The choice of words is of paramount importance in the drafting of contracts.
In the case of Soteria Insurance Limited v IBM United Kingdom (2022), the Court of Appeal clarified the court’s approach when interpreting exclusion clauses.
After a disputed invoice and IBM’s attempt to terminate the contract, Soteria accepted IBM’s repudiatory breach of contract and they sued for damages. Their primary claim was for wasted expenditure to the tune of £128 million, but in the alternative, they claimed £27.2 million in additional resource and third-party costs, which they said would not have been incurred but for IBM’s breach of contract.
On appeal, the Court held that the exclusion clause contained in the contract did not apply to a claim for wasted expenditure for the following reasons:
The natural and ordinary meaning of the words – The exclusion clause did not include the express term ‘wasted expenditure’.
Clear language is needed to exclude such obvious remedies – 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 non-performance.
Distinguishing different types of loss – The categories of loss that were expressly excluded (profit, revenue, savings) were all similar and involved a speculative element. It made commercial sense to exclude these types of loss. Conversely, wasted expenditure was easily and precisely ascertainable.
Loss of the bargain – The exclusion clause did not cover all aspects of ‘loss of the bargain’, but only some of them. The Court construed that other types of loss of bargain, such as wasted expenditure, were not excluded.
Recoupment – Wasted expenditure is a different type of claim to lost profits, revenue or savings.
The takeaway point from this case is that parties who are seeking to exclude liability for wasted expenditure resulting from a breach of contract should make express reference to that head of loss in the relevant clause.
Furthermore, to avoid any uncertainty as to the remit of the terminology being used, it is wise for the parties to also set out an agreed definition of ‘wasted expenditure’.
NOT ALL IS LOST EXPRESS TERMS NEEDED TO EXCLUDE CLAIMS FOR WASTED EXPENDITURE
In Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited [2022] EWCA Civ 440, the UK Court of Appeal has given valuable guidance on the construction of exclusion and liability clauses.
The decision makes clear that a claim for wasted expenditure is a distinct head of loss from a claim for loss of profits.
The practical impact is that parties who wish to exclude claims for wasted expenditure must do so in clear and express terms. Mere reliance on a general exclusion for loss of profits will not suffice.
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