Wasted expenditure is NOT the same as ‘loss of profits’

Recently, in the case of Soteria Insurance Limited v IBM United Kingdom Limited, the Court of Appeal (CoA) handed down a key decision on whether wasted expenditure fell within a loss of profit exclusion.

The High Court had said that it did. However, the CoA overturned the High Court’s decision and held that Soteria had the right to claim damages for wasted expenditure. The key outcome of the case was that any party wishing to exclude wasted expenditure claims should explicitly draft wording that effectively addresses this type of loss.

Soteria entered into a contract with IBM, under which IBM was to supply Soteria with a new IT system for operating their insurance business. Soteria withheld payments alleging delays and other breaches by IBM, and IBM sought to terminate the contract for this non-payment. Initially it was held that IBM did not have the right to terminate, and so it had repudiated the agreement. Soteria’s primary claim was for damages of approx. £132 million in wasted expenditure that it had lost as a result of IBM’s wrongful termination.

IBM relied on an exclusion clause in defending the wasted expenditure claim, which said that “neither party shall be liable to the other … for loss of profit, revenue, savings (including anticipated savings)” (the “Exclusion”). IBM argued the claim was excluded by the Exclusion because the actual loss to Soteria was the profit, revenue or savings through which the ‘wasted expenditure’ would have been recouped, but for the breach. It therefore fell within the definition of a claim for ‘loss of profit, revenue or savings’.
Soteria argued that the claim was not one for loss of profits. Instead it was a claim to put it into a ‘break-even position’ rather than to recompense it for lost profit.

CoA Decision
The CoA held that the Exclusion did not cover wasted expenditure claims and concluded there were a number of good reasons for distinguishing wasted expenditure from loss of profits generally. When analysing an exclusion clause, the more valuable the right, the clearer the language of the clause must be. If the parties wanted to avoid liability for a ‘catastrophic non-performance’, then they should have included clear and obvious exclusionary words in the contract.

As a result of the CoA’s decision, Soteria’s award of damages was increased by circa £80 million.

While every case will turn on its own facts, the CoA’s decision reinforces the English courts’ approach to the interpretation of contracts. Parties who wish to exclude claims for wasted expenditure need to do so expressly, rather than seeking to rely on a general exclusion for loss of profits.

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