English Court of Appeal overturns controversial decision on wasted expenditure

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

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 £128 million in respect of wasted expenditure (and other losses) on the project to date. The costs claimed included £34.1 million paid to IBM, large sums paid to third party suppliers, management/secondee fees, and a significant £42 million claim for subordinated loan interest. The High Court Decision

Mrs Justice O’Farrell in the Technology and Construction Court 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”. Mrs Justice O’Farrell’s reasoning was that wasted expenditure should be treated as a form of expectation loss, subject to the overriding compensatory principle.  

The Court of Appeal Decision

The Court of Appeal provided five separate reasons for disagreeing with the TCC decision.

1. Natural and Ordinary Meaning of the Words

   The disputed exclusion clause precluded recovery of “loss of profit, revenue [or] savings” as well as “data…goodwill [or] reputation” and indirect or consequential losses. On a natural and ordinary reading of the clause, wasted expenditure was not expressly referred to, nor did the language used cover wasted expenditure.

   The fact that the exclusion clause specifically excluded a number of particular types of losses supported the conclusion that the parties had consciously elected not to refer to wasted expenditure.

2. The Proper Approach to Exclusion Clauses
   

   When interpreting exclusion clauses, particular rules of construction come in to play: specifically, very clear language is needed to show that a party has intentionally given up its right to a particular form of compensation. The more valuable the right, and the more extreme the consequences of non-performance, the higher the threshold becomes. The exclusion clause in this case did not come “anywhere near” the required threshold to exclude wasted expenditure.

3. Different Types of Loss

   The Court of Appeal reinforced the position that wasted expenditure is a recognised and recoverable type of loss which is different from loss of profits and that a claimant could not recover both. There can be good reasons for distinguishing between wasted expenditure and loss of profits, revenue or savings. Loss of profit, revenue and savings (as well as data, goodwill and reputation) are types of loss that are often difficult to quantify and are “notoriously open-ended”. Wasted expenditure claims are an “entirely different animal” because they are more likely to be precisely ascertainable. In that light, by not excluding the recovery of wasted expenditure the exclusion clause in this case appeared to strike a fair commercial balance between the parties.

4. Loss of the 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.

Practice Points – drafting exclusion clauses

The clarity provided by the Court of Appeal is welcome to those drafting and interpreting exclusion clauses. 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.  Consideration should also be given to whether wasted expenditure should be expressly mentioned in any liability cap (if it is not completely excluded).

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