The Technology & Construction Court considers when damages will be awarded for wrongful termination of a services agreement

CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] EWHC 347 (TCC)

The question

What is the nature of the losses suffered as a result of a wrongful termination of a services agreement?

Key takeaway

The starting point for assessing losses is to identify the contractual benefit lost as a result of the other party’s breach. Even if losses are framed as “wasted expenditure”, this may only represent a different method for quantifying the “loss of the bargain” and will not change the characteristics of the losses.

The background

In June 2015 CIS General Insurance Ltd (CIS), a Co-operative Group insurance company, engaged IBM United Kingdom Ltd (IBM) to supply a new IT system to underpin CIS’ insurance services and manage the system for a 10-year period. The Managed Services Agreement (MSA) between the parties provided for payment by CIS against certain milestones.

A dispute arose in early 2017 as to whether these milestones had been met. IBM submitted an invoice to CIS in the sum of c£3m on the basis that it considered the milestones to have been fulfilled. CIS refused to pay the invoice alleging that the milestones had not been met.

Following several setoff notices by CIS and final payment notices by IBM, IBM purported to terminate the MSA because of CIS’ failure to pay the invoice. CIS claimed that this amounted to repudiatory breach and brought a claim against IBM seeking damages of £128m, the majority of which was for wasted costs – which, given the language of the exclusion clauses in the MSA, was characterised as expenditure incurred in relation to the alleged wrongful termination by IBM. CIS also alleged that IBM failed to adequately implement the MSA and argued that it would not have entered into the MSA if it had known that the IT platform was not a proven, off-the-shelf product that could meet its requirements. IBM counterclaimed for the unpaid January 2017 invoice (c£3m).

The decision

The Technology & Construction Court (TCC) found that, whilst IBM’s invoice was payable, it had been disputed by CIS under the agreed contractual procedure. As such, IBM was not entitled to terminate the MSA for non-payment.

Whilst IBM had taken all reasonable steps to ascertain the risks associated with the project and had accurately represented the rewriting and development work required, IBM were also found to be responsible for critical delays to the project and for failing to report these delays to CIS. IBM had therefore failed to meet key milestones and was in breach of the MSA. The TCC awarded CIS almost £16m in respect of additional costs incurred as a result of IBM’s delays in reaching the contractual milestones and set off IBM’s unpaid £3m invoice against that figure.

However, CIS’s wasted costs claim was rejected by the TCC. They agreed with IBM that, although the quantum of CIS’ claimed losses related to expenditure, the actual loss was the revenue, profit and savings through which that expenditure would have been recouped if the breach had not occurred – and these were expressly excluded.

O’Farrell J said, “The starting point is to identify the contractual benefit lost as a result of IBM’s repudiatory breach of contract”. While CIS was entitled to characterise its claim as one for wasted costs, that simply represented “a different method of quantifying the loss of the bargain; it does not change the characteristics of the losses for which compensation is sought”. The TCC concluded that CIS’ claim was expressly excluded under the terms of the MSA.

Why is this important?

This decision from the TCC provides useful guidance on wasted costs and how damages arising out of termination of a contract are categorised. It also provides useful discussion of the case law relating to reasonable and best endeavours, as well as set off, and highlights the importance of following contractually agreed procedures for submitting and disputing invoices.

Any practical tips?

The comments concerning the categorisation of loss and damage should be considered when drafting or reviewing exclusions and limitations of liability. Consider how exclusions in respect of revenue, profits and/or anticipated savings may interact with recovery of expenditure or wasted costs. Consider specifically stating that certain categories of loss are intended to be recoverable (in any event/ notwithstanding the exclusions).

Also ensure that contractual procedures for raising, submitting, challenging and paying invoices are workable and consistent with related provisions (eg as to set off).