Exclusion clauses: Court of Appeal awards significant damages for wasted expenditure

Exclusion clauses: Court of Appeal awards significant damages for wasted expenditure

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The recent Court of Appeal judgment in Soteria Insurance limited (formerly CIS General Insurance Limited (CISGIL)) v IBM United Kingdom Limited 2022 EWCA Civ 440 has overturned the High Court’s interpretation and analysis of a common exclusion clause in relation to “wasted expenditure”.   

By way of background, a deal was agreed for IBM to supply CISGIL with a new IT system and ongoing management of the system for a 10-year term. The deal suffered serious delays and CISGIL refused to pay an invoice, following which IBM purported to terminate the contract. CISGIL claimed damages of over £130m for wasted expenditure plus other damages and wrongful repudiation of the contract. The judge at first instance accepted CISGIL’s claim regarding wrongful repudiation. However, the lion’s share (nearly £100m) of CISGIL’s claim for wasted costs failed on the basis that the contract excluded liability “…for loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect)…”

A number of issues were dealt with on appeal, but the primary issue for the Court of Appeal was the interpretation of the exclusion clause. Coulson LJ considered the general rules of interpretation and summarised his conclusions in five sections:

  • Natural and ordinary meaning of the words – while the contractual definition for Losses was widely defined, the exclusion clause carved out specified types of loss to be excluded. The words “wasted expenditure” did not appear in the exclusion clause and, following the principles of construction, were not included in the natural and ordinary meaning of the words “loss of profit, revenue [or] savings”.
  • Proper approach to exclusion clauses – the more valuable a right and the more extreme the consequences, the clearer the language of an exclusion clause must be and the more resistant the court must be to allowing a party to escape liability for their non-performance. Here, as an example, CISGIL had paid £34 to IBM for a functioning IT system they did not receive – such wasted expenditure must have been the most likely claim. The parties could not have intended to exclude such a claim without clear and obvious words – here there were no relevant exclusionary words.
  • Different types of loss – he went on to consider the types of loss that were excluded by the clause and those that were not. The types of loss expressly identified in the exclusion clause (loss of profit, revenue, savings) are of a similar type and often considered to be types of consequential loss. They are speculative losses which are difficult to ascertain and therefore frequently excluded. In contrast, expenditure already incurred is easily ascertainable. From a commercial perspective it made sense for the parties to exclude liability for losses which were onerous to ascertain, while not excluding easily-ascertained losses. Further, wasted expenditure was a type of loss that did appear in exclusion clauses and so if there was an intention to exclude it, IBM should have done so.

Interestingly Coulson commented that other heads of loss – loss of data, goodwill and reputation – are also a species of loss of profit claims – sounding in a loss of profit or decrease in revenue.

  • Loss of the bargain – Coulson reasoned that the clause intended to exclude some losses which flow from a loss of bargain, but not all. Here, the loss of bargain was not solely represented by lost profits, revenue and savings, but included the loss of the IT system itself – here, it was fundamentally wrong to characterise the loss of bargain as entirely a loss of profit. In normal circumstances, the principal loss resulting from the loss of the bargain would be the costs of re-procurement of an IT system from a different IT contractor; it would be extraordinary for the clause to hypothetically exclude a claim for re-procurement costs. The clause did not support such an onerous result in the event of wrongful repudiation.
  • Distinguishing the result in “Royal Devon” – Interestingly, the high court judge in this case was the same as that in The Royal Devon & Exeter NHS Foundation Trust v ATOS IT Services UK Limited [2017] EWHC 2196 (TCC) which also considered an exclusion of liability for loss of profits (etc) and a claim involving wasted expenditure. There, she allowed the claims for wasted costs to proceed to trial because the exclusion clause did not preclude the Trust from recovering such costs as damages to compensate it for the loss of a functioning system. 

The judge had sought to distinguish this case from Royal Devon on the basis that in Royal Devon, the claim for wasted costs was “non-pecuniary” (i.e. the Trust was not claiming for loss of potential future profits) but had a value at least equal to the Trusts’s expenditure on the system and that such a claim was not defeated by a loss of profit exclusion. The Court of Appeal did not accept this reasoning: “The issue is whether wasted expenditure was somehow excluded by the words 'loss of profits/revenue/savings'. The answer to that question of construction cannot possibly turn on whether the anticipated benefit of any given contact was primarily pecuniary or primarily non-pecuniary.”

It went on to say that had the High Court decision been upheld, the same words in the same contract would have had a different meaning depending on the employer’s identity and whether it was a for-profit or not-for-profit company, which could not be “rational”.

Overall, an important decision, once again reflecting the need for precision with drafting – failing to exclude the wasted expenditure element hugely increased the claim from the amount of around £13m at High Court level to the contractual cap of c. £80m.

However, further twists may yet follow, as IBM is seeking leave to appeal the Court of Appeal’s decision to the Supreme Court.

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