Bristows' SnippITs - TCS v DBS: Lessons from Major IT Dispute (Part 4)

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

Exclusions and Limitations - a £multi-million lesson on clear drafting

On 17 May 2024, the Technology and Construction Court handed down its judgment on one of the largest IT disputes in recent years: Tata Consultancy Services Limited v Disclosure and Barring Service. The 243-page judgment (summarised here) provides a relatively rare and detailed insight into the court’s determination on a broad range of issues that often arise when a complex IT project goes wrong.

This series of posts covers the key considerations for suppliers and customers of large-scale IT projects. Our earlier posts can be found here:

• Part 1: Delays, critical path and “unconscious pacing”
• Part 2: Systems integrator - who is responsible for managing third party dependencies?
• Part 3: Rebaselining, renegotiations and the dangers of estoppel

In this final post we explore the issues with the exclusion and limitation clauses in the contract, highlighting the importance of clear drafting for these provisions.

Key takeaways

1. Definitions can have a BIG impact: Liability caps and heads of loss exclusions can be subject to considerable negotiation but the mechanics of these clauses are often overlooked. Suppliers and customers should ensure the following details are agreed and reflected in clear drafting:
   1. Where a cap is not a specified amount, make sure the value is clearly described, using defined terms if possible. In this case, the court was unable to identify the value of a cap linked to the undefined concept of “implementation Charges”. 
   2. Whether a cap applies in aggregate or per claim and how it is calculated. It can be helpful to run through different scenarios to check the mechanics of the clause (DBS used a scenario to explain why it said TCS’s interpretation of the cap did not work). 
2. Is it really wasted expenditure? Parties should be weary of “dressing up” an otherwise excluded claim for loss of profits as wasted expenditure. The courts will look at the nature and substance of the costs claimed not just how they have been categorised when deciding if exclusions apply. Speculative losses (such as loss of anticipated savings) are likely to fall within the umbrella of “loss of profits”. 

Background

The dispute related to the modernisation of an IT system by TCS for DBS. Following significant issues and delays on the project, TCS brought a number of claims (primarily for delay) totalling over £110 million in damages. DBS also brought various counterclaims, including for delays and quality issues with the system. Both parties raised arguments about how the caps and exclusions under the contract applied to the other party’s claims.

TCS’s claim: wasted expenditure or loss of profits?

TCS’s claim was subject to an exclusion in relation to “any loss of profits, turnover, business opportunities… (whether direct or indirect).”

One of the claims TCS advanced was a claim it described as for “wasted expenditure”. This was calculated based on the loss of savings it expected to make if elements of the project had been delivered on time, creating operational efficiencies. DBS argued that this was in fact a claim for loss of profits and was therefore excluded. TCS agreed that it could have elected to characterise the same claim as a loss of profits claim – its claim had even started out as a lost revenue claim before being amended. However, having now elected to characterise it as a wasted expenditure claim, TCS argued that it was not caught by the exclusion. 

DBS’ claim: meaning of “implementation Charges”

DBS had a claim for Delay Payments under the contract, which were subject to their own cap of “10% of the implementation Charges.”

The term “implementation Charges” was not defined in the contract, though “Charges” was. The parties disagreed on how the cap should be calculated. TCS’s interpretation (based on a subset of the Charges) produced a cap of £290,000. DBS argued that no cap could be identified and also put forward some alternative interpretations, producing caps ranging from £3.6 million to £4.5 million.

DBS’s claim: individual or per claim cap?

DBS’s remaining claims were subject to a separate cap, which applied to “all other claims, losses or damages” and was either £10 million, or a limit based on “Charges paid under this Agreement during the 12 month period immediately preceding the date of the event giving rise to the claim under consideration less in all circumstances any amounts previously paid.”

DBS argued that this wording could only work if a different cap applied for each claim “under consideration”. Given different events gave rise to each claim, a different 12-month period would apply in each instance, leading to a different calculation for the cap. DBS argued that this meant the cap applied separately to each of its individual claims (aside from Delay Payments, it brought 9 separate claims, each for £10 million or less).

TCS argued that words “total aggregate liability” (used earlier in the clause) and less “amounts already paid” meant that this was intended to be an overall, single cap on liability. 

Decision

Wasted expenditure or loss of profits?

• The court considered the recent Court of Appeal decision in Soteria Insurance Ltd v IBM United Kingdom Ltd
• The court found that Soteria did not allow TCS to articulate a claim as it saw fit to fall outside the exclusion clause. Instead, Soteria drew a distinction between two very different substantive claims: anticipated savings and loss of profits (which were potentially speculative and open-ended) and wasted expenditure (which was calculated based on actuals, rather than projections).
• The court found that TCS’s claim was not a claim for wasted expenditure as it was not a claim for specific costs which were actually incurred and had been identified as ‘wasted’. 
• TCS’s claim was for loss of anticipated savings which was “the same in substance” as a claim for loss of profits. TCS’s claim was therefore excluded under the contract and failed.

Meaning of “implementation Charges”

• The court rejected TCS’s interpretation of how “implementation Charges” should be calculated, finding that it was not possible to identify which subset of the Charges was meant to be used to calculate the cap.
• The effect of this was that no limit to the Delay Payments that DBS could claim had been identified.
• In the event, the court did not need to make a determination on the value of the cap as DBS’s claim for Delay Payments failed for other reasons.  

Individual or “per claim” cap? 

• The court found that the clause was “far from a model of clarity.”
• However, it ruled that the correct interpretation was that the clause created a single cap for all of DBS’s remaining claims.
• The judge was persuaded by terms such as “the aggregate liability” as well as the absence of the simple language “per claim” in the clause.
• DBS’s claims were therefore subject to a single, absolute cap of £10 million (or alternative).