The case of Soteria v IBM serves as useful guidance for the construction and interpretation of exclusion of liability clauses. The case saw the Court of Appeal overturn the High Court’s initial judgement by holding that exclusion clauses drafted to cover “Loss of profit, revenue and expenditure” do not encompass exclusion of liability for wasted expenditure.
By way of factual background, the parties had a written contract providing that IBM was to supply Soteria with a new IT system over a term of 10 years (the “Contract”). Following a delay in the delivery, Soteria refused to pay a “milestone” invoice totalling £2.9 million. IBM terminated the Contract for non-payment and the IT system was not delivered.
Soteria subsequently sued IBM for £132 million in damages for wasted expenditure flowing from what it argued was wrongful repudiation of the Contract; such expenditure including payments made to IBM and third parties in the anticipation that IBM would fulfil the Contract.
The Contract included a clause which excluded liability 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)”.
IBM argued that this clause encompassed wasted expenditure. However, Soteria maintained that the claim for wasted expenditure would put them in a “break even position” rather than recompense them for loss of profit. The High Court agreed with IBM’s argument, taking the view that wasted expenditure was synonymous with profits, revenue or savings and was therefore captured by the exclusion clause in the Contract.
Soteria appealed this decision and the Court of Appeal overturned the High Court’s judgment. In its judgment, the Court of Appeal focussed on the particular words used in the exclusion clause, explaining that the correct approach when determining what type of loss was excluded was to ascertain the natural and ordinary meaning of the words. The court reasoned that the Contract explicitly carved out specific types of loss where liability was excluded, and this did not refer to wasted expenditure, nor did wasted expenditure fall within the natural and ordinary meaning of loss of profit. Furthermore, the court held that wasted expenditure was an obvious and common type of loss and therefore commercially experienced parties could not have intended to exclude it without any express reference to it in the exclusion clause.
The Court went on to explain that it also made commercial sense for the Contract to exclude loss of profits, revenue or savings but not wasted expenditure, as the two types of losses were conceptually different. Calculating the former involved an element of speculation, whereas the latter was more straightforward to ascertain.
This case provides useful judicial commentary on how courts will interpret the construction of exclusion clauses in contracts. Parties and practitioners should be mindful when entering into agreements to ascertain at an early stage which types of losses they wish to exclude, and where a specific type of expenditure is to be covered by an exclusion clause, the drafting should expressly reflect this intention. It may be that a “standard” exclusion clause may not work in the way a party expects.
This updated was written by Orlaith Mallen and Oliver Macrae.