Exclusion clauses: Wasted expenditure distinct from loss of profit (Court of Appeal)

Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd [2022] EWCA Civ 440

The question

Should boilerplate contract clauses be used and relied upon in complex transactions? 

The key takeaway

The Court of Appeal has overturned a controversial High Court decision and ruled that an exclusion clause for “loss of profit, revenue [or] savings” did not preclude the Claimant from recovering wasted expenditure following repudiation of the contract by the Defendant.

The background

Soteria Insurance Limited (formerly CIS General Insurance Limited) (CIS) engaged IBM United Kingdom Limited (IBM) to supply a new IT system for CIS’ insurance business and to manage it for 10 years, under a Master Services Agreement. However, IBM experienced difficulties with its sub-contractor, resulting in milestone dates being missed and CIS refusing to pay a milestone invoice. IBM then purported to terminate the contract based on CIS’ failure to pay.

CIS disputed IBM’s right to terminate, treating IBM’s termination as a repudiatory breach and purporting to accept the repudiation, bringing the contract to an end. CIS’ primary claim against IBM was for £128m in respect of wasted expenditure (and other losses) on the project to date. The costs claimed included £34.1m paid to IBM, large sums paid to third party suppliers, management/secondee fees, and a significant £42m claim for subordinated loan interest. 

The High Court decision

Mrs Justice O’Farrell in the Technology and Construction Court (TCC) found IBM’s purported termination was a repudiatory breach. However, CIS was not entitled to recover its wasted expenditure as it was excluded by the contractual exclusion of “loss of profit, revenue [or] savings”. The High Court judgment was discussed in our Spring 2021 Snapshots edition here.

The development

The Court of Appeal disagreed with the TCC’s decision and provided the following reasoning: 

1. Natural and ordinary meaning of the words – on the natural and ordinary meaning of the words, claims for wasted expenditure were not included in “loss of profit, revenue [or] savings”.
   
   
2. The proper approach to exclusion clauses – clear language is required to exclude a valuable right and clauses which may have extreme consequences must be stringently construed. The exclusion clause in this case did not come “anywhere near” the required threshold to exclude wasted expenditure.
   
   
3. Different types of loss – pre-estimating loss of profit, revenue and savings is difficult, and these losses are often classed as consequential and excluded. Ascertaining wasted expenditure is a straightforward accounting exercise and the ability to claim it is a valuable right; a prudent drafter would expressly exclude it if this was the parties’ intention.
   
   
4. Loss of bargain – CIS was entitled to recover its loss of bargain. The loss of bargain in this case was principally the loss of an IT system itself. It was not, as IBM argued, comprised solely of savings, revenues and profit that would have been achieved had the IT solution been successfully implemented. The exclusion clause had not been drafted to exclude the entirety of CIS’ loss of the bargain. Even if it had been, the wording of such a clause would need to be expressed more clearly, and the effect of the drafting would need to be entirely apparent.
   
   
5. Loss of profits, revenue or savings and wasted expenditure are distinct – finally, the Court of Appeal explained that wasted expenditure is not a method for calculating loss of profit, revenue or savings. They are not the same claim or the same type of loss. Both are separate calculations of damages for loss of bargain, and any link between them is limited to the fact that a party cannot recover wasted costs that are greater than the profit, revenue or savings it expected to make from the contract.

Why is this important?

Consideration should be given to whether wasted expenditure should be expressly mentioned in any liability cap (if it is not completely excluded). The fairly commonplace exclusion of loss of profits, revenue and savings will not by itself prevent an injured party from recovering its wasted expenditure. For that right to be lost, the exclusion clause will need to be expressed in much clearer terms.

Any practical tips?

Parties seeking to exclude or limit liability for wasted expenditure claims should include express wording to that effect and think carefully about tailoring their wording/including specific definitions in the context of the particular transaction.