High Court considers losses excluded under a limitation of liability clause


CIS General Insurance Ltd v IBM United Kingdom Ltd [2021] EWHC 347 (TCC) dealt with a claim for wasted costs and damages resulting from the termination of a contract for a new IT system. The Court found in favour of the claimant but the defendant’s limitation of liability clauses successfully excluded the majority of the value of the claim.

In a detailed judgment, also covering other issues, the Court gave a useful assessment of the characterisation of damages and “wasted costs”.

Background

CIS General (CISGIL), a wholly own subsidiary of the Co-operative Group was in the business of underwriting and distributing general insurance products.

In 2015 CISGIL contracted IBM to supply, implement and manage a new IT system for the business.

By 2017 the project had run into difficulties and was experiencing delay. In March 2017 IBM submitted an invoice for £2.9 million in relation to a project milestone. IBM’s position was that this invoice related to payments due for software licences but CISGIL contended that the milestone had not been achieved and the payment had not been properly authorised.

The situation escalated as CISGIL refused to pay the invoice. IBM served a final payment notice and purported to exercise a contractual right of termination based on CISGIL’s failure to pay the invoice. CISGIL disputed IBM’s right to terminate, treated the purported termination as repudiatory breach and purported to accept such repudiation.

CISGIL’s position was that the project was seriously delayed and that it had no confidence in IBM’s ability to deliver the project. CISGIL then initiated proceedings, claiming damages for £128m - the costs incurred in respect of the project - for repudiatory breach and breach of warranty. Damages were couched as wasted costs arising from wrongful termination by IBM. CISGIL’s secondary claim for £27.2m related to the costs of delay to the project caused by IBM and its failure to report accurately on progress.

IBM disputed the termination claim, its case being that it was entitled to payment of the invoice regardless of failure to meet the milestones. IBM counterclaimed in relation to the unpaid invoice.

Judgment

The Court held that the invoice had become due and payable but that CISGIL had validly disputed the invoice. As the invoice was in valid dispute IBM was not entitled to serve a final notice or terminate. As such, IBM’s purported termination amounted to repudiatory breach which was accepted by CISGIL. It was therefore required to consider the quantum of loss arising from IBM’s wrongful termination.

The limitation of liability clause in the Master Services Agreement stated (bold added):

“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.”

IBM asserted that CISGIL’s claim for wasted expenditure was excluded by the clause above. Its position was that although the quantum of loss was assessed by reference to the expenditure incurred, the actual loss was the profit revenue or savings through which that expenditure would later have been recouped but for the breach.

CISGIL submitted that its claim for wasted expenditure was not a claim for loss of profit. “Compensation for wasted expenditure puts it into a break-even position on the assumption that its financial and non-financial benefits from IBM's performance would have been worth at least as much to CISGIL as the amounts expended in reliance on the contract.”

The Court considered whether CISGIL’s claim for “wasted costs” would fall under the exclusions of the limitation of liability clause.

In a detailed judgment, the Court assessed the characterisation of damages arising from wrongful termination. As an essential legal principle, damages for breach of contract are compensatory, seeking to put the claimant in the position as if the contractual bargain had been properly performed. The starting point is therefore usually measured by reference to the additional expenditure required to achieve the anticipated contractual benefit – “the expectation basis”. Alternatively, a claimant may elect to claim damages on “the reliance basis” with reference to expenditure incurred in reliance on the defendant’s promise. The judgment in this case noted that in The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] “a claim for wasted costs can be explained as compensation for the loss of the bargain based on a rebuttable presumption that the value of the contractual benefit must be at least equal to the amount that the claimant is prepared to expend in order to obtain such benefit”.

Applying the principles to the facts, the Court identified the starting point as assessing the contractual benefit lost due to IBM’s repudiatory breach. This was the increased business competitiveness that would have resulted in increased savings, revenues and profits. The Court stated that “CISGIL is entitled to frame its claim as one for wasted expenditure but that simply represents a different method of quantifying the loss of the bargain; it does not change the characteristics of the losses for which compensation is sought”. The limitation of liability clause excluded “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect) …” and as such excluded such a claim whether quantified as loss of profit, revenue and savings, or alternatively as wasted expenditure.

The Court therefore held that CISGIL’s primary claim for £128 million of wasted expenditure was excluded.

The Court did assess, however, that CISGIL was entitled to £15.9  million (of the £27.2m sought) in relation to additional costs incurred as a result of IBM’s breaches of contract for delays and reporting failures. The Court also held that, on the facts, the disputed invoice payment was not dependent on milestone achievement and was due, such that IBM was also entitled to set off the £2.9 million in relation to the unpaid invoice.

Comment

The case provides a useful reminder of the principles of compensatory loss for breach of contract and the importance of well-drafted limitation of liability clauses. Although CISGIL sought to couch it’s claim as damages for “wasted costs” this didn’t change the characteristics of the loss and was simply an alternative method of quantifying the loss of bargain, which in this case was actually the loss of profit, revenue, savings that would have been achieved but for the breach.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at March 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.


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