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The Court of Appeal clarifies the approach to exclusion clauses

In Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440, the Court of Appeal has ruled that an exclusion of liability clause did not – either by inference or implication – prohibit a claim for wasted expenditure. This overturned the judgment of the High Court that Professor Peel, a leading voice on the law of contract, had suggested may have been incorrect in the way it interpreted the exclusion clause. Though this case related to a technology contract, these points are relevant to commercial contracts more generally.

The relevant clause 

The question for the Court of Appeal was whether the below exclusion clause precluded a claim for wasted expenditure:

"... neither party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement… which are indirect or consequential Losses, or for loss of profit, revenue, savings (including anticipated savings), data...".

First instance decision 

At first instance, the judge found that this clause did bar such a claim, even though the wording did not expressly refer to claims for wasted expenditure. The judgment suggested that the courts might approach claims for wasted expenditure as falling within some kind of all-embracing class of claims for lost profit/revenue/savings. The judgment introduced further confusion as it seemed this might only apply to situations where the anticipated benefit of a contract was pecuniary.

The same trial judge, Mrs Justice O’Farrell, had taken the opposite approach to a situation where the anticipated benefit of the contract was non-pecuniary in Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd [2017] EWHC 2197 (TCC). The "benefit" in this other case was having a properly functioning patient records system.

Interpretation

The Court of Appeal was unanimous in finding that the first instance judge erred in her interpretation of the clause. Properly construed, it did not bar a claim for wasted expenditure.   

This was based on both the natural meaning of the words used and the strict approach required when interpreting exclusion clauses. The more extreme the consequences of interpreting an exclusion clause in a particular way, the “more stringent the court must be” before construing it in a way which allows the contract breaker to avoid liability.

The Court of Appeal found that wasted expenditure is intrinsically distinct from loss of profits, revenue or savings, emphasising that they are “entirely different animal[s]”. The Court described the different heads of loss as follows:

  1. losses of profits, revenue and savings are "consequential" losses, where counterfactuals must be considered as to what the benefits of the contract would have been had it been properly performed in accordance with its requirements; whereas
  2. claims for wasted expenditure are a “pure accounting exercise” which simply look to the sums incurred. Such claims aim to compensate the party for being worse off as a result of the non-provision of the relevant services.

Careful thought (and drafting) required 

The key take-away is that contractual exclusion of claims for wasted expenditure (or indeed any particular head of loss) must be expressly provided for in the drafting. Careful thought is required at the drafting stage to avoid interpretation difficulties with all contractual clauses. This is only rendered more important in the context of exclusion clauses, which are subject to especially stringent rules of interpretation.

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