Developments in contract: Wasted expenditure does not equal profits

Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited

The Court of Appeal has overturned a decision of the High Court, holding that a claim for wasted expenditure is not precluded by an exclusion clause that excludes liability for loss of profit, revenue, or savings.

General Principles

General principles permit the recovery of damages to place the claimant in the same position as if the contract had been performed. The value of the damages is primarily calculated on the expectation basis, ie the benefit that the claimant expected to achieve as a result of the contract, often sought in a claim for lost profits or revenue. In the alternative, where the expectation basis is uncertain, a claimant may elect to claim damages on a reliance basis, ie the wasted expenditure incurred in reliance on the defendant’s promise. The reliance basis is useful for claims brought either where the expectation basis is too uncertain to quantify, or more usefully where an exclusion clause precludes a claimant from bringing a claim for profits or revenue under the expectation basis.

Where a contract contains an exclusion clause purporting to exclude claims for profits, revenue, or savings, defendants have attempted to resist the reliance basis, arguing that the actual loss should be properly characterised as the profit, revenue or savings through which that expenditure would later have been recouped, but for the breach.

The Soteria Case

The High Court accepted such an argument in the Soteria case.

The underlying dispute concerned the provision of an IT system by the respondent (IBM) to the appellant (CISGIL), which was delayed and not finally delivered. At first instance, the High Court held that IBM had wrongfully repudiated the contract and that CISGIL had established a claim for wasted expenditure, but that the exclusion clause precluded recovery. CISGIL appealed on the construction of the exclusion clause.

The exclusion clause precluded recovery of any losses “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)”.¹

The items of wasted expenditure claimed included sums paid to IBM and other third-party suppliers incurred in the expectation that IBM would perform its contractual obligations. CISGIL also claimed financing costs.

The High Court, in deciding that wasted expenditure fell within the remit of profits, revenue or savings, characterised the contractual benefit lost by CISGIL as the savings, revenues and profits that CISGIL would have achieved had the IT solution been successfully implemented. The High Court concluded that in framing its claim as one for wasted expenditure, CISGIL was simply representing a different method of quantifying the loss of the bargain.²

On appeal, Lord Justice Coulson started with these general principles: that the clause should be construed in accordance with what a reasonable person having the background knowledge available to the parties would have understood it to mean, but where there are competing constructions, the court is entitled to prefer the construction that is consistent with business common sense. This was balanced against the need to consider that clear express words must be used to properly exclude remedies which would ordinarily arise by operation of law.

Coulson LJ contrasted the exclusion clause in the case of Kudos Catering (UK) v Manchester Central Convention Complex Ltd, which expressly excluded claims for wasted expenditure, with the exclusion clause in Soteria, which the respondents alleged contained an implied exclusion of claims for wasted expenditure. Coulson LJ held that the objective meaning of the instant exclusion clause, as understood by the reasonable person in the position of the parties, was that it did not exclude a claim for wasted expenditure, as wasted expenditure was not expressly included or referred to in the clause. The specificity of the clause in other matters contributed to this construction.

Moreover, the judge elaborated that the recovery of monies paid to IBM by CISGIL would ordinarily be recoverable as damages and indeed would be a likely claim in the event of repudiation by IBM. For such a likely claim to be excluded, he explained that the exclusion must be clear and obvious. The judge described IBM’s “convoluted argument” as confirming the “absence of the necessary clarity”.³

The Court of Appeal further held that the construction of the clause cannot turn on whether the anticipated benefit of the contract was pecuniary or non-pecuniary, as this would lead to the unusual position where the same words of a contract could be construed differently depending on the parties and whether they were a profit-making company or not.

What this means

This is an important reminder that the court will take a strict approach to the construction of exclusion clauses, requiring express rather than implied provisions to deprive a party of a remedy that would otherwise arise as of right.

Whilst it is common to see exclusion of liability for profits, revenue and savings, parties should give careful thought to the position on the costs that could be wasted in performance of a contract that is subsequently repudiated. In some circumstances it may be reasonable to expressly exclude such losses whilst in other circumstances it may be inappropriate to do so.

¹ Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited at paragraph [24].
² CIS General Insurance Limited v IBM United Kingdom Limited [2021] EWHC 347 (TCC) at paragraphs [682] to [683].
³ Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited at paragraph [61].