Contractual Damages And Exclusion Clauses: You Get What You Bargained For (CIS V IBM)

• Published date: 23 June 2021
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution
• Law Firm: Stephenson Harwood
• Author: Mr Ben Sigler and Harriet Campbell

Where a party terminates a contract for repudiatory breach, a damages award should place it in the position it would have been in had the contract been properly performed. Assuming the contract was a profitable one, there are two alternative measures of loss which might be sought: 1) "expectation loss" (the financial benefit which the non-defaulting party expected from the contract, e.g. increased profits or reduced expenditure); or 2) "reliance loss" (the wasted costs incurred in the expectation of the financial benefit, e.g. payments to the counterparty, third parties and internal costs).

In CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] EWHC 347 (TCC), O'Farrell J analysed the authorities on the two measures of contractual loss. She held that, although the two methods for quantifying loss of bargain are different, there is no change in the underlying characteristics of the losses for which compensation is sought. Here, this meant that a claim for reliance losses (or wasted expenditure) fell within an exclusion of liability clause which excluded claims for "loss of profit, revenue, savings... (in all cases whether direct or indirect)..." (the "Exclusion Clause"). The effect of this finding was to reduce the damages awarded from '128 million to '15.9 million. This judgment provides a stark reminder of the need to carefully consider the scope and application of exclusion clauses when contracting.

Background

Following a reorganisation within the Co-operative Group Limited (the "Co-op Group"), in 2015, CIS General Insurance Limited ("CIS") (the former insurance business of the Co-op Group) contracted with IBM for a new IT system (the "System"). The cost of supply and implementation of the System was over '50 million and the cost of the management services to be provided by IBM over a 10-year period was estimated at '125.6 million. The implementation did not go well.

In 2017, CIS, disputed an invoice from IBM, which O'Farrell J determined it had done validly. Thereafter, IBM purported to terminate the contract by notice following CIS' failure to pay the invoice, without adhering to the contractual escalation process. O'Farrell J accepted CIS' claim that in wrongfully purporting to terminate the contract, IBM was in repudiatory breach, which breach CIS accepted¹.

Conclusions on contractual exclusion clauses

CIS sought damages on the "reliance loss" basis rather than on the basis of "expectation loss" (i.e. the additional costs of obtaining the...