The UK High Court’s ruling in CISGIL v IBM has been overturned by the Court of Appeal. The judgment of Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited  EWCA Civ 440 was handed down on 4 April 2022, in which Coulson, LJ declared that – contrary to the previous ruling – wasted expenditure was recoverable by CISGIL and that the sum of £80.5m was due to be paid to CISGIL by IBM. This greatly increases the net sum of £12m previously awarded by the High Court.
The background to the appeal
IBM United Kingdom Limited (IBM) failed to deliver an IT system to CIS General Insurance Limited, now Soteria Insurance Limited (CISGIL). IBM claimed to be entitled to terminate the contract when CISGIL refused to pay a milestone invoice of £2.9m. The High Court found that IBM had wrongfully terminated the contract and should not have terminated it because, as IBM was aware, the unpaid invoice was disputed by CISGIL, and IBM’s termination right was limited to “undisputed” payments.
However, CISGIL had sought to claim for its wasted expenditure of £132m incurred as a result of IBM’s failure to deliver the IT system and services to be delivered under the contract. The High Court found that CISGIL’s claims for wasted expenditure were excluded under clause 23.3 of the contract on the basis that “wasted expenditure” should be treated as a form of “loss of profit” (that this clause excluded). Applying the High Court’s decision, CISGIL would only be entitled to the net sum of £12m less VAT once a set-off sum in IBM’s favour had been accounted for.
Both parties accordingly felt that there was a basis for appeal.
Two particular issues of note arise from the appeal:
Issue 1: Did clause 23.3 of the contract exclude the recovery of damages for wasted expenditure?
Clause 23.3 of the contract read as follows:
“Subject to clause[s] 23.2 and 23.4, neither party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory [duty] or otherwise) which are 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) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party”.
“Losses” were then defined in the contract as:
“All losses, liabilities, damages, costs and expenses including reasonable legal fees on a solicitors/client basis and disbursements and reasonable costs of investigation, litigation settlement, judgment, interest.”
The Court of Appeal rejected the High Court finding that wasted expenditure should be excluded as being commensurate to loss of profit. They based this conclusion on the following principles:
Firstly, as a matter of construction, it would be necessary to look very carefully at the actual words used (and especially in the context of exclusion or limitation clauses). The Court of Appeal noted in this regard that the contract had a lengthy list of exclusions that included loss of profit but did not mention wasted expenditure.
Secondly, the Court of Appeal re-evaluated the basis of calculating damages for breach of contract and re-confirmed the principle that a claimant could either claim for loss of profit or wasted expenditure, but not both. In contrast to the High Court, however, the Court of Appeal did not find that this effectively meant that both types of potential loss had to be dealt with in the same way for the purposes of limitations and exclusions. The lower court’s observation that calculating the amount of wasted expenditure could act as means of calculating the amount of loss of profit (i.e. on the basis that the expenditure was all in anticipation of earning such profit) was described as “an unjustified leap of reasoning”.
Issue 2: Which of the two possible caps on liability put forward would apply?
At the appeal stage, in assessing which of two possible caps on liability could apply to the wasted expenditure calculated by the High Court to amount to £122m. The contract has two separate caps; one for implementation services, and the other for the ongoing “business as usual”/BAU services. IBM argued that if the claim for the wasted expenditure only arose under clause 23.5(a), then that would cap the net claim at £80.5m (allowing for the other claims and cross-claims, including IBM’s set-off). Whereas CISGIL argued that because their claim was made under both clause 23.5(a) (relating to Implementation Services) and clause 23.5(e) (relating to Management Services), then that that would cap the net claim at £96m.
In this regard the Court of Appeal sided with IBM; as the project lead never in fact proceeded beyond the implementation stage, the Court of Appeal found that CISGIL could not tenably argue that they had then suffered any loss in respect of the (never provided) BAU services, and to which the second liability cap could then have applied.
What can we learn from the ruling?
The case provides valuable guidance on the construction of liability clauses.
To successfully demonstrate that loss falling within the scope of wasted expenditure is excluded from loss recoverable under a damages claim, the safest approach may be to discuss at the negotiation stage whether or not wasted expenditure is covered by an exclusion clause, agree exactly what is meant by wasted expenditure and then specify “wasted expenditure” (preferably with an accompanying definition as to what it is agreed that this will cover) as a type of loss excluded under the exclusion of liability clause.
Moreover, if wasted expenditure is to be covered by a specific cap on liability (or excluded altogether), then this should be expressly stated in the relevant clause.