English Court of Appeal overturns controversial decision on wasted expenditure

Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd [2022] EWCA Civ 440

Background

Soteria Insurance Limited (formerly CIS General Insurance Limited) (“CIS”) engaged IBM United Kingdom Limited (“IBM”) to supply a new IT system for CIS' insurance business and to manage it for 10 years, under a Master Services Agreement. However, IBM experienced difficulties with its sub-contractor, resulting in milestone dates being missed and CIS refusing to pay a milestone invoice. IBM then purported to terminate the contract based on CIS’ failure to pay.

CIS disputed IBM's right to terminate, treating IBM's termination as a repudiatory breach and purporting to accept the repudiation, bringing the contract to an end. CIS' primary claim against IBM was for £128 million in respect of wasted expenditure (and other losses) on the project to date. The costs claimed included £34.1 million paid to IBM, large sums paid to third party suppliers, management/secondee fees, and a significant £42 million claim for subordinated loan interest. The High Court Decision

Mrs Justice O’Farrell in the Technology and Construction Court found IBM's purported termination was a repudiatory breach. However, CIS was not entitled to recover its wasted expenditure as it was excluded by the contractual exclusion of “loss of profit, revenue [or] savings”. Mrs Justice O’Farrell’s reasoning was that wasted expenditure should be treated as a form of expectation loss, subject to the overriding compensatory principle.  

The Court of Appeal Decision

The Court of Appeal provided five separate reasons for disagreeing with the TCC decision.

1. Natural and Ordinary Meaning of the Words

   The disputed exclusion clause precluded recovery of “loss of profit, revenue [or] savings” as well as “data…goodwill [or] reputation” and indirect or consequential losses. On a natural and ordinary reading of the clause, wasted expenditure was not expressly referred to, nor did the language used cover wasted expenditure.

   The fact that the exclusion clause specifically excluded a number of particular types of losses supported the conclusion that the parties had consciously elected not to refer to wasted expenditure.

2. The Proper Approach to Exclusion Clauses
   

   When interpreting exclusion clauses, particular rules of construction come in to play: specifically, very clear language is needed to show that a party has intentionally given up its right to a particular form of compensation. The more valuable the right, and the more extreme the consequences of non-performance, the higher…