Exclusion clauses in contracts are used to try to ensure that one or more parties are not liable for certain types of loss. In Soteria Insurance Ltd v IBM United Kingdom Ltd, the Court of Appeal considered the scope of a clause which attempted to exclude consequential losses such as lost revenue and whether the drafting of the clause was wide enough to exclude a claim for the wasted expenditure incurred by the claimant as a result of the late delivery of a new IT system.
The claimant was an insurance underwriter which contracted with IBM in 2015 to supply a new IT system. The delivery of the system was delayed and the claimant tried to terminate the contract. The claimant alleged that it had incurred wasted expenditure in the sum of £132 million which consisted of sums paid to IBM and third-party suppliers as well as with the costs of obtaining finance for the new system.
After the High Court found that consequential losses were not recoverable because of the exclusion clause, the matter was considered by the Court of Appeal which based its decision upon the fundamental difference between claims for loss of revenue and wasted expenditure. Claims for loss of profit depend upon a counterfactual analysis of what might have happened if the contract had been performed but the claimant’s wasted expenditure in this case could be ascertained more easily because certain sums were spent in anticipation of receiving the system. This gave rise to a clear commercial rationale for excluding losses such as loss of profit which are difficult to ascertain but not wasted expenditure which can be calculated more easily.
The decision of the Court of Appeal emphasises that contracting parties do not lightly agree to give up valuable rights such as a claim for lost expenditure. It follows that the more valuable the right, the clearer the court will expect the wording of an exclusion clause to be. The more costly the consequences of applying an exclusion clause to a certain type of loss, the more precise the drafting must be.
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