IT Contracts: The £80 Million Pound Question: Wasted Expenditure

In Soteria Insurance Ltd -v- IBM United Kingdom Ltd [2022] EWCA Civ 440, the Court of Appeal found that the High Court was wrong to conclude that a contractual exclusion for loss of profit, revenue and savings prevented a claim by the customer against the IT supplier for wasted expenditure.

Background

The case chiefly concerned the proper construction of an exclusion clause. The judgment recorded that at least £80 million turned on the construction of that one clause of the contract.

The customer, CISGIL contracted with IBM for the supply of a new IT system for its insurance business. The contract comprised a Master Services Agreement (‘MSA’) and Statements of Work covering the provision of the new IT system and associated management services.

Serious delays occurred for which IBM was responsible. Projections suggested Release 1 would be delayed by 18 months and Release 2 by some 31 months.

A dispute arose in respect of an IBM invoice which was not paid, following which the contract was terminated. CISGIL commenced proceedings alleging that IBM had wrongfully repudiated the contract. Its principal claim was for damages for wasted expenditure arising. 

Wasted Expenditure

It was anticipated that the new IT solution ‘would produce substantial savings, increased revenues and increased profits’. However, because IBM wrongfully repudiated the contract, the new IT system was never delivered and the costs which CISGIL incurred in anticipation of it (including £34.1 million paid to IBM, other large sums paid to third party suppliers and financing costs) were wasted.

The Exclusion Clause

Clause 23.3 said (in relevant part):

‘… neither party shall be liable to the other or any third party … for loss of profit, revenue, savings (including anticipated savings) …’.

High Court Decision

The High Court found that IBM had wrongfully repudiated the contract and CISGIL had established a claim for wasted expenditure; but that claim was excluded in its entirety by clause 23.3.
It reasoned:

• the loss of the bargain comprised the savings, revenues and profits that would have been achieved had the IT solution been successfully implemented;
• a claim for damages in this type of case would usually be quantified based on those lost savings, revenues and profits;
• CISGIL was entitled to frame its claim as one for wasted expenditure, but that simply represented a different method of quantifying the loss of the bargain; it did not change the characteristics of the losses for which compensation was sought; and
• such a claim was excluded, whether quantified as the value of the lost profit, revenue and savings, or as wasted expenditure.

CISGIL appealed.
 

Court of Appeal’s Decision

The Court of Appeal reversed the decision on the following bases:

1. Natural and Ordinary Meaning of the Words: claims for ‘wasted expenditure’ were not excluded by the terms of clause 23.3 because those words were simply not there;
2. The Proper Approach to Exclusion Clauses: the more valuable the right, the clearer the language of any exclusion clause needs 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. The parties could not be taken to have excluded this obvious and common type of damages where they had not made any reference in the relevant clause to wasted expenditure at all;
3. Different Types of Loss: loss of profit, revenue, savings are all of a similar kind: they are often considered to be types of consequential loss. They depend on hypotheticals, inevitably involve at least an element of speculation and can be notoriously open-ended. These types of potential loss are routinely excluded. Claims for wasted expenditure are an entirely different animal. To be able to claim such wasted expenditure is a valuable right. Moreover, if the victim of a breach of contract has spent money in anticipation that the contract would be performed, then the loss is precisely ascertainable: it is a pure accounting exercise. Such claims are not usually regarded as claims for consequential loss. Here, the claims that would have compensated CISGIL for being better off as a result of the new IT system were excluded; the claims to compensate them for being worse off as a result of the non-provision of the IT system were not;
4. Loss of the Bargain: IBM suggested that the loss of the bargain was comprised solely in the savings, revenues and profit that would have been achieved had the IT solution been successfully implemented. But here, the primary thing which had been lost was the provision of the new, improved IT system. If clause 23.3 does not exclude all the types of loss that may result from the loss of the bargain, then it simply becomes a question of identifying those which were excluded (loss of profit, revenue or savings), and those which were not (most obviously, claims for re-procurement and wasted expenditure)

Comment

The case serves as a useful reminder to those who draft IT contracts. The court noted that a prudent drafter could have sought expressly to exclude wasted expenditure, and should not have been content to rely on a clause referring only to loss of profit/revenue/savings. It emphasised ‘it is not only possible, but it is not uncommon for claims for wasted expenditure to be the subject of an exclusion clause … [b]ut such claims were not excluded here’.

The case is also highly relevant in the current post-pandemic climate where in our experience many IT development projects have encountered delay. Both customers and suppliers may be considering whether to exercise termination rights under contract or at common law. 

The court in this case recognised that both parties became resigned to the abandonment of the project, retained legal teams and tried to manoeuvre themselves into a position where they could extricate themselves from the MSA with minimum damage. It observed that a high-risk strategy was adopted on both sides where a milestone payment of modest value in relation to the high value of the overall project was the vehicle used to bring the project to an end. This is a reminder, if one were needed, that termination of any IT contract carries risk and specialist disputes advice should be sought at an early stage.

For further advice on IT disputes please contact Paul Walsh.