English Court of Appeal overturns controversial decision on wasted expenditure
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The English Court of Appeal has corrected a controversial High Court decision and ruled that an exclusion clause for “loss of profit, revenue [or] savings” did not preclude the claimant from recovering wasted expenditure following the defendant’s repudiation of the contract.
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.
- 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.
- 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…
