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Commercial Contracts: The Importance of Understanding Liability Exclusion Clauses

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"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."

Above is the clear and unambiguous liability exclusion clause, found in a ten-year sub-contract between IBM and Fujitsu, whereby Fujitsu agreed to provide management, support and IT infrastructure maintenance as and when needed, to fulfill the IT and business process change service needs of the DVLA - who held the main commercial contract with IBM.

In time, Fujitsu opposed this exclusion clause, alleging, first, that IBM was in breach of contract from depriving it of work and, secondly, that IBM had breached its fiduciary duties by failing to implement change control procedures in relation to its main contract with the DVLA. As a result of these breaches, Fujitsu alleged IMB had caused revenue losses of over £36 million.

In its defence, IBM denied any breach of contract, and of course denied liability for any losses by pointing to the exclusion and limitation of liability clause found within the sub-contract between the two parties.

In the case, Fujitsu Services Ltd v IBM United Kingdom Ltd [2014] EWHC 752 (TCC), Fujitsu unsuccessfully attempted to argue that the exclusion clause could not apply, since if it did, the contract would not actually be a contract at all - it would merely be a "statement of intent", devoid of any contractual force, which could not have objectively been intended by either party.

The Court began with the presumption that, unless clear and unambiguous wording is used, it could not be said that parties to a contract would intentionally abandon any remedies awarded to them by law. The Court then proceeded to examine the surrounding clauses, which may affect or interact with the context of the clause. It also deliberated on the two parties bargaining power, the mutuality of the clause, the sophistication of the parties and the length and detail of the tailor-made contract, which was drawn up by their legal representatives.

In its decision, the Court concluded that the sub-contract could not be defeated, and favoured a straightforward application of the clause.

Fujitsu then attempted to convince the Court that the clause should apply to indirect and consequential losses, and also that fiduciary duty breaches could not be excluded because it is a liability in equity and not under the sub-contract - both arguments failed, and the losses suffered by Fujitsu were consequently excluded, and unrecoverable.

The case clearly highlights that in commercial contracts parties will be bound to what they agree on, even if it was clearly a bad deal. It also stresses the importance of closely and critically scrutinising such liability exclusion clauses to fully understand them, and ensure that the potential losses, which can result from them - like what happened to Fujitsu - can be intentionally avoided.

Commercial Contract Dispute & Litigation Funding Across the UK

Whether you are in commercial contract dispute because you do not agree with the meaning of the contract terms, someone has breached the contract by failing to fulfil their obligations or you were induced to enter into a contract on a false premise, Advantage Litigation Services have the skills and expertise to help you find an expert commercial contract lawyer as well as a way of funding the commercial litigation process. To discuss your contractual dispute today, please call 0800 160 1298 or click here to see how we can help.

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