Exclusion of claims for wasted expenditure: Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440

Where a claimant claims damages as a result of the defendant’s repudiation of a contract, the claimant can choose to either claim its loss of profits, or its wasted expenditure (sometimes referred to as the “expectation” and “reliance” measures of compensatory damages for loss of the contractual bargain). As Lord Denning MR observed in Anglia Television Limited v Reed[1]:

• "It seems to me that a plaintiff in such a case as this has an election: he can either claim for loss of profits; or for his wasted expenditure. But he must elect between them. He cannot claim both. If he has not suffered any loss of profits- or if he cannot prove what his profits would have been- he can claim in the alternative the expenditure which has been thrown away, that is, wasted, by reason of the breach."

In Soteria Insurance Ltd v IBM United Kingdom Ltd, judgment in which was handed down on 4 April 2022, the Court of Appeal considered whether a claim for wasted expenditure was excluded by a term of the contract excluding liability for “loss of profits, revenue, savings”. The decision is interesting because it considers the proper characterisation of wasted expenditure claims and their relationship with claims for loss of profit.

The Facts

The claim related to an IT system to be provided by IBM to the appellant, known at the relevant time as CIS General Insurance Limited (CISGIL). The IT system was very late and, ultimately, not delivered at all. The judge found that IBM was responsible for the delays. CISGIL declined to pay an IBM invoice and IBM terminated the contract. Each side blamed the other for that termination.

CISGIL commenced proceedings against IBM alleging that IBM had wrongfully repudiated the contract. The claim was for, inter alia, damages in the sum of £132 million in respect of their wasted expenditure arising out of the alleged wrongful repudiation. IBM defended the claims on various grounds, including that they had been entitled to terminate the contract because of the non-payment of the invoice and that the claim for wasted expenditure was in any event excluded by operation of clause 23.3 of the contract. Clause 23.3 provided:

• "Subject to clause 23.2 and 23.4, 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 (save as set out in clause 24.4(d)), 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". (Emphasis added).

Schedule 1 to the MSA defined "Losses" 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 of Farrell J

The Judge found, amongst other things, that:

a) IBM had wrongfully repudiated the contract;

b) CISGIL had established a claim for wasted expenditure in consequence of that repudiation. Subject to separate arguments about the exclusion clause and the contractual cap, the judge valued that claim at £122 million;

c) However, that claim for wasted expenditure was excluded in its entirety by operation of clause 23.3 of the contract; and

f) CISGIL were entitled to recover damages in respect of additional costs and losses as a result of IBM's other breaches of contract in the net sum of £12,998,390 together with interest.

Decision of the Court of Appeal

The Court of Appeal found, for five separate reasons, that the Judge was wrong to construe clause 23.3 as precluding CISGIL from recovering its claims for wasted expenditure following IBM’s repudiation of the contract:

1. The natural and ordinary meaning of the words in clause 23.3 was not such as to exclude wasted expenditure. The types of loss excluded by clause 23.3 included “loss of profit, revenue, savings”, loss of goodwill, data and reputation, but there was no reference to “wasted expenditure”. The Court of Appeal held that “claims for "wasted expenditure" were not excluded by the terms of clause 23.3 because those words are simply not there”[2];
2. It is in principle possible for parties to exclude liability for wasted expenditure. However, the principles relating to the construction of exclusion clauses (referred to at paragraphs 34-37 of the Court of Appeal’s judgment) provide that the more valuable the right, the clearer the language of any exclusion clause will need to be. Therefore 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 Court of Appeal considered that there was nothing in clause 23.3 to suggest that costs which CISGIL inevitably incurred in the expectation that the IT system would be delivered would be irrecoverable if IBM repudiated the contract. For the recoverability of such a claim to be excluded, the exclusion would have been required to be clear and obvious. However, “here, there were no relevant exclusionary words, let alone clear and obvious ones”[3] and “[t]he parties cannot be taken to have excluded this obvious and common type of damages in circumstances where they have not made any reference in the relevant clause to wasted expenditure at all”[4];
3. There are good reasons for distinguishing between loss of profits, revenue or savings, on the one hand, and wasted expenditure, on the other. Claims for loss of profit, revenue and savings, often considered to be types of consequential loss, are all of a similar kind. They are claims which involve a consideration of a variety of counterfactuals and, because they depend on hypotheticals, they inevitably involve at least an element of speculation. By contrast: “[c]laims for wasted expenditure are an entirely different animal … if the victim of a breach of contract has spent money in anticipation that the contract would be performed, then his or her loss is easy to ascertain: there will be invoices, contracts, receipts and the like. This type of loss is the opposite of speculative: it is precisely ascertainable. It is a pure accounting exercise. Perhaps for that reason, such claims are not usually regarded as claims for consequential loss.”[5] The exclusion of loss of profits / revenue / savings, but not wasted expenditure, struck a fair commercial balance between the parties because “[t]he 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”[6];
4. The purpose of clause 23.3 was to exclude some types of loss which flowed from an underlying loss of the bargain, but not others. The loss of the bargain was not solely represented by lost profits, revenues and savings, but was principally represented by the loss of the IT system itself. IBM’s construction of clause 23.3 would in effect result in the exclusion of all claims for the loss of the bargain resulting from IBM’s repudiation; and
5. The Judge’s characterisation of wasted expenditure as a method of calculating lost profits, revenue or savings, such that wasted expenditure was to be taken as being impliedly included within lost profits, revenue or savings, was “an unjustified leap of reasoning”[7]. The Court of Appeal held that “Whilst lost profits (or revenue or savings) is one method of calculating damages for the loss of the bargain, a claim for wasted expenditure is simply a different method of calculating such damages. That does not make wasted expenditure a method of assessing or claiming lost profits (or revenue or savings)”[8].

The takeaways from this decision are that: (i) whilst it is possible to exclude claims for wasted expenditure for repudiation of a contract, the wording of such an exclusion clause will need to be clear and obvious; and (ii) wasted expenditure is a separate and distinct measure of damages from loss of profit, such that claims for wasted expenditure will not generally fall within the scope of a contractual clause excluding claims for loss of profits.

[1] [1972] 1 QB 60

[2] At [57]

[3] At [61]

[4] At [62]

[5] At [69]

[6] At [70]

[7] At [84]

[8] At [84]