The Technology and Construction Court (TCC) has reaffirmed the approach to be taken to the construction of exclusion and limitation of liability clauses, in the case of Fujitsu Services Ltd v IBM United Kingdom Ltd .
The dispute related to a contract for the provision of information technology services to the DVLA. IBM was responsible for providing these services, under an agreement which IBM had acquired from PwC when it purchased PwC's consultancy business. IBM subcontracted aspects of the services to Fujitsu. Fujitsu claimed that IBM had committed various breaches of the sub-contract, for which it claimed damages for loss of profits in the region of £36 million. IBM defended the claim on various bases, including by reference to exclusion and limitation of liability clauses in the sub-contract.
The sub-contract included a limitation of liability clause which confirmed that IBM's aggregate liability was to be limited to £5 million each 'Contract Year', with an overall aggregate liability for "all claims or losses arising under this sub-contract" to be limited to £10 million (clause 20.4). There was an exclusion of liability at clause 20.7 of the sub-contract, which provided as follows:
"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 validity of these clauses was dealt with as a preliminary issue in advance of the full trial.
The court confirmed that such clauses would be construed no differently from any other term in a contract: the aim was to ascertain what the reasonable person would have understood the parties to have meant, having regard to all the relevant surrounding circumstances. One started with the presumption that neither party intended to abandon any of its remedies for breaches by the other, and clear express words would be needed to rebut that presumption.
In this case, the court found that the language of the exclusion was clear and unambiguous in excluding liability for loss of profits. The words of the exclusion also had to be read in the context of the whole clause, the contract as a whole, and the material background and circumstances when the contract was entered into. None of these things militated against giving the language its clear meaning. Indeed, several factors supported it:
- the sub-contract was a lengthy commercial agreement negotiated by the parties, with the benefit of legal advice;
- the exclusion clause was a 'tailor-made' one; and it applied equally to both parties; and.
- Fujitsu, in arguing that the clause was not effective, could not identify any other commercially sensible formulation as to what the parties intended.
The court also rejected Fujitsu's contention that the exclusion clause was so wide that giving effect to it would deprive IBM's obligations of all contractual force, leaving Fujitsu with no effective remedy and reducing the contractual obligations to mere 'statements of intent'. The court held that any such 'statement of intent' rule was of little assistance where the wording of the clause was plain and it was mutually beneficial, as here; but in any event this clause did not 'empty the contract of content'. It would not prevent, for example, claims for debt (as distinct from a 'loss'), declaratory relief or injunctive relief.
In short, the clause was "an exercise of risk allocation between the parties", and the court upheld it.
All was not lost for Fujitsu, however. Its claim for an account of profits was not excluded. This was not simply the 'mirror image' of a claim for loss: it related to alleged wrongful gain by IBM, not to losses suffered by Fujitsu. An account of profits was a claim for a different remedy with a different financial value, and was not caught by the reference to 'loss' in the exclusion clause.
The account of profits claim was, however, caught by the limitation of liability clause (which the court also upheld, applying similar reasoning to the above), because the wording of that clause was wider: it covered "any claim, demand, proceedings or liability".
Every exclusion and limitation of liability clause will of course be interpreted on its own terms, and by reference to its own particular wording. This decision does provide a useful reminder of the principles of interpretation that the courts will adopt and that if an exclusion clause is clear and unambiguous the court is likely to apply it. It is, however, an illustration of how even seemingly broad exclusion clauses may contain cracks through which more esoteric claims may fall.