In Soteria Insurance Ltd (formerly CIS General Insurance Limited) v IBM, the Court of Appeal has held that a clause excluding consequential losses, or loss of profits, revenue or savings, did not prevent a claimant recovering damages for wasted expenditure.
The underlying dispute in this case concerned the provision of an IT system by IBM to Soteria, which was delayed and finally not delivered. After IBM terminated the contract for non-payment, Soteria commenced legal proceedings on the basis that IBM had wrongfully refused to complete their contractual obligations and sought damages for wasted expenditure incurred as a result of IBM’s refusal to deliver the new system.
At first instance, the High Court held that IBM had wrongfully repudiated the contract but held that Soteria’s claim for wasted expenditure was irrecoverable as it fell within the scope of an exclusion clause in the contract excluding liability for ‘indirect or consequential losses, or for loss of profit, revenue or savings’.
On appeal, however, the Court of Appeal overturned this decision, finding that the parties could not be taken to have excluded wasted expenditure in absence of any express exclusion. The exclusion clause should have been construed in accordance with what a reasonable person, having the background knowledge available to the parties, would have understood it to mean. In the Court’s view, under this test, wasted expenditure would not fall within the natural and ordinary meaning of the words ‘loss of profit, revenue or savings’. Furthermore, wasted expenditure was a fundamentally different type of loss to loss of profits, revenue or savings; the former could be calculated precisely whereas a calculation of the latter required an element of speculation.
The practical message from this case is that parties need to carefully consider any potential losses at the outset and determine whether they need to be excluded. Any exclusion for wasted expenditure will need to be expressly set out as it will not be possible to rely on a general exclusion for loss of profits.
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