EXCLUSION CLAUSES AND WASTED EXPENDITURE
In Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440, the England and Wales Court of Appeal (Civil Division) dealt with whether an exclusion clause excluded liability for wasted expenditure arising out of wrongful repudiation in addition to excluding liability for loss of profit/savings/revenue.
Brief facts. In brief, the respondent (“IBM”) was contracted to provide an IT system to the appellant (“CISGIL”). Ultimately, IBM did not deliver the IT system and was held responsible for critical delays in the delivery of the system. The contract was subsequently terminated. ([2] Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA CIv 440 (“Soteria v IBM”)).
CIGSIL commenced proceedings against IBM and it was found that IBM had wrongfully repudiated the contract. However, CIGSIL’s claim for wasted expenditure, amounting to £122 million, was held to be excluded in its entirety by operation of clause 23.3 of the contract. ([3] – [4] Soteria v IBM).
CIGSIL appealed on the issue of the proper construction of clause 23.3. While there was an issue over what would be the proper sum due to CIGSIL if their appeal succeeded (among others), for the purposes of this brief blog, we will only focus on the interpretation of clause 23.3. ([5] Soteria v IBM).
Clause 23.3. We set out the clause 23.3, the exclusion clause at the heart of the dispute, below ([24] Soteria v IBM):
“Subject to clause 23.2 and 23.4, 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 word “Losses” has been defined as “All losses, liabilities, damages, costs and expenses including reasonable legal fees on a solicitors/client basis and disbursements and reasonable costs of investigation, litigation settlement, judgment, interest.” ([25] Soteria v IBM).
And clause 23.4 provides as follows ([26] Soteria v IBM):
“23.4 Notwithstanding clause 23.3, the Customer shall if proven and without prejudice to its other rights and remedies, be entitled to recover as direct loss:
(a) incremental cost of implementing and performing workarounds;
(b) the reasonable cost of
(i) running a procurement exercise;
(ii) the reasonable, incremental costs of procuring substantially similar replacement or alternatives services or systems in substitution for the Services for the remainder of the committed Term of the Agreement;
in both cases on termination by Customer of the Agreement under clauses 26.2(a) and 26.2(b);
(c) the cost of replacing tangible goods tangible or materials lost, stolen or damaged (or the value of those goods or materials where they are not replaceable) caused by a failure of the Supplier and/or its Contractors to provide the Services in accordance with Agreement; or
(d) the costs of restoring Customer Data and/or any Software lost, damaged or corrupted by the Supplier, and in bozth cases by reloading from the last back up required to be taken by the Supplier.”
Readers may find both the exclusion clause and the scheme set above to be (at least on first blush) either familiar or not unusual. Yet at least £80 million turned on the interpretation of clause 23.3 ([1] Soteria v IBM).
Wasted expenditure. Before proceeding further, it is also relevant to bear in mind that CIGSIL’s claims for wasted expenditure were broadly consisted of various items of expenditure that were incurred by CIGSIL “… in the expectation that IBM would perform their contractual obligations and provide them with a much-improved IT system” as well as financing costs ([27] Soteria v IBM).
“Loss of profit, revenue, savings”. Coulson LJ (with whom Phillips LJ and Zacaroli J agreed) first held that the natural and ordinary meaning of the phrase “loss of profit, revenue, savings” in clause 23.3 does not cover or include “wasted expenditure”: while clause 23.3 contained a “good deal of particularity as to what types of loss were being excluded from the otherwise wide definition in Schedule 1”, it was significant that the parties did not exclude claims for wasted expenditure ([56] – [59] Soteria v IBM).
Proper approach to exclusion clauses. Coulson LJ also held that, as set out in the case of Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] AC 689 and Stocznia Gdynia SA v Gearbulk Holdings Limited [2010] QB 27, parties should not be taken to have intended to abandon valuable rights arising by operation of law and clear words must be used in order to rebut this presumption. Coulson LJ then held that “there was nothing” in clause 23.3 which suggested that the costs incurred by CIGISIL in expectation that the contract would be completed satisfactory would be irrecoverable if IBM had repudiated the contract. ([60] – [64] Soteria v IBM).
Different types of loss. In addition, Coulson LJ held there are “a number of good reasons” for finding that loss of profits, revenue or savings are different from wasted expenditure. Among others, loss of profits, revenue or savings are often considered to be “types of consequential loss” which are “difficult for the potential contract-breaker to estimate in advance”, while claims for wasted expenditure are different as “if the victim of a breach of contract has spent money in anticipation that the contract would be performed, then his or her loss is easy to ascertain” and are hence usually not regarded as claims for consequential loss. ([65] – [69] Soteria v IBM).
Coulson LJ therefore stated that it would be “unsurprising from a commercial perspective” that the parties would have excluded speculative and uncertain types of losses by clause 23.3 while not excluding wasted expenditure. ([70] Soteria v IBM).
Coulson LJ also observed that a victim cannot claim for loss of profits and wasted expenditure ([71] Soteria v IBM), and if IBM had wanted to exclude wasted expenditure, they could have done so ([72] Soteria v IBM).
Loss of bargain. Coulson LJ further held that “… what clause 23.3 was seeking to do was to exclude some of the types of loss which flow from an underlying loss of the bargain, but not to exclude other types of loss which arise from that same lost bargain” ([74] Soteria v IBM), and disagreed with IBM that the loss of the bargain was comprised solely in the savings, revenues and profits that would have been achieved by CIGSIL had the contract been successfully performed ([75] Soteria v IBM).
In this regard, clause 23.4 was significant. Coulson LJ found that the “paradigm financial loss resulting from the loss of bargain would, in an ordinary case, be the cost of re-procurement”. However, clause 23.4 provided that costs of re-procurement would only be recoverable in particular instances, which was not what happened here. If so, Coulson LJ stated that ([78] Soteria v IBM):
If the costs of re-procurement are an item of wasted expenditure, then they would be excluded based on IBM’s interpretation of clause 23.3, which “would be an extraordinary result” ([79] Soteria v IBM).
But if the costs of re-procurement are not excluded by clause 23.3, then it would mean that clause 23.3 does not exclude all claims for loss of bargain ([80] Soteria v IBM).
Wasted expenditure not a method of calculating loss of profits, revenue and savings. Lastly, Coulson LJ also held that “[w]hilst lost profits (or revenue or savings) is one method of calculating damages for the loss of the bargain, a claim for wasted expenditure is simply a different method of calculating such damages. That does not make wasted expenditure a method of assessing or claiming lost profits (or revenue or savings)” ([84] Soteria v IBM), as these are different types of claims ([85] Soteria v IBM).
Conclusion. Soteria v IBM is an important decision on exclusion clauses. It makes clear that in general, exclusion clauses are interpreted strictly and that parties would not be taken to have abandoned valuable rights lightly. It also makes clear that an exclusion for loss of profits, revenue and savings would not generally be taken to exclude wasted expenditure (though, of course, it is subject to the contract in question).
As a rule of thumb, when you draft an exclusion clause, it is important to consider carefully what types of losses are excluded, and if there are any types of losses which have not been excluded.
If you want to exclude liability for losses for your own benefit, it would do well for you to be as explicit as possible. For instance, you should not assume that, e.g., just because you are recycling a precedent, the correct types of losses have been excluded from your contract. This should involve considering the nature of the transaction in question and asking what are the potential losses that may result from the transaction.
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