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EXCLUDING LIABILITY FOR “WASTED EXPENDITURE”

Lloyd's Maritime and Commercial Law Quarterly

EXCLUDING LIABILITY FOR “WASTED EXPENDITURE”

CIS v IBM

Edwin Peel *

The decision of O’Farrell J in CIS General Insurance Ltd v IBM United Kingdom Ltd 1 raises a number of issues,2 but this note focuses on just one of them; namely, whether a claim for damages pleaded on the basis of “wasted expenditure” fell within an exclusion clause which made no express reference to “wasted expenditure” as an excluded head of loss. O’Farrell J’s conclusion that it did raises a number of broader questions, both about the nature of a claim for damages for “wasted expenditure” and the meaning to be given to the heads of loss commonly referred to in exclusion clauses, such as “loss of profit”.
The salient facts may be reduced to a relatively simple form. The claimant (CIS) entered into a contract with the defendant (IBM) for the supply of a new IT system to enhance the delivery of its business as a provider of insurance products. This was to take the form of an initial supply and implementation, followed by management services over a period of ten years from implementation. During the course of the implementation, CIS terminated the contract. Although CIS claimed that IBM was in breach of contract on several grounds, the basis upon which O’Farrell J found that CIS was entitled to terminate was IBM’s own wrongful termination of the contract,3 which amounted to a repudiatory breach which CIS had accepted. So far as damages are concerned, CIS claimed £128m as “wasted costs” arising out of IBM’s wrongful termination and £27.2m for “additional costs” incurred as a result of delay to the project caused by IBM and its failure to report accurately on progress. IBM counterclaimed for the sum of c.£2.9m in respect of an unpaid invoice. O’Farrell J assessed the claim for additional costs at £15.9m and allowed IBM’s counterclaim. No further comment is called for in relation to those heads of loss.4 O’Farrell J. held that the claim for “wasted costs”, or “wasted expenditure” as she more commonly referred to it, was excluded by the following term of the contract (cl.23.3):
“… neither party shall be liable to the other or any third party for any Losses5 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
* Professor of Law, Clarendon Harris Fellow in Law, Keble College, Oxford; Barrister, One Essex Court.
1. [2021] EWHC 347 (TCC).
2. Among the other issues considered were (i) the construction and effect of an “anti-set off” clause; and (ii) the meaning and effect of an express warranty to have taken “all reasonable steps”.
3. IBM purported to exercise a right of “contractual termination” based on CIS’s failure to pay an invoice. This was wrongful because CIS had validly disputed the invoice, which meant, under the terms of the contract, that it was not due until the dispute had been resolved. It was in this context that O’Farrell J dealt with an anti-set off clause. It was subsequently held that the invoice was valid and this formed the basis of IBM’s counterclaim referred to below.
4. It was accepted by IBM that the claim for additional costs did not fall within cl.23.3 (see following paragraph in text) and, while subject to a limitation of liability, the sum assessed fell below the limit.
5. “Losses” were defined in the contract as “All losses, liabilities, damages, costs and expenses including reasonable legal fees on a solicitor/client basis and disbursements and reasonable costs of investigation, litigation, settlement, judgment, interest”. Although this definition was set out by O’Farrell J in her judgment (at [667]), no further comment was made about it. The question whether liability for “wasted expenditure” had been excluded was dealt with solely on the basis of the wording in cl.23.3.

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