This blog was co-authored by: Maria Zeber, Trainee Solicitor
The English Court of Appeal has overturned a High Court decision and ruled that an exclusion clause that excluded liability for loss of profits, revenues and savings did not exclude wasted expenditure (Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited  EWCA Civ 440).
CIS contracted with IBM to design and implement a new IT system. The project was beset by substantial delays and the IT system was ultimately never delivered. Towards the end of the project, IBM purported to exercise a contractual right of termination based on CIS’ failure to pay an invoice for £2.9m. CIS disputed IBM's right to terminate (on grounds that the invoice was properly disputed) and claimed for damages in the sum of £132 million in respect of wasted expenditure arising out of the alleged wrongful repudiation by IBM.
The High Court judgment
The High Court had held (see our earlier blog, CIS General Insurance Ltd v IBM United Kingdom: 5 key takeaways for technology contracts and disputes) that:
- Because the £2.9m invoice had been disputed by CIS in accordance with the contractual procedure, its non-payment did not entitle IBM to terminate the contract (IBM’s termination right was in respect of “undisputed” payments only). By purporting to terminate nonetheless, IBM was in repudiatory breach of the contract.
- However, the claim for wasted expenditure was excluded by operation of an exclusion clause (clause 23.3 of the contract). The judge considered that “the loss of the bargain suffered by (CIS) as a result of IBM's repudiatory breach comprised the savings, revenues and profits that would have been achieved had the IT solution been successfully implemented”. Because clause 23.3 excluded claims for “…indirect or consequential losses, or for loss of profit, revenue, savings…”, CIS’ wasted expenditure claim was excluded.
Construction of the exclusion clause
CIS appealed on the issue of the proper construction of clause 23.3.
The Court of Appeal, overturning the decision of the High Court, held that clause 23.3 did not exclude claims for “wasted expenditure” because “those words are simply not there”.
The words that were there and that were being relied on – loss of profit, revenue or savings – were distinguished from wasted expenditure.
Claims for loss of profit, revenue or savings all “involve a consideration of a variety of counterfactuals,” e.g. what additional revenue would have been earned by the new IT system? As such, they rely on speculation and depend on hypotheticals. Claims for wasted expenditure, on the other hand, “are an entirely different animal” because the “loss is easy to ascertain: there will be invoices, contracts, receipts and the like”. As such, loss of profit, revenue and savings “are often considered to be types of consequential loss,” while wasted expenditure claims “are not usually regarded as claims for consequential loss”.
Loss of profits and wasted expenditure “are (also) different types of loss as a matter of law” – “when a contract is repudiated, the victim can claim loss of profits or the expenditure which has been thrown away as a result of the repudiation. He or she cannot claim both… On its face, therefore, clause 23.3 expressly excluded the former type of loss, but did not exclude the latter”.
While it is true that calculating the amount of wasted expenditure can act as means of calculating the amount of lost profits (as it is assumed that one would not expend - in anticipation of the contract being performed - more than one expects to gain from its performance), that “does not mean that they are the same claims, or the same types of loss”.
The Court of Appeal also disagreed the loss of the bargain was comprised solely in the profits, revenues or savings that would have been achieved by CIS had the IT system been implemented – this “ignores the straightforward point that the loss of the bargain was principally represented by the loss of the IT system itself”. Therefore, the “financial loss resulting from the loss of the bargain would, in an ordinary case, be the cost of re-procurement”. While “some types of loss of bargain damages, like loss of profit, revenue or savings, were excluded by clause 23.3”, others “such as re-procurement costs and wasted expenditure, were not”.
The High Court had found that CIS had demonstrated wasted expenditure of £122m. The Court of Appeal had to decide which contractual liability cap applied to this.
The contract had several caps, which applied in respect of different liabilities. Of the relevant two, one applied in respect of liabilities relating to the implementation stage; and the other, in respect of liabilities relating to the managed services that would follow. While the court agreed with CIS that the caps could be aggregated, it did not think the latter cap applied, since all of CIS’ losses related to the failure to implement the system. Applying the first cap only, the court ruled that CIS was due £80.6m.
The case provides helpful guidance on drafting and construction of liability clauses.
In order to ensure that claims for wasted expenditure are captured by limitation clauses, the words “wasted expenditure” should be included in the clause. Lack of such an express reference now means that claims for wasted expenditure may not be excluded, if relying solely on the words “indirect losses” or “profits, revenues and savings”.