The importance of language and wording in contractual clauses

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A recent decision of the English Court of Appeal provides helpful guidance on exclusion of liability clauses. In the case, the Court of Appeal overturned the High Court’s judgement that the words “loss of profit, revenue, savings (including anticipated savings” excluded a claim for wasted expenditure.

Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM United Kingdom Ltd

In this case, Soteria had engaged IBM to provide it with an improved IT system over the course of 10 years, and had incurred great expenditure in anticipation of the IT system materialising. Due to significant delays on IBM’s part, the IT system was never provided, and the contract terminated. On the basis of repudiatory breach, Soteria sued IBM for £132 million in damages for wasted expenditure, including payments made to IBM and third parties.

The case – or at least the difference between an award of damages for approximately £80 million and £12 million – turned on the construction and interpretation of clause 23.3 which excluded liability for:

“indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data (save as set out in clause 24.4(d)), goodwill, reputation (in all cases whether direct or indirect)”.

In the High Court, O’Farrell J said that the ‘wasted expenditure’ claimed by Soteria was essentially the same thing as ‘loss of profits, revenue, [and] savings’, and the nature of these losses could not be changed by simply framing the claim as one for wasted expenditure. Therefore, the damages were covered by the exclusion, and not claimable.

In contrast, the Court of Appeal found that the nature of ‘wasted expenditure’ was very different to ‘loss of profits, revenue, [and] savings’, for the following reasons:

The natural and ordinary meaning of the words. On the natural and ordinary reading of the clause, claims for wasted expenditure were simply not included.

The proper approach to exclusion clauses is that the language needs to be very clear in order to exclude such a valuable right, and the more extreme the consequences, the more stringent the court should be in construing and interpreting the clause.

These were inherently different types of losses. Loss of profit, revenue and savings are often considered types of consequential loss. They require the court to ask a bunch of hypotheticals, present counterfactuals, and speculate to arrive at a valuation. Wasted expenditure does not require the same analysis; the loss is easy to determine because it is the actual cost to the innocent party, in anticipation of fulfilment of the contract, and valuing the loss is simply an accounting exercise.

It was incorrect to find that Soteria’s loss of bargain only comprised loss of profits, revenue and savings: the main loss was of the IT system, and there were different ways of calculating damages associated with a loss of bargain. One is loss of profits, revenue and savings, and another is wasted expenditure. The measure is not the same for each, and they are not two sides of the same coin

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This case provides helpful, and in our view welcome, guidance on the construction and interpretation of what are very common clauses in commercial contracts. It demonstrates that parties should take the time to consider and understand the implications of their exclusion of liability clauses; indeed, such careful consideration could make £67 million worth of difference.

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