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

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 contract. However, the judge also found that the claimant's claim for wasted expenditure was entirely excluded by the effect of a contractual exclusion clause. As a result, the claimant was awarded approximately £15.89 million by way of damages, which was further subject to the defendant's set-off of the amount of the unpaid invoice.

On appeal, the claimant challenged the judge's construction of the exclusion clause. If the judge was wrong on the construction of the exclusion clause then a further issue arose as to the operation of the contractual liability caps. The defendant also brought a cross-appeal. However, this blog post focuses on the construction of the exclusion clause.

Decision

The Court of Appeal overturned the judge's decision regarding the construction of the exclusion clause, finding that it did not exclude the claim for wasted expenditure as discussed further below. Coulson LJ gave the lead judgment, with which Phillips LJ and Zacaroli J agreed.

The court found in favour of the defendant in relation to the operation of the contractual liability caps, with the result that the claimant was entitled to recover approximately £80.5 million.

The exclusion clause

The clause in question read as follows:

"Losses" was defined as:

High Court's construction of the exclusion clause

The trial judge started by considering the nature of the contractual benefit that was lost by the claimant as a result of the repudiation and identified it as comprising the savings, revenues and profits that the claimant would have achieved if the IT system had in fact been delivered. Although a claim for damages in such circumstances would typically be quantified based on those lost savings, revenues and profits, the claimant was entitled to characterise its claim as one for wasted expenditure - relying on the rebuttable presumption that the value of the contractual benefit lost must be at least equal to the amount the claimant was prepared to spend in order to obtain it. However, that was simply an alternative method of quantifying the loss and did not change the nature of the loss for which compensation was sought. The judge therefore held that the claim for wasted expenditure was caught by the exclusion of claims for "loss of profit, revenue, savings" in the contract.

In so concluding, the judge sought to distinguish her own decision in Royal Devon & Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWHC 2196 (TCC). In that case, the judge found that the claimant was unable to recover lost profits, revenue or savings because these heads of loss were expressly excluded by the contract. However, she concluded that the claimant was entitled to recover wasted expenditure, which was not expressly excluded. The claimant was entitled to damages to compensate for the loss of a functioning IT system, which was a contractual benefit of which it had been deprived by the breach. The rebuttable presumption that the value of that loss was at least equal to the claimant's expenditure did not transform the claim into a claim for loss of any additional benefits flowing from the use of the system.

In the present case, the judge sought to distinguish her decision in Royal Devon on the basis that, in that case, the contractual benefit lost as a result of the breach was non-pecuniary in nature (as the Claimant did not expect to make a financial gain from the use of the IT system). In such cases, she said, it was the non-pecuniary benefit that was assigned a notional value equivalent to at least the amount of expenditure incurred in anticipation of it.

Court of Appeal decision

The Court of Appeal concluded that the trial judge's conclusion was incorrect for five reasons:

(i) The ordinary and natural meaning

The court began by considering the ordinary and natural meaning of the words used in the exclusion clause. The question was whether, as a matter of language, "loss of profit, revenue, savings" included "wasted expenditure".

The court held that a reasonable person in the position of the contracting parties would understand the exclusion clause to mean that it did not exclude liability for a claim for expenditure that had been incurred but wasted because of the other party's repudiatory breach. Such claims were neither expressly referred to in the exclusion clause nor, in the natural and ordinary meaning of the words, included in "loss of profit, revenue [or] savings".

(ii) The proper approach to exclusion clauses

The court considered that its conclusion on the basis of a textual analysis was confirmed by the principles that apply to the construction of exclusion clauses, in particular:

• The more valuable the right the clause seeks to exclude, the clearer the language of any exclusion clause will need to be: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 and Stocznia Gdynia SA v Gearbulk Holdings Ltd [2010] QB 27.
• The more extreme the consequences of the exclusion clause, the more stringent the court must be before construing the clause in a way that allows the party in breach to avoid such liability: Kudos Catering (UK) v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38.

The exclusion clause in question did not meet either of these tests. It contained no reference to wasted expenditure at all and did not begin to suggest that such costs were to be excluded.

(iii) Different types of loss

The court considered that losses of profit, revenue and savings were a fundamentally different type of loss to wasted expenditure. The former involve a consideration of a variety of counterfactuals, as to what would have happened if the contract had been performed. They were "notoriously open-ended" and could cause problems of "speculation and ascertainment", and were therefore routinely excluded as consequential loss. Wasted expenditure, in contrast, was easily and precisely ascertainable, being a "pure accounting exercise" - and, perhaps for that reason, was not usually regarded as consequential loss.

It made commercial sense that, while speculative and uncertain losses were excluded by the contract, wasted expenditure - an easily ascertainable loss - was not. Further, if the defendant had wanted to exclude wasted expenditure it could easily have done so by including an express reference to wasted expenditure in the clause.

(iv) Loss of the bargain

The court considered which types of losses resulting from the underlying loss of bargain were excluded by the clause. It considered that, in the circumstances of this case, the loss of the bargain was principally represented by the loss of the anticipated new IT system itself. It was not limited to lost profits, revenue and savings. The exclusion clause therefore excluded some, but not all, of the losses that would arise from a loss of bargain.

If, on the contrary, the clause excluded the entirety of the loss of bargain then it was indistinguishable from Kudos, where the court found that the clause did not support such a draconian result as express words were not used.

(v) The correct characterisation of wasted expenditure and Royal Devon

The court found that the trial judge had erred by characterising "wasted expenditure" as just another method for calculating "lost profits, revenues or savings". As noted above, in claims for wasted expenditure there is a rebuttable presumption that, if the contract had been performed, the expenditure would have been recouped out of profits, savings or revenue. However, that does not mean that a claim for expenditure incurred in the expectation that the contract will be performed is the same as a claim for lost profits, revenue or savings.

The court was not persuaded that this case should be distinguished from Royal Devon. The answer to whether the exclusion of "loss of profits, revenue [or] savings" had the effect of also excluding wasted expenditure could not turn on whether the anticipated benefit of the contract was primarily pecuniary or non-pecuniary. Such an approach would lead to an extremely uncertain result: the meaning of the same words in the same contract would be completely different depending on whether the claimant was a for-profit undertaking.

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