenue or revenue share.

If the workshare arrangements are implemented, together with the change control procedure, revenue may be generated but not an agreed revenue share. The share only falls to be determined on a case by case basis to be determined by the commercial agreement of the parties.

FSL also relies on the exception in clause 20.7(c) which, as set out above, provides :

“c)

loss of profits shall be recoverable only as specified in Schedule 13 (Finance) or as a basis which may be used for calculating damages payable for infringement of Intellectual Property Rights or breach of confidentiality claims;…”

FSL originally contended that, because under Schedule 13 FSL is contractually entitled to claim profit, this exception allows for the recovery by FSL of loss of profits for any breach of contract by IBM, including a breach of the workshare arrangements.

In my judgment, clause 20.7(c) cannot be read as widely as or in the manner that FSL contends. Similarly to clause 20.7(b), clause 20.7(c) was concerned to ensure that in so far as any entitlement to loss of profits under Schedule 13 arose (whether or not by reference to target profit margins), it was not excluded by the basic exemption.

On the workshare claim, FSL has to contend that Schedule 13 gives rise to an entitlement to recover as damages loss of profit on services that it has not provided. On any view, clause 20.7(c) cannot be read so as to exempt from the basic exception all payments which IBM might have been liable to pay pursuant to Schedule 13 but where (even if through IBM’s breach) no liability arises. Schedule 13 does not give rise to an entitlement to claim damages for loss of profit for a failure on the part of IBM properly to allocate work under the workshare arrangements.

In submissions in reply FSL submitted that clause 20.7(c) should be construed as meaning that “lost profits on lost payments” under Schedule 13 are recoverable (see transcript day 3 p. 57). A “lost payment” is a payment to which FSL should have been entitled and which has not been paid. But this is not the way that FSL has pleaded the workshare claim – it might be said unsurprisingly, given the issues arising under clause 6 as set out above. The workshare claim is a claim for loss of profits for breach of the workshare provisions, not a claim for loss of profits for breach of an obligation to pay (whether under clause 6.2 or otherwise). Thus FSL does not bring a claim for “lost profits on lost payments”.

I have adopted above an approach which is faithful to the express language of the basic exclusion. As already indicated, clause 20.7 of the Sub-Contract excludes liability not by reference to any particular cause of action, but rather by reference to particular types of loss. IBM contends, and I have accepted, that clause 20.7 concerns the exclusion of liability for “loss”.

In my judgment, a claim by FSL for an account of profits wrongfully made by IBM is not a claim by FSL for “loss of profits, revenue” within the meaning of clause 20.7, and would not be understood as such by the reasonable man contemplated in Rainy Sky SA v Kookmin Bank (supra). The account claims are not for loss on the part of FSL but for allegedly wrongful gain by IBM.

IBM submits that the accounts claims are the “mirror image” of a claim for loss. I do not agree. They are claims for a different remedy than a claim for loss, and would result in a financial award, if any, for a different amount. Additionally, it might be possible, subject to liability, for FSL to recover not only an award of damages for loss of profit but also an account of profit wrongfully made by IBM. Although I was not referred to these authorities, in a different context a restitution claim based on unjust enrichment (or a claim for knowing receipt) can be treated as a claim for “damage” – see for example Friends Provident Life Office v Hiller Parker May & Rowden [1997] QB 85 and Charter plc and another v City Index Ltd [2008] Ch 313. But the context here, namely the construction of an exemption clause, is quite different to the context in those cases, namely the construction of the phrase “same damage” in s.1(1) of the Civil Liability (Contribution) Act 1978. The House of Lords in Royal Brompton Hospital NHS Trust v Hammond [2002] 1 WLR 1397 made it clear that that Act should generally be given a broad interpretation. There is no basis here for a broad interpretation. If there is to be any particular bias to be adopted in interpretation of an exemption clause, it is towards a strict approach.

Nor am I attracted by IBM’s submission that, because a contractual claim for account only arises in exceptional circumstances (see Attorney-General v Blake [2001] 1AC 268 at 285F-G), the parties would not have intended that such a claim would not be excluded. To my mind, it simply makes it more likely that the parties did not address their minds at all to a need to exclude liability for an account.

I am not therefore persuaded that the account claims fall within the scope of the exclusion in clause 20.7.

For these reasons, I conclude that :

This construction is what a reasonable person, being someone with all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time in 2002 (and for the avoidance of doubt in 2008) would have understood the parties to have meant.

The effect of these findings is that FSL cannot claim damages from IBM on the workshare claim, amongst others. Significant though the result may be for FSL as matters have unfolded, it is one which accords with the clear wording of clause 20.7 in a contract freely negotiated between two large commercial parties.

As set out above, clauses 20.4(c) and (d) provide :

“20.4

Subject to Clauses 20.6 and 20.8, PwC’s liability to Fujitsu arising under any indemnity or otherwise under or in relation to this Sub-Contract, whether in contract, tort, by statute or otherwise and whether or not arising from any negligence on the part of PwC or any of their agents or employees shall be subject to the following limits:

…

…

c)

subject to Clauses 20 4(d) and 20.8, in respect of any Claims or losses arising PwC’s aggregate liability to Fujitsu arising under this Sub-Contract in each Contract Year shall be limited to £5 million for all events or failures giving rise to such Claims or losses;

d)

notwithstanding the cap set out in Clause 20.4(c), PwC’s overall aggregate liability for all Claims or losses arising under this Sub-Contract shall be limited, subject to Clause 20.8, to £10 million for all events or failures giving rise to such Claims or losses.”

Given my findings on issue 1, issue 2 does not strictly arise (save in relation to the account claims). In relation to the account claims, FSL concedes that such claims fall within clause 20.4 and I would in any event so have found. Such liability would arise “under or in relation to” the Sub-Contract and the definition of “Claim” (being “any claim, demand, proceedings or liability”) is obviously wide enough to cover a claim for an account.

I address the remaining claims in any event for the sake of completeness. For the same or similar reasons as set out under issue 1 above, I would have found that any liability on the part of IBM to FSL on the workshare, change control and money claims would fall within clauses 20.4(c) and (d):

For these reasons, I conclude that :

This construction is what a reasonable person, being someone with all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time in 2002 (and for the avoidance of doubt in 2008) would have understood the parties to have meant.

Paragraphs 29 and 30 of the Particulars of Claim read as follows :

“Fiduciary Duties

29.

The partnering principles, and/or IBM’s duty of good faith set out above, and/or the circumstances in which IBM was performing its duties (including, in particular, those referred to at paragraphs 3 and 4 above) and/or the workshare provisions (referred to at paragraphs 31 to 40 below), gave rise to a situation in which IBM was (or ought to have been) acting for itself and for Fujitsu in procuring work under the PACT Agreement and in allocating such work between the parties.

30.

In the circumstances, IBM owed to Fujitsu fiduciary duties (or business duties akin to fiduciary duties). In particular, IBM owed to Fujitsu the following fiduciary duties (or business duties akin to fiduciary duties):

30.1

A duty to act faithfully and honestly in the procuring of work under the PACT Agreement and subsequent allocation of such work to Fujitsu under the Sub-Contract;

30.2

A duty to act in all respects under the Sub-Contract in accordance with the respect and trust placed in IBM by Fujitsu;

30.3

A duty to be open, honest, clear and reliable in the provision of information to Fujitsu relating to the services which Fujitsu was entitled to carry out pursuant to the Sub-Contract; and

30.4

A duty to account to Fujitsu in respect of the services requested or performed under the PACT Agreement which Fujitsu was entitled to carry out pursuant to the Sub-Contract.”

In oral submission, FSL did not press its case in relation to “business duties akin to fiduciary duties” but limited its case to the question of fiduciary duties alone. It also made it clear that FSL could not in fact contend that IBM had a duty to procure (as alleged), let alone a fiduciary duty to act honestly and faithfully in any procurement obligation.

Indeed, the alleged fiduciary duties became framed in a much narrower and un-pleaded (though still rather general) way by FSL.

FSL accepted :

FSL contended that the cardinal issue was that IBM was not entitled “when dealing with arrangements which affect[ed] the Sub-Contract or under it ... to put [its] interests ahead of [FSL’s] or to act in such a manner as to disadvantage [FSL] at [FSL’s] expense”. IBM had “a duty to act in good faith for the benefit of both parties in dealings which relate[d] to under the [PACT Agreement] which can affect or do affect [the] Sub-Contract or are capable of affecting the Sub-Contract or capable of affecting [FSL’s] expectations under the Sub-Contract.” (see the transcript for day 2 p. 32 lines16 to 24).

It was common ground that the starting point for consideration of the existence of alleged fiduciary duties is Bristol and West Building Society v Mothew [1998] Ch. 1. There (at 16C-D and 18A-C) Millett LJ stated:

“The expression “fiduciary duty” is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. Unless the expression is so limited it is lacking in practical utility….

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”

There is no doubt that the existence of a contract does not bar the co-existence of fiduciary duties. The fiduciary duties, if they exist, must then be moulded to fit the contractual framework. Thus in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 it was stated by Mason J (at paragraph 70):

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.”

This approach is consistent with the later English cases of Kelly v Cooper [1993] AC 205 (at 213 to 215) and Henderson v Merrett Syndicates Limited [1995] 2 AC 145 (at 206 A-D).

A further example of this type of approach can be seen in Global Container Lines Ltd v Bonyad Shipping Co [1998] 1 Lloyds Rep 528. There Rix J stated (at 545):

“If the parties’ relationship has been premised, as I have found, on the possibility of competition within such areas, then I do not see how, in those respects at any rate, the parties can owe to one another the full range of fiduciary duties. It seems to me that Mr Vos was right to place reliance on modern authorities which have stressed that duties, even of agents and such like who are natural candidates for the status of fiduciaries, have to be tailored to the facts and circumstances of the case and do not come wholesale under the label of “fiduciary relationship”.”

Rix J concluded as follows (at 547):

“… within the scope of the joint venture and outside the scope of Global’s existing business, I would agree…that Global did owe the duties of a fiduciary or at any rate business duties akin to fiduciary duties and premised on an obligation of non-competition. In this area, Bonyad were trusting Global, and Global were likewise trusting Bonyad, to avoid competition, to act fairly, and be loyal to one another…

Within the area of Global’s existing business it is much harder to say what, if any, implied obligations existed…the only obligation that can be implied is the standard contractual obligation which is used when it is necessary to fill a lacuna that the parties act reasonably.”

However, the law reports are replete with authorities which make it clear that the courts must be careful not to distort the parties’ contractual bargain by the inappropriate introduction of equitable principles. In a commercial context wider duties will not lightly be implied. Fiduciary duties do not commonly arise outside the settled categories of fiduciary relationships, not least because independently contracting parties do not undertake normally to subordinate their own commercial interests to another.

In In re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74 Lord Mustill stated (at 98C-F) :

“But what kind of fiduciary duties did the company owe to the customer? None have been suggested beyond those which the company assumed under the contracts of sale read with the collateral promises; namely to deliver the goods and meanwhile to keep a separate stock of bullion (or, more accurately, separate stocks of each variety of bullion) to which the customers could look as a safeguard for performance when delivery was called for. No doubt the fact that one person is placed in a particular position vis-à-vis another through the medium of a contract does not necessarily mean that he does not also owe fiduciary duties to that other by virtue of being in that position. But the essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself. Their Lordships have not heard in argument any submission which went beyond suggesting that by virtue of being a fiduciary the company was obliged honestly and conscientiously to do what it had by contract promised to do. Many commercial relationships involve just such a reliance by one party on the other, and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences far exceeding those foreseen by Atkin L.J. in In Re Wait [1927] 1 Ch. 606. It is possible without misuse of language to say that the customers put faith in the company, and that their trust has not been repaid. But the vocabulary is misleading; high expectations do not necessarily lead to equitable remedies.”

In Yeoman’s Row Management Limited & anr v Cobbe [2008] UKHL 5 Lord Walker stated (at paragraph 81):

“… the court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as fiduciary obligations and equitable estoppel.”

In F & C Alternative Investment (Holdings) Ltd v Barthelemy [2011] EWHC 1731 Sales J stated (at paragraph 223):

“Fiduciary obligations may arise in a wide range of business relationships, where a substantial degree of control over the property or affairs of one person is given to another person. Very often, of course, a contract may lie at the heart of such a business relationship, and then a question arises about the way in which fiduciary obligations may be imposed alongside the obligations spelled out in the contract. In making their contract, the parties will have bargained for a distribution of risk and for the main standards of conduct to be applied between them. In commercial contexts, care has to be taken in identifying any fiduciary obligations which may arise that the court does not distort the bargain made by the parties: see the observation by Lord Neuberger of Abbotsbury writing extra-judicially in “The Stuffing of Minerva's Owl? Taxonomy and Taxidermy in Equity” [2009] CLJ 537, 543 and Vercoe v Rutland Fund Management Ltd [2010] EWHC 424 (Ch), [351]-[352]. The touchstone is to ask what obligations of a fiduciary character may reasonably be expected to apply in the particular context, where the contract between the parties will usually provide the major part of the contextual framework in which that question arises….”

and at paragraph 225:

“It may also be the case that the overall contextual framework created by the contract simply means that it is not appropriate for the law to impose the whole range of possible fiduciary duties or fiduciary duties of particular types in that specific context — in other words, it may be found that the parties could not reasonably expect that some particular duty of a fiduciary character should apply in the context of their particular relationship or in the context of their relationship with a person accepting appointment as a manager or board member.”

In Ross River Limited v Waverley Commercial Limited [2012] EWHC 81 (Ch) Morgan J stated (at paragraphs 235 and 236):

“There are certain settled categories of fiduciary relationship. These include trustee and beneficiary, agent and principal, solicitor and client, promoter and company, partners, director and company… The categories of fiduciary relationship are not closed. There may be such a relationship where all the circumstances justify a finding that fiduciary obligations are owed. …

It is possible for fiduciary obligations to arise in a commercial relationship. An obvious example is a commercial agency. Fiduciary relationships do not commonly arise in a commercial setting outside the settled categories of fiduciary relationship. This is because it is normally inappropriate to expect a commercial party to subordinate its own interests to those of another commercial party.”

In Ross River Limited v Cambridge City Council [2008] 1 All ER 1004 Briggs J stated (at paragraph 197):

“In relationships falling short of partnership, but having in them elements of joint enterprise or joint venture, there is no hard and fast rule as to the existence or otherwise either of a duty of good faith, a fiduciary duty or a duty of disclosure. Each case will turn on its own facts, but if the relationship is regulated by a contract, then the terms of that contract will be of primary importance, and 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.”

A useful short summary of the authorities is to be found in John Youngs Insurance Services Ltd v Aviva Insurance Service UK Ltd [2011] EWHC 1515 (TCC) (albeit in a quite different fiduciary context) where Ramsey J identified the following principles (at paragraph 94) :

“(1)That in the case of an agent employed under a contract, the scope of any fiduciary duties of the agent will be determined by the terms of the underlying contract : see Henderson v Merrett at 206C;

(2)

Not every breach of duty by a fiduciary is a breach of fiduciary duty : see Bristol and West Building Society v Mothew at 16D;

(3)

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal : see Bristol and West Building Society v Mothew at 18B;

(4)

The facts and circumstances must be carefully examined to see whether in fact a purported agent and even a confidential agent is in a fiduciary relationship to his principal: see Boardman v Phipps at 127B;

(5)

The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction: see Hospital Products v United States Surgical Corp at 97;

(6)

A person may be in a fiduciary position in respect of some part of their activities and not in respect of other parts; each transaction or group of transactions must be looked at: see New Zealand Netherlands Society v Kuys at 1130 D;

(7)

The essence of a fiduciary relationship is that it creates obligations of a different character from those deriving from the contract itself. Many commercial relationships involve an obligation by a party to do honestly and conscientiously what that party had by the contract promised to do. To introduce into such relationships the whole new dimension which flows from giving them a fiduciary character would have adverse consequences. Merely because a party puts faith in another party and contends that their trust has not been repaid does not give rise to a fiduciary duty; high expectations do not necessarily lead to equitable remedies: see in re Goldcorp Exchange at 98F.”

In support of its contention that IBM owed FSL fiduciary duties, FSL relies on the existence of an express duty of good faith. Whether or not such a duty exists is the subject of issue 4 below. But it is important to note that the existence of a duty of good faith does not mean that a fiduciary relationship exists. This is well explained in Conaglen on Fiduciary Loyalty (2010) at paragraph 40-43:

“Undoubtedly, fiduciaries must act in good faith [but] it is suggested that the duty of faith is not peculiar to fiduciaries. In particular, a duty of good faith has frequently been recognised in circumstances that are not traditionally considered to be fiduciary relationships and when fiduciary analysis played no part in reaching the court’s conclusion. In numerous cases, for example, courts have held that discretionary powers in contracts had to be exercised in good faith … The important point is that in these various cases the courts have been careful to make clear that a duty of good faith, when it is recognised, is not a fiduciary duty.”

and well demonstrated in Re Prudential Staff Pension Scheme v Prudential Assurance Scheme Ltd & ors [2011] EWHC 960 (Ch) where, when considering the exercise of a power to which an implied duty of good faith applied, Newey J stated (at paragraph 146) that :

“it is important to remember that powers such as that at issue in the present case are not fiduciary. As a result, the donee of the power is…entitled to have regard to his own interests when making decisions…”.

Having considered the authorities and the respective submissions, I have reached the clear conclusion that, whether or not an express duty of good faith existed, no fiduciary duties arose on the part of IBM in favour of FSL under the Sub-Contract.

First, the relationship between IBM and FSL does not fall within any settled category of fiduciary relationship (for example, solicitor-client, principal-agent, partner-partner).

Secondly, by clause 44 of the Sub-Contract the parties expressly eschewed :

FSL was at all times to be an independent contractor. Neither party had the authority or power to bind the other in any way.

Thus not only was the Sub-Contract silent as to the existence of fiduciary duties, the parties appear to have gone out of their ways to take steps to exclude the possibility of any such duties arising.

The express exclusion of any partnership relationship – or indeed any other association – undermines FSL’s attempt in some way to rely on the partnering principles in Schedule 2 to the Sub-Contract as giving rise to fiduciary duties.

But those principles would not advance FSL’s case in any event. By clause 2.1 of the Sub-Contract the parties agreed to comply with the partnering principles in Schedule 2. Clause 2.1 makes it clear that the focus is on ensuring the delivery of a satisfactory service to the DVLA and that FSL, along with IBM, would play its part in the delivery of that service. This is reinforced by the provision for the delivery of assistance by FSL to IBM in clause 2.2.

Having agreed to comply with the principles in Schedule 2, by clause 2.2 of that Schedule the parties then agreed only “to have regard to” the principles set out in Annex A. This is consistent with the sense of the relevant parts of Schedule 2, which is not to set out concrete contractual terms but rather, in the words of Annex A, to “describe” how the DVLA, IBM and FSL would “seek to work together to develop their relationship”. FSL was to “co-operate with and support development of the principles…” The principles themselves are aspirational and motivational – part of a “vision”. They cannot be said to give rise to fiduciary duties, even ignoring the exclusion of a partnership relationship. I refer also to my findings on issue 4 in relation to the partnering principles (at paragraphs 162 to 164 below).

Thirdly, this was an arms’ length commercial contractual relationship between contractor and sub-contractor. The rights and obligations were consistent with that relationship : fundamentally an obligation on FSL to provide services and on IBM to pay for such services. The parties’ disclosure obligations were expressly provided for (for example in clause 12). The defining characteristic of a fiduciary, namely the overriding obligation of loyalty, did not exist. Nor did IBM undertake to act for or on behalf of FSL in any particular matter, including in relation to the workshare arrangements. Nor did IBM have control of any property or the affairs of FSL.

The fact that FSL was reliant on IBM for work allocation and on IBM to notify it of requests and events under the PACT Agreement does not alter or extend the nature of the relationship. As highlighted in In re Goldcorp Exchange Ltd (in receivership) (supra), there are many commercial contracts under which one party has to rely on and trust the other on central matters. The reposing of faith is not enough by itself to give rise to a fiduciary relationship.

Put simply, to import fiduciary obligations would be to distort the true bargain between the parties. It cannot be said that obligations of a fiduciary nature could reasonably be expected to apply to the Sub-Contract which was a contract between main contractor and sub-contractor for the supply of services.

The authorities relied on by FSL do not assist FSL on the facts. So, for example, John Youngs Insurance Services Ltd v Aviva Insurance Service UK Ltd (supra) was a case where a fiduciary relationship on any view existed. The issue was the extent of the fiduciary duties arising. Similarly, in Kelly v Cooper (supra) it was common ground that the estate agent stood in a fiduciary relationship to his principal, the question was the scope of the fiduciary duties. Global Container Lines Ltd v Bonyad Shipping Co (supra) was a case where a joint venture relationship existed. There was no such relationship here. The fact that the original proposal to the DVLA was a joint one between PwC and FSL goes nowhere near creating a relationship such as to give rise to fiduciary duties (particularly where the parties disavowed not only a joint venture but also any other association).

The allegations of breach of fiduciary duty are without foundation in principle. I am confident that they would not have been made had it not been for the difficulties facing FSL under clause 20.7 of the Sub-Contract in particular. Moreover and in any event, the pleaded duties are unsustainable in their scope by reference to FSL’s own submissions and the narrowed versions advanced in oral submission lacking in the necessary precision.

For these reasons, I conclude that IBM does not owe FSL fiduciary duties as alleged in paragraph 30 of the Particulars of Claim. For the avoidance of doubt, my conclusion on this issue would be the same whether or not IBM owed FSL a duty of good faith (express or, for that matter, implied).

Paragraph 24 of the Particulars of Claim reads as follows :

“Duty of Good Faith

24.

In addition, IBM owed to Fujitsu a duty of good faith in the performance of its duties under the Sub-Contract. In that regard, Fujitsu will rely on the content of the partnering principles set out above and on the following express terms of the Sub-Contract (as amended in 2008 and on similar or equivalent wording prior to those amendments):

IBM warrants and represents that …

(f)

it will discharge any obligations it has regarding the Services (to the extent applicable) and that IBM will supply and render appropriately experienced, qualified and trained personnel to discharge any obligations IBM has to the Services under this Sub-Contract, and that such personnel will discharge such obligations with all due skill, care and diligence in accordance with Good Industry Practice and any applicable Quality management Systems” (clause 19.4(f))

‘Good Industry Practice’ means ‘at any time, the exercise of that degree of skill, diligence, prudence and foresight which would reasonably and ordinarily be expected at such time from a skilled and experienced (a) provider of information, communication and technology services and information systems and/or (b) provider of expertise in change management and business processes; seeking in good faith to comply with its contractual obligations and complying with relevant Legislation and being engaged in the same type of industry and under the same in [sic] similar circumstances and conditions as that in which the relevant matter arises.’ (Schedule 1)”

It will be noted at the outset that the allegation under consideration is of an express, not an implied, term of good faith.

As set out above, clause 19.4(f) provides as follows :

“19.4

PwC warrants and represents that :

…

(f)

it will discharge any obligations it has regarding the Services (to the extent applicable) and that IBM will supply and render appropriately experienced, qualified and trained personnel to discharge any obligations IBM has to the Services under this Sub-Contract, and that such personnel will discharge such obligations with all due skill, care and diligence in accordance with Good Industry Practice and any applicable Quality Management Systems.”

In my judgment, clause 19.4(f) does not give rise to an express duty of good faith on the part of IBM in the performance of its duties under the Sub-Contract.

First, there is no direct provision to this effect – contrast for example the express term in the contract in Berkeley Community Villages Ltd and another v Pullen and anr [2007] EWHC 1330 (Ch) :

“In all matters relating to this Agreement the parties will act with the utmost good faith towards one another and will act reasonably and prudently at all times.”

In a detailed contract like the Sub-Contract, one would expect clear words if there was to be an express duty of good faith. There are no such clear words.

Secondly, it is difficult to see why in the context of the warranty in clause 19.4(f) an obligation of good faith on the part of IBM would arise. The warranty to perform makes such an obligation otiose.

Thirdly, consideration of the language itself does not support the existence of the express term alleged. I put to one side the (important) fact that on any view the warranty does not extend to all of IBM’s obligations under the Sub-Contract, only those “regarding the Services”.

The first warranty given by IBM is that it will discharge any obligations it has “regarding the Services (to the extent applicable)”. The wording is clear and the warranty is separated from what follows by the word “and”. I do not accept FSL’s submission that, without more, those words must be otiose since IBM was already under an obligation to discharge its services. Amongst other things, a claim for breach of this warranty would give rise to a different and potentially more favourable measure of damage to FSL. The warranty also goes on to indicate how IBM will discharge its obligations. And in any event the wording is unambiguous. As already indicated, there is no claim for breach of this warranty or representation. No obligation of good faith is referred to in this warranty. It cannot assist FSL on issue 4.

The second warranty given by IBM is that it will supply and render appropriately experienced, qualified and trained personnel to discharge any obligations that IBM has regarding the Services and that such personnel will discharge such obligations with all due skill, care and diligence in accordance with “Good Industry Practice and any applicable Quality Management Systems”.

This is the focus of clause 19.4(f). In order to discharge its obligations in relation to the Services under the Sub-Contract, IBM would provide appropriate personnel. The warranty by IBM here is limited to the provision of proper personnel and that such personnel would discharge IBM’s obligations with all due skill and care in accordance with “Good Industry Practice”.

Acting in accordance with the “Good Industry Practice” required the personnel provided by IBM to seek in good faith to comply with IBM’s contractual obligations. I do not accept IBM’s submission that “seeking in good faith” to comply with IBM’s contractual obligations was merely a qualification to the obligation to exercise appropriate skill, diligence, prudence and foresight. Its position in the definition of “Good Industry Practice”, following a semi-colon, gives it an independent status.

I do not accept FSL’s submission that the definition of “Good Industry Practice” gives rise to an express duty on the part of IBM to act in good faith because the references to “provider” are more naturally read as references to an organisation. They are more naturally read as references to individual personnel. Thus, for example, only an individual would be “skilled” or “experienced”. And the “Good Industry Practice” is only introduced into clause 19(f)(c) by reference to the obligations of personnel, not IBM.

Thus the warranty in clause 19.4(f)(c) does not give rise to an express obligation of good faith on the part of IBM in the performance of its duties under the Sub-Contract. Again, there is no claim for breach of IBM’s warranty that the personnel supplied by IBM would discharge IBM’s obligations with all due skill, care and diligence in accordance with “Good Industry Practice”.

As for the partnering principles, I repeat my findings under issue 3 above. The principles in Annex A lack contractual certainty. Objectively construed, they are not intended to be the subject of direct contractual effect. I refer for example to the following principles : “leaders will champion the partnering relationship”, “at all times take a reasonable and balanced view of each other’s obligations and commitments”, “establish mutual ambitions and shared objectives from the outset of the PACT Agreement”, “do our best to ensure that work is mutually enjoyable and fulfilling for everyone”, “work together to grasp opportunities effectively”, “work together to establish a shared commitment to customer focused service delivery”.

IBM was obliged to “have regard to” these “principles”, including the principle of working together on an “open, honest, clear and reliable” basis, but no more. The parties appear to have chosen deliberately to step back from an express agreement that they would owe each other a duty of good faith. Rather they chose to agree simply to “have regard to” the principles in Annex A. That choice should be respected.

Put shortly, the fact that IBM agreed to have regard to the principles set out in Annex A of Schedule 2 of the Sub-Contract does not give rise to an express duty of good faith.

For these reasons, I conclude that IBM does not owe FSL the duty of good faith alleged in paragraph 24 of the Particulars of Claim.

For the reasons set out above my conclusions on the preliminary issues are as follows:

In reaching these conclusions, I have assumed the facts in paragraph 3 of the Particulars of Claim to be true, but those facts have not been determinative of any issue.

I invite the parties to draw up an order reflecting the above and to agree the questions of consequential orders and costs so far as possible.

Finally, I record my gratitude to all counsel for their helpful submissions and assistance.