In its hotly anticipated judgment in Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited, the Court of Appeal of England and Wales has reaffirmed that the courts should apply the conventional rules of contractual interpretation to exclusion clauses: if parties intend to exclude a particular type of loss, they should use clear and unambiguous language to do so.
The contract was for the provision by IBM United Kingdom Limited (‘IBM’) of a new IT system for CIS General Insurance Limited’s (‘CISGIL’) insurance business. Delivery of the system was delayed and CISGIL refused to pay an interim invoice. When IBM purported to terminate the contract for non-payment, CISGIL asserted that that was a repudiatory breach of the contract, which CISGIL accepted. CISGIL brought a claim for (among other things) wasted expenditure of £122 million.
The High Court’s decision
Mrs Justice O’Farrell held that IBM had repudiated the contract but, controversially, that wasted expenditure was excluded by an exclusion clause that notably made no reference to that type of loss: ‘…neither party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement … which are indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data … goodwill, reputation (in all cases whether direct or indirect) …’.
The judge focused her analysis on the bargain that the contract represented to CISGIL, concluding that it was the savings, revenues and profits that would have been achieved had the IT solution been successfully implemented. A conventional claim for damages for the loss of such a bargain would be quantified on the basis of those lost savings, revenues, and profits and any wasted expenditure would be captured within that claim. She reasoned that while CISGIL was entitled to frame its claim as one for wasted expenditure, that claim simply represented a different method of quantifying the loss of the bargain. Accordingly, as the exclusion clause excluded that loss of bargain by excluding loss of profit, revenue and savings, it also excluded wasted expenditure.
The Court of Appeal’s decision
The Court of Appeal allowed the inevitable appeal for the following reasons:
- The natural and ordinary meaning of the words. Emphasis on the language used by the parties is paramount to the proper construction of a contract.The fundamental difficulty that IBM never addressed was that the words ‘wasted expenditure’ did not appear in the exclusion clause and, on the natural and ordinary meaning of the words, were not included in ‘loss of profit, revenue [or] savings’.
- The proper approach to exclusion clauses. It is well-established that the more valuable the right, the clearer the language of any exclusion clause will need to be; the more extreme the consequences, the more stringent the court must be before construing the clause in a way which allows the contract-breaker to avoid liability for what may be its catastrophic non-performance. In this case, there were no relevant exclusionary words, let alone clear and obvious ones.
- Wasted expenditure is a different type of loss to loss of profits, revenues or savings. It was logical for the parties to exclude profit, revenue and savings but not exclude wasted expenditure. Loss of profit, revenue and savings are of a similar kind: they are often considered to be types of consequential loss, difficult to estimate in advance and can be notoriously open-ended. For these reasons they are routinely excluded. Wasted expenditure, in contrast, is none of these things.
- The loss of the bargain analysis was wrong. The bargain was the new IT system, not the profit, revenue and savings that may arise from it. The purpose of the exclusion clause was to exclude some of the losses flowing from the loss of that bargain (namely, profits, revenues and savings) but not others (namely, wasted expenditure).
- A claim for wasted expenditure is not an alternative method of claiming lost profits, revenues or savings. It was a mistake to conflate lost profit, revenue and savings with wasted expenditure. While the juridical basis for recovering wasted expenditure involves the rebuttable presumption that such expenditure would be recovered out of profits or revenue or savings, that does not make them the same claim in different forms.
This judgment is a welcome return to the usual rules for those drafting exclusion clauses. The takeaway is simple: if contracting parties use clear language to describe the type of losses they are seeking to exclude, they can be confident that those types of losses and no others will be excluded.
  EWCA Civ 440