Express words are required in exclusion clauses to exclude claims for wasted expenditure

In Soteria Insurance Ltd v IBM United Kingdom Limited [2022] EWCA Civ 440, the Court of Appeal held that an exclusion clause which excluded liability for consequential losses, or loss of profit, revenue or savings did not extend to a claim for wasted expenditure. The Court’s reasoning is explained below, but the key message is that to exclude claims for wasted expenditure, the best approach is to use appropriate express words in the exclusion clause.

Background

The dispute related to the delivery of a new IT system which was delayed. Following the claimant’s refusal to pay a “milestone” invoice, the defendant purported to terminate the contract. The claimant treated this purported termination as a repudiatory breach of contract and claimed £132 million in damages for wasted expenditure, being amounts paid in expectation of the delivery of the new IT system. The defendant counterclaimed for the sum due under the invoice. At trial, the judge found that the defendant had wrongfully repudiated the contract but the claimant’s claim for wasted expenditure was excluded by the contractual exclusion clause. The claimant appealed against the judge’s construction of the exclusion clause.

The clause provided that: “neither party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory or otherwise) 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) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party.”

"Losses" were defined as: "All losses, liabilities, damages, costs and expenses including reasonable legal fees on a solicitors/client basis and disbursements and reasonable costs of investigation, litigation settlement, judgment, interest.”

Decision – the construction of the exclusion clause

The Court of Appeal concluded that the exclusion clause did not apply to a claim for wasted expenditure for the following reasons.

1. The natural meaning of the words did not cover wasted expenditure, essentially because these words were not used in the clause.
2. The strict approach to construing exclusion clauses: “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 his catastrophic non-performance”.
3. Wasted expenditure was a different type of loss to loss of profits and the other categories mentioned in the clause: they all involved a speculative element based on evaluating a counterfactual, i.e., what would have happened if the contract had been performed. Wasted expenditure, in contrast, was easily and precisely ascertainable. It made commercial sense that while speculative losses were excluded, wasted expenditure was not.
4. The exclusion clause did not cover all aspects of ‘loss of the bargain’, but only some of them, so did not encompass wasted expenditure.
5. Although wasted expenditure is a different method of calculating loss that could otherwise be calculated by measuring lost profits, that does not make it a measure of lost profits. Contracts may have both pecuniary and non-pecuniary benefits, so an absence of pecuniary profit is not necessarily inconsistent with a claim for wasted expenditure.

Key Takeaways

This decision serves as a reminder of the strict approach to the construction of exclusion clauses and why it is essential for parties to use clear drafting. Specifically, if parties intend to exclude claims for wasted expenditure, they should use appropriate express words in any exclusion clause because the exclusion of consequential loss or profits will not cover such claims.

The Court’s reasoning might also apply to a claim for the cost of re-procurement following a breach of contract. Commercial parties should consider whether these costs should also be referred to expressly in any exclusion clause. However, it remains to be seen if increasingly lengthy and specific exclusion clauses will be commercially acceptable or whether the risk of claims for these types of losses will remain.