One step beyond: loss of profits and wasted expenditure

In the opening paragraph of his judgment in Soteria Insurance Ltd (‘CIS’) v IBM United Kingdom Ltd (‘IBM’) [2022], Coulson LJ remarked that at least £80m turned on the construction of one clause. The Court of Appeal had to decide whether that clause excluded IBM’s liability for wasted expenditure.

Background

CIS entered a contract with IBM to implement a new IT system. The project did not go to plan. IBM purported to terminate the contract following CIS’ failure to pay an invoice. CIS argued that termination was wrongful and treated it as a repudiatory breach of contract. CIS sought damages for wrongful termination – including some £132m in respect of wasted expenditure.

At first instance, O’Farrell J found the contract had been wrongfully terminated but that an exclusion clause excluded the claim for wasted expenditure in its entirety.

Clause 23.3 stated: “…neither party shall be liable to the other … for loss of profit, revenue and savings…”

CIS appealed. There were a number of issues considered but this article focuses solely on the exclusion clause.

The Court of Appeal’s decision

Coulson LJ highlighted five reasons why O’Farrell J’s construction of clause 23.3 was wrong.

1. The judge had not looked at the natural and ordinary meaning of the clause. Claims for “wasted expenditure” were not excluded because “those words are simply not there.” The objective meaning of “loss of profit, revenue [or] savings” did not include “wasted expenditure”. The clause went into detail about what losses were excluded, but did not mention “wasted expenditure” which he found to be “telling”.
2. He looked at the proper approach to exclusion clauses and stressed that the more valuable the right being excluded, the clearer the language of any exclusion clause needs to be. The parties could not be taken to have excluded wasted expenditure, which was an obvious and common type of damages, when they had not made any reference to it in the clause.
3. Loss of profits, revenues and savings can be distinguished from wasted expenditure. The former are difficult to estimate in advance and difficult to prove. There is therefore a reason why those claims are routinely excluded. Wasted expenditure is easy to ascertain. The claimant will have incurred expenditure for which they have invoices etc. Coulson LJ found it made commercial sense to exclude uncertain types of loss but not easily ascertainable loss. As he put it: “The claims that would have compensated [CIS] from being better off as a result of the new IT system were excluded; the claims to compensate them for being worse off …were not.”
4. Next Coulson LJ considered the loss of bargain. IBM suggested the sole loss of bargain was savings, revenues and profit that would have been achieved from successful implementation. Coulson LJ found what was lost was a new improved IT system. The contract excluded positive interests but did not exclude negative interests, namely “expenses incurred and losses suffered in reliance on the contract”.
5. Lastly, Coulson LJ considered an argument which had found favour with the judge. The argument was that a claim for damages for repudiatory breach would usually be for savings/revenue/profits had the contract been performed. Wasted expenditure would be presumed to be recouped from the profit etc (although that was a rebuttable presumption). As clause 23.3 excluded loss of profit etc, it also excluded any claim for wasted expenditure. Coulson J stated the characterisation of wasted expenditure as a method of calculating loss of profits etc was an “unjustified leap in reasoning”. In the Royal Devon v Atos case O’Farrell J had found a clause similar to clause 23.3 did not exclude liability because the claimant health authority had lost a non-pecuniary benefit. Coulson LJ disagreed that the position should be any different when a pecuniary benefit had been lost.

Coulson LJ concluded the judge had been wrong on the construction issue and recovery of damages for wasted expenditure was not excluded by clause 23.3.

Exclusion clauses of this nature are commonplace in many IT projects. For those wanting to exclude liability, the decision highlights the more valuable the right being excluded is, the clearer the language of the clause needs to be.

Rowan Turrall is partner and head of dispute resolution at Boyes Turner: boyesturner.com