Court Of Appeal Finds Claim For Wasted Expenditure Not Excluded By Clause Excluding Consequential Losses

• Published date: 27 May 2022
• Subject Matter: Litigation, Mediation & Arbitration, Trials & Appeals & Compensation
• Law Firm: Herbert Smith Freehills
• Author: Ms Rachel Lidgate, Martin Hevey and Ramyaa Veerabathran

The Court of Appeal has found that a clause excluding consequential losses, or loss of profits, revenue or savings, did not preclude a claimant recovering damages for costs wasted in anticipation of receiving a new IT system which was not ultimately delivered: Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd [2022] EWCA Civ 440.

The decision identifies the differences between a claim for wasted expenditure and claims for loss of profits, revenue or savings, and suggests that references to the latter types of loss are unlikely to be read as encompassing the former. The practical message is that where a party wishes to exclude claims for wasted expenditure, it would be prudent to include express words to that effect but if it doesn't, an exclusion of loss or profits will not necessarily exclude wasted costs.

More generally, the decision acts as a reminder of two principles relating to the construction of exclusion clauses which the courts continue to apply - both of which point to the need for clear drafting. First, the courts will not lightly assume that parties intend to give up valuable rights unless that is made clear - and indeed the more valuable the right, the clearer the language will need to be. And second, the more extreme the consequences of the exclusion clause, in terms of excluding liability that would otherwise arise, the clearer the wording must be.

Background

The claimant company was in the business of underwriting and distributing general insurance products. In 2015 it contracted with the defendant for the supply of a new IT system and the subsequent management of that system for a period of ten years.

The delivery of the new IT system was delayed. A dispute arose and, ultimately, the defendant purported to exercise a contractual right of termination based on the claimant's refusal to pay an invoice for '2.9 million. The claimant treated this purported termination as a repudiatory breach of contract and brought a claim for damages in respect of wasted expenditure to the tune of '132 million, broadly consisting of sums paid to the defendant and to third party suppliers in the expectation of receiving a new IT system pursuant to the contract, as well as significant financing costs. The defendant contended that it had been entitled to terminate for the claimant's non-payment of the invoice and counterclaimed the invoiced sum.

The trial judge found that the defendant had wrongfully purported to terminate the...