The Court of Appeal has ruled in Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd [2022] EWCA Civ 440. It reversed a first instance decision about a failed technology purchase.
The context was litigation between IBM and CIS arising from the failed implementation of a new managed IT system. The first instance court found that, following a dispute regarding payments to IBM, CIS had validly terminated the contract for repudiatory breach in July 2017. CIS made various claims in consequence, including a claim for £128m in wasted expenditure incurred in respect of the project (that is, its reliance losses).
Clause 23.3 of the contract contained an exclusion of liability for various heads of loss, including “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect) …”. IBM maintained that, on a proper construction, CIS’ reliance loss claim was caught by that exclusion. The judge held that the framing of the claim as one for wasted expenditure “simply represents a different method of quantifying the loss of the bargain; it does not change the characteristics of the losses for which compensation is sought.” On this basis, the claim for reliance losses was in substance one for loss of profit, revenue or savings and excluded.
The Court of Appeal has now said that the first instance judge was wrong to construe clause 23.3 of the contract as preventing CIS from recovering its claims for wasted expenditure following IBM’s repudiation of the contract.
The Court of Appeal said that the objective meaning of clause 23.3, as understood by a reasonable person in the position of these parties, was that the clause did not exclude a claim for expenditure incurred, but wasted because of the other party’s repudiatory breach. Claims for wasted expenditure – costs actually incurred but wasted – were not set out in clause 23.3 and, on the natural and ordinary meaning of the words, were not included in “loss of profit, revenue [or] savings”. In addition, clause 23.3 contained plenty of detail about the types of loss that were being excluded and so the parties’ decision not to exclude claims for wasted expenditure was telling.
It also said that it made commercial sense. The claims that would have compensated CIS for being better off due to a new IT system were excluded; the claims to compensate them for being worse off due to the non-provision of the IT system were not. This was a fair commercial balance between the parties.
The loss of the bargain was principally represented by the loss of the IT system itself. Some types of loss of bargain damages, like loss of profit, revenue or savings, were excluded by clause 23.3. Other types, such as re-procurement costs and wasted expenditure, were not.
The Court of Appeal also said that “wasted expenditure” is not a method of calculating “lost profits, revenues or savings”.
Therefore, the court allowed the appeal and ruled that a sum of £80,574,168 was due to CIS.
