A good day for wasted expenditure

Soteria, an insurance company, engaged IBM to deliver a new IT system. The project ran into significant problems, and the contract was eventually terminated, with each party blaming the other for the termination. 

Among other things, Soteria claimed over GBP 120m for its wasted expenditure on the failed project. The contract contained an exclusion of claims for “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect)”, but the exclusion did not mention wasted expenditure.

High Court

The High Court found that Soteria’s claim for wasted expenditure fell within the scope of the exclusion, and so was not recoverable. Soteria’s loss of the bargain was the profit, revenue and savings it would have achieved if the IT system had been delivered. Framing this as wasted expenditure was just a different way of quantifying the same loss. 

This decision caused some consternation, which included criticism by Prof Ed Peel in an article referenced by the Court of Appeal.

Court of Appeal

Soteria’s appeal was successful. Wasted expenditure had not been excluded, primarily because:

• the words were “simply not there”: wasted expenditure did not feature in the fairly extensive list of exclusions. The more valuable the right, the clearer the language of an exclusion clause needs to be, and the sums involved here speak for themselves.
• they are different types of loss: loss of profit, revenue and savings are each types of consequential loss that are difficult to quantify and thus routinely excluded. Wasted expenditure is none of these things, and it is commercially logical that the two types of loss are treated differently.
• an expectation of profit did not define the loss: Soteria’s primary loss was the IT system itself, regardless of its ultimate intention of making a profit. It was wrong to distinguish Royal Devon & Exeter on that point simply because the claimant in that case had been a non-profit. 

Comment

The decision has been broadly considered to restore the status quo. IBM is expected to appeal.

Some key points for contracting parties:

• consider carefully at the outset what your key potential losses would be, and what contractual provisions you would need to rely upon to recover them. 
• when drafting an exclusion for your own benefit, be as explicit as possible.
• if the exclusion will deprive the other party of significant recovery, consider how you would justify that this was the commercial bargain the parties intended to strike.

Judgment: Soteria Insurance v IBM