Do Exclusion Clauses Extend to Wasted Expenditure?
Exclusion clauses are standard practice in commercial contracts, but the extent to which they operate depends much on the wording. This is why they can cause uncertainty and potential disputes. Sometimes, the court will allow an exclusion or limitation clause to be enforced in part only.
In a recent case1, the Court of Appeal considered an exclusion clause carefully, where more than £80m was at stake. At issue was whether or not the clause excluded wasted expenditure as distinct from loss of profit.
Properly and reasonably drafted, exclusion clauses play a vital role in limiting or excluding the parties’ rights in specific circumstances.
What happened in this case?
A tech company contracted to provide IBM with a new IT system over a 10-year period, but problems arose with delays - and implementation which never materialised. The contract included an apparently carefully drafted exclusion clause that expressly excluded, for example, damages for loss of profit, revenue and savings (including anticipated savings).
A dispute arose in relation to an unpaid IBM invoice for £2.9m and the contract was eventually terminated by IBM. The parties blamed each other for the termination.
The claimant sued the tech giant for damages – principally £132m of wasted expenditure - on the basis that IBM had wrongfully repudiated the contract; and IBM counterclaimed for the unpaid invoice. The CA overturned the High Court’s decision which had found in favour of the claimant.
The issue on appeal was the proper construction of the exclusion clause, particularly whether the exclusion clause included liability for wasted expenditure.
The CA carefully went through the long-standing principles applicable to the construction of contract terms, ruling that the natural and ordinary meaning of the words used in the clause did not exclude wasted expenditure.
Importantly, it said 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 his catastrophic non-performance”.
Here, there was nothing in the exclusion clause to suggest that costs incurred, should the tech project be completed satisfactorily, would somehow be irrecoverable if IBM repudiated the contract. Further, it made commercial sense that wasted expenditure was not excluded – it “struck a fair commercial balance between the parties”.
Key takeaway
As well as the important reminder of the correct rules of contractual construction and interpretation, there are two key lessons to be drawn from this ruling:
Exclusion and limitation clauses must clearly set out every head of loss it is intended to cover, particularly if a particular item is ‘valuable’ to one party.
There are different types of losses. The CA pointed out that claims for wasted expenditure are “an entirely different animal” to consequential losses.
As Coulson LJ observed: “From a commercial perspective, it was unsurprising that speculative and uncertain types of loss were excluded – but wasted expenditure (which is an easily-ascertainable type of loss) was not.”
1Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited [2022] EWCA Civ 440.
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