The Court of Appeal recently held in the case of Soteria Insurance -v- IBM that an exclusion clause limiting liability for ‘loss of profit, revenue and savings’ did not exclude claims for wasted expenditure incurred in anticipation of a contract’s completion.

We summarise the case below, which related to a complex IT system implementation, and the key takeaway that if a business wants to exclude liability for wasted expenditure of the other party, then the contract needs to clearly set this out. This is a helpful clarification for the drafting of exclusion clauses.

Background

IBM agreed to provide Soteria, an insurance company, with a complex IT system. After a number of delays, Soteria refused to pay a key ‘milestone’ invoice and following this non-payment, IBM terminated the contract, refusing to deliver the system. Soteria instigated legal proceedings on the basis IBM had wrongfully refused to complete their contractual obligations, seeking damages for wasted expenditure incurred as a result of IBM’s refusal to deliver the new system alongside damages for breach of warranty and delay.

The High Court found IBM had wrongfully failed to fulfil its contractual obligations, but also concluded Soteria’s claim for wasted expenditure (totalling around £78m) incurred in anticipation of the contract’s conclusion, fell within the scope of an exclusion clause excluding liability for ‘indirect or consequential losses, or for loss of profit, revenue or savings’.

It was found that a ‘traditional’ claim for damages resulting from a party’s failure to complete its contractual obligations would be for the loss of savings, revenue or profits would have been achieved had the contract been performed, but a further claim for wasted expenditure was in fact a way of redefining those same losses. As a result, Soteria’s total recovery for its losses was capped at around £13m.

Appeal

The Court of Appeal upheld Soteria’s appeal, concluding the parties could not be taken to have excluded wasted expenditure in the absence of any express exclusion.

It was found that though the contract had defined ‘losses’ broadly and had set out explicitly the types of losses where liability would be excluded (namely, ‘loss of profit, revenue or savings’), the High Court had failed to engage with the exercise of ascertaining what losses were being excluded within the natural and ordinary meaning of those words. In carrying out this same exercise, the Court of Appeal found that as understood by a reasonable person, wasted expenditure would not fall within the natural and ordinary meaning of the words ‘loss of profit, revenue or savings’.

The judge concluded that wasted expenditure was a fundamentally different type of loss to loss of profits, revenue or savings – the former could be calculated precisely whereas a calculation of the latter losses required an element of speculation.

Learnings

Key takeaways from this judgment are:

  • parties should consider in detail any potential losses at the outset and determine whether they need to be specifically excluded;
  • wasted expenditure is a type of loss in its own right that might be applicable upon the termination of an IT contract;
  • any exclusion for wasted expenditure needs to be set out clearly and should be distinct from any exclusion clause relating to future loss of profit, revenue and savings.