Fujitsu sues IBM for bad faith. Does that even exist?

JusticeThis is not strictly about cloud, but it applies to cloud contracts nonetheless and it’s worth a read.

Fujitsu sued IBM in the UK for breach of good faith and for lost revenues of £37m. They weren’t entirely successful and although it’s only a preliminary ruling so far, the court has provided some interesting guidance.

DVLA entered into a partnering agreement with Price Waterhouse Coopers (PWC) to provide technology solutions over 10 years. PWC outsourced an unspecified share of IT infrastructure maintenance services to Fujitsu under a sub-contract and a month later sold its consultancy business to IBM. This meant the sub-contract was now between IBM and Fujitsu. Presumably Fujitsu believed IBM was retaining the majority of the work for itself as it sued for nearly £37m for receiving a lesser amount of work.

The sub-contract had excluded IBM’s liability for “loss of profits, revenue and business” and capped claims to an aggregate of £10m. Fujitsu argued the exclusion applied only to indirect or consequential losses but the court ruled it was broad enough to exclude direct losses too. However, it did not prevent a claim for “an account of profits”.

The court noted this was a sophisticated arms length commercial contract with both parties of equal bargaining power and the liability cap potentially benefitted both parties. Thus the cap applied even though Fujitsu’s claim was significantly higher.

Further, IBM’s alleged failure to sub-contract work to Fujitsu did not amount to bad faith as there was no general rule under English law to perform contracts in good faith and acting in accordance with “good industry practice” did not trigger one. If Fujitsu wanted such an obligation, it should have expressly included one. Nor did IBM owe a fiduciary duty to Fujitsu. A fiduciary duty would arise in relationships of trust where one party might have to subordinate their interests to that of the other, such as a solicitor to his client. Conversely, a ‘partnering’ arrangement is a commercial contract without such a duty.

This case doesn’t change the law but it serves as a useful reminder when drafting cloud contracts.

5 key points to take away

  1. There is no general duty of good faith in English law and a requirement to comply with “good industry practice” doesn’t imply one. If you want it in your contract, you have to expressly include it.
  2. Exclusions and liability caps in contracts can be a very effective way of reducing or eliminating risk, even if the claimed losses are significantly higher than the cap.
  3. A “partnering” relationship does not of itself mean one party must favour the interests of another.
  4. If you want guaranteed minimum revenue or share of projects, you must specify this.
  5. If you want to improve your position in a contract, you need to negotiate and get your lawyer to draft accordingly as the court won’t rewrite it for you later!

This preliminary ruling is likely to mean the parties will settle without the full hearing going ahead – currently scheduled for February 2015. While a settlement is generally better for the litigants, you can’t deny a full judgment would make for great reading…

 

Image “Scales Of Justice Tablet Means Law Trial” courtesy of Stuart Miles / FreeDigitalPhotos.net

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