Excluding liability for wasted expenditure in breach of contract

Case Study

The case

In Soteria, the claimant sought to recover the significant expenditure that it had incurred in anticipation of receiving a highly upgraded IT system from the defendant. However, the defendant failed to supply the IT system, in contravention of the terms of the contract, causing the claimant to suffer losses of £128m.

In the contract between the companies, a clause stated that IBM’s liabilities in the event of termination excluded “loss of profit, revenue, savings (including anticipated savings)”.

High Court decision

The High Court held that, although the exclusion clause did not specifically exclude wasted expenditure, the claimant’s loss consisted of savings, revenue and profit it would have recovered had the defendant supplied the IT system.

The High Court, therefore, concluded that framing the loss as wasted expenditure did not detract from the characteristics of the loss, meaning that the £128m lost by the claimant was excluded and thus irrecoverable.

Case Study

The outcome

Court of Appeal decision

The claimant appealed the decision to the Court of Appeal, which overturned the High Court’s ruling on the following grounds:

Wasted expenditure did not come under the same category of loss as loss of profits, revenue or savings when looking at the natural and ordinary meaning of the words.
The court explained that the proper approach to exclusion clauses is that the more valuable a right being excluded, the clearer the language must be to exclude it. Wasted expenditure has the potential to be highly valuable, and so it could not be the parties’ intentions to exclude it if it is not expressly mentioned.
Calculating loss of profits, revenue and savings is a difficult accounting exercise in comparison to calculating wasted expenditure, for which the claimant could easily produce receipts, invoices and other documentation proving its loss. Therefore, the types of losses could be distinguished between uncertain and certain losses, so it makes commercial sense for parties to exclude the former but not the latter.
The court held that the High Court was wrong to conclude that the claimant’s loss of bargain was limited to lost profits, revenue and savings. Rather, the principal loss was that of a functioning IT system meaning that the costs associated with not receiving the system (i.e. the wasted expenditure incurred) could be recovered.

Key takeaways

This case highlights the importance of accurate and comprehensive drafting to convey your intentions when contracting, a lack of appreciation of which can lead to significant liabilities if things go wrong.

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Excluding liability for wasted expenditure: the dangers of imprecise drafting

The case

High Court decision

The outcome

Court of Appeal decision

Key takeaways

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