Bristows SnippITs - The £80 million question: Wasted expenditure or loss of profits?

This post is part of the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.

Contract drafters can breathe a sigh of relief following the Court of Appeal’s recent decision in CISGIL v IBM ([2022] EWCA Civ 440). On the primary issue, the Court allowed CISGIL’s appeal and in the process provided much-needed clarity on excluding liability for wasted expenditure claims. Read our previous update here.

Background

• IBM contracted with CISGIL to implement then manage an insurance system. The project was severely delayed and the relationship subsequently broke down. Following a dispute over an unpaid invoice, IBM terminated the contract. CISGIL claimed for its wasted expenditure.
• At first instance, the High Court held that IBM had wrongfully terminated the contract and therefore CISGIL was allowed to bring its claim for damages arising from IBM’s repudiatory breach.
• However, the Judge held that the bulk of CISGIL’s damages claim (which was wasted expenditure of £123m) was excluded by a clause in the agreement excluding IBM’s liability for “loss of profit, revenue, savings (including anticipated savings)”. CISGIL’s claim for wasted expenditure was therefore excluded under the contract and its damages claim was reduced to just £12m in respect of other losses.

What happened?

• One of the key points of appeal was whether the High Court had been correct in ruling that the exclusion of liability for loss of profit, revenue and savings applied to CISGIL’s claim for wasted expenditure.
• The Court of Appeal rejected the High Court’s findings on this issue for the following reasons:

1. Taken at its natural and ordinary meaning, the exclusion clause did not cover not preclude claims for wasted expenditure – the words “wasted expenditure” were simply not used in the clause.
2. The more valuable the right being given up in an exclusion clause, the clearer the language would need to be. This threshold was not met.
3. There are good reasons for distinguishing between loss of profits (which can be speculative and difficult to quantify) and wasted expenditure (which involves a pure accounting exercise). In excluding liability for loss of profits but not wasted expenditure, the contract “struck a fair balance between the parties”.
4. CISGIL was entitled to recover its loss of bargain. The exclusion clause excluded some losses that arose from this loss of bargain, but not others. IBM incorrectly asserted that the only loss of bargain for CISGIL was its loss of savings, revenue or profit (which were all excluded). However, CISGIL’s loss of bargain also included the loss of the IT system that should have been provided by IBM.
5. The High Court had been incorrect in characterising CISGIL’s wasted expenditure claim as a method of calculating lost profits, revenue or savings – this was an “unjustified leap of reasoning”.

• Accordingly, the damages award to CISGIL was increased from £12m to over £80m.

What you need to know

• An exclusion of liability for loss of revenue, profits and anticipated savings will not (without more) prevent a party from claiming for wasted expenditure.
• Parties that wish to prevent wasted expenditure claims should ensure that this is made sufficiently clear in the contract and that the express words “wasted expenditure” are used wherever possible.
• Further, even using the words “wasted expenditure” may not be sufficient to exclude a party’s liability for wasted expenditure in the event of a repudiatory breach (as was the case in Kudos Catering, which was referred to and relied on by the Court of Appeal). When the effect of an exclusion clause would give rise to a “draconian result”, the words would need to expressed even more clearly, possibly in a free-standing clause of the agreement. Therefore, if parties intend exclusions to apply even in cases of non-performance, wilful default or wrongful repudiation, the words of the contract should reflect this.
• Contract drafters may also need to be wary of the level of specificity they use in exclusions clauses and the impact of any gaps in their wording. In this case, the Court noted that specific forms of loss were particularised and for that reason found it more significant that wasted expenditure was omitted. There is a tension here, so contract drafters should aim to strike a balance.
• While good news for customers, suppliers should be mindful of agreeing to exclusions for loss of revenue and profits, absent other wording. Such clauses may exclude the lion’s share of loss suffered by a supplier if a contract is terminated for a customer’s breach (or wrongfully terminated by the customer).
• Both suppliers and customers who are seeking to bring a wasted expenditure claim will also need to ensure that they can demonstrate a loss of bargain out of which the wasted expenditure claim arises. Especially in light of the bullet point above, suppliers will need to consider what the loss of bargain is if there is a contractual exclusion of liability for loss of profits, revenue and savings.

You can find all Bristows SnippITs articles here.