In a recent judgment from the Court of Appeal, the Court has ruled that "wasted expenditure" is distinct from "loss of profit", overturning a previous High Court decision that held that a limitation of liability clause which referred to "loss of profit, revenue, savings (including anticipated savings)" excluded a claim for wasted expenditure. Although a technology case, this case is important for all types of commercial contracts and demonstrates the importance of clear drafting. In light of this case, it would be sensible for parties to carefully check the wording of their contracts. If it is the intention to exclude specific claims, this should be expressly provided for in the contract.
The case concerned an IT system to be provided by IBM (the respondent) to CISGIL, (the appellant). In summary, the system was never delivered and a dispute arose in respect of an unpaid invoice. Subsequently, the contract was terminated. The appellant commenced a claim against the respondent, alleging wrongful repudiation of the contract. The respondent defended the claim on the basis that they had been entitled to terminate the contract because of the non-payment of the invoice.
Initially, the Technology and Construction Court (TCC), hearing the claim, ruled that:
a) The respondent had wrongfully repudiated the contract
b) As a consequence of the repudiation, the appellant had established a claim for wasted expenditure which, subject to separate arguments about the exclusion clause and the contractual cap, the judge valued at £122m
c) However, that claim for wasted expenditure was excluded in its entirety by operation of an exclusion clause in the contract
d) The appellant was entitled to recover damages of £15.8m in respect of additional costs and losses as a result of the respondent’s other breaches of contract
e) The respondent was entitled to set-off against that figure the sum of £2.9m referred to above
f) The appellant was therefore entitled to recover damages in the net sum of £12.9m together with interest
The respondent appealed on the proper construction of the exclusion clause. As the judgment stated “whilst that may sound a little unexciting, the parties are agreed that at least £80m turns on the construction of that one clause of the contract.”
The exclusion clause provided:
“……..neither party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory or otherwise) which are indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data (save as set out in clause 24.4(d)), goodwill , reputation (in all cases whether direct or indirect) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party".
The losses at issue included items of expenditure incurred in the expectation of a much-improved IT system which "would produce substantial savings, increased revenues and increased profits". However, due to the repudiation and the IT system never being delivered, the costs incurred were wasted.
The Court of Appeal
The Court of Appeal concluded that the TCC had been wrong to construe the exclusion clause as precluding the appellant from recovering its claims for wasted expenditure following a repudiation of the contract. Looking at the natural and ordinary meaning of the words, the court found that claims for wasted expenditure were not included in “loss of profit, revenue or savings”. The court considered that the objective meaning of the clause, as understood by a reasonable person in the position of these parties, was that the clause did not exclude a claim for expenditure incurred, but wasted because of the other party's repudiatory breach.
In respect of the proper approach to exclusion clauses, it was held that clear language is necessary to exclude such a valuable right. In particular, it was found that “The more valuable the right, the clearer the language of any exclusion clause will need to be; the more extreme the consequences, the more stringent the court must be before construing the clause in a way which allows the contract-breaker to avoid liability for what may be his catastrophic non-performance.”
It was also found that there are a number of good reasons for distinguishing between loss of profits, revenue or savings, on the one hand, and wasted expenditure, on the other. Claims for loss of profit, revenue and/or savings can be open ended and are types of potential loss, typically classed as consequential losses and excluded. Wasted expenditure on the other hand is easy to ascertain with invoices, contracts and receipts. Finally, it was found that the clause did not exclude all the types of loss that may result from the loss of the bargain, and it becomes simply a question of identifying those which were excluded (loss of profit, revenue or savings), and those which were not (most obviously, claims for re-procurement and wasted expenditure).
Accordingly, the Court of Appeal overturned the High Court’s decision and found that recovery for damages for wasted expenditure was not excluded by the clause.
The case reminds us that if losses are to be excluded from a contract, this needs to be drafted in clear, unambiguous wording. This is an important decision in the context of exclusions and limitations of liability and will have significant ramifications. Parties are well advised to review their standard terms of contracts to ensure that they do not fall foul of this decision.