Attention needed in considering Wasted Expenditure following Appeal Court decision

legal law concept statue of lady justice with scales of justice sky background

SHARE

A landmark case has highlighted the necessity for clarity when setting out limitation clauses within services related contracts. An insurance company has won over £80 million in damages after the appeal court ruled that an exclusion clause in respect of loss of ‘profit, revenue and savings’ did not cover losses due to wasted expenditure.

Soteria Insurance acquired a new IT system from IBM for around £50 million, with further agreed management costs extending over 10 years, at a cost of £125 million. The installation and integration of the system was marred with delays, so much so that Soteria refused to pay a ‘milestone’ payment within their agreement. Following the non-payment IBM terminated the contract and refused to deliver the system.

Soteria initiated proceedings and alleged that the refusal by IBM to deliver upon the promised IT system had in fact been wrongful and the International IT company had failed to complete its contractual obligations; the wasted expenditure and other associated costs had been estimated at £128 million and Soteria sought the full recuperation of these losses.

In the High Court, the judge agreed that whilst IBM had certainly failed to meet its contractual obligations, Soteria’s claim for wasted expenditure could not be included in the total amount for losses arising from the same; the judge underlined a crucial contractual clause which excluded losses of ‘profit, revenue and savings’ which would cap Soteria’s claim at around £13 million, rather than the full £128 million estimate.

However, on appeal Soteria was able to overturn this decision, winning over £80 million in damages. The appeal judges took a stricter view on the language of the limitation clause, highlighting that the contractual limitation did not cover wasted expenditure as there was no express exclusion clause. Using “a reasonable person” test, they concluded that ‘wasted expenditure’ could not be regarded as synonymous with the words ‘loss of profit, revenue or savings’.

Harry Bush of Brunel Professions said: “The courts have always had a “laissez-faire” attitude to the contractual relationship between contracting businesses and this case reveals that this mantra has not changed. The courts continue to make judgement upon the written word and not on the intentions that the contracting parties may or may not have had. It is therefore crucial for contracting parties that wish to impose their own requirements within a contract, to do so in explicit terms.”

Reports about the case have been published by Hill Dickinson and Fountain Court.

Professionalindemnity.com is owned by Brunel Professions, which is a leading professional indemnity insurance broker in the UK. Click here to get a quote or call 0345 450 1074 to speak to a broker.

 

Menu