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Reliance losses and another lesson in drafting liability and exclusion clauses in IT agreements: CIS Insurance Limited v IBM

The recent decision in CIS v IBM, is a timely reminder of the importance of paying careful attention to the drafting of exclusions of liability in IT agreements, especially where a party hopes to be able to recover reliance losses for breach of contract.

Reliance losses are considered to be losses incurred or “wasted” by an innocent party in expectation of the other party’s contractual performance. In the context of an IT agreement these are likely to include costs relating to the termination of other agreements, third party costs and internal management time. Expectation losses represent the benefits the innocent party is expecting to gain from the contract’s performance, such as savings in operational costs and increased revenues and profits.

In this case, the Technology and Construction Court explained that the starting point was to identify the contractual benefit lost by CIS as a result of IBM’s repudiatory breach. A conventional claim for damages in this type of case would usually be quantified on the basis of expectation losses (i.e. lost savings, revenues and profits). Here, CIS claimed a substantial amount of wasted expenditure (i.e. its reliance losses).

The Court held that CIS was 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 was sought. That is to say, there is no fundamental difference between expectation losses and reliance losses - they are simply different methods for quantifying the losses.

The Master Services Agreement (including related contractual arrangements) between CIS and IBM excluded any claim by either party for “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect) …”. Although here, CIS had focused its claim on wasted expenditure, the Court found that CIS’s losses were actually anticipated savings, revenues and profits that could have been achieved had the IT solution been successfully implemented. The Court therefore held that CIS’s claim was excluded, whether it was quantified as the value of the lost profit, revenue and savings, or as wasted expenditure. The Court distinguished this from the case of Royal Devon & Exeter NHS Trust v Atos where a similar argument run by the supplier had failed as in that case it was not an expectation of profits that the NHS Trust was expecting but improved clinical outcomes. In that case the claim for loss of the benefit of the contract from which the reliance loss claim was derived was not in substance one for loss of profit.

Given the characterisation of the actual losses claimed here, and how they were held to fall within the exclusion of liability drafting, it is thought that this case may be appealed. Nevertheless, for customers of IT systems and services the CIS v IBM case highlights the importance of understanding the categories of losses which may be incurred if the contract is not performed, assessing the extent to which those losses may be covered by the exclusion clause, and drafting the exclusion clause accordingly. Where a party expects to incur a substantial level of wasted expenditure for a failed IT implementation, and wishes to ensure recovery of such expenditure, it should ensure that the exclusion and limitation of liability drafting is very clear on this issue.

Given the relative lack of direct authority, and the very substantial sums at stake, it would not be surprising if this point were taken to the Court of Appeal. A decision on the point at appellate level would be keenly anticipated due to the ubiquity of loss of profits exclusions, and obvious implications for damages claims. In the meantime, the presence of an effective exclusion of lost profits within a contract will be even more valuable to a party in default.


commercial, technology, exclusion clauses

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