A recent decision of the Court of Appeal has provided clarification on the interpretation of exclusion clauses in commercial contracts.
In CIS General Insurance Limited v IBM United Kingdom Limited  EWHC 347, the High Court heard arguments on a dispute between the IT supplier and consumer for wrongful termination of contract. IBM had contracted to provide CIS IT systems but after delays in the provision of the goods, CIS withheld payment of IBM’s invoice. IBM relied on this non-payment to terminate the contract. CIS alleged that IBM had wrongfully terminated the contract and sought £132million in damages for wasted expenditure resulting from the termination. The High Court agreed that IBM had wrongfully terminated the contract but that CIS could not claim for wasted expenditure because it was excluded by the exclusion clause in the contract.
On appeal, the Court overturned this decision and found in favour of Soteria (formerly CISGIL). The key issue for the Appeal Court was the proper construction of the exclusion clause.
The exclusion clause in the parties’ contract provided that “neither party shall be liable to the other…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, data, goodwill, reputation”.
At first instance, the High Court applied The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd  EWHC 2197 (TCC) and held that a claim for wasted expenditure is no different from a claim for loss of profits as it “simply represents a different method of quantifying the loss of the bargain”.
On appeal, the Court disagreed with this assessment and held that the judgement in Royal Devon was incorrectly applied. The Appeal Court held that a claim for wasted expenditure was significant and distinct from a claim for loss of profits and could only be excluded with clear wording to that effect.
Lord Justice Coulson of the Court of Appeal went on to state that the High Court should have considered the natural and ordinary meaning of the words as to what losses were being excluded. In this case, the clause could not have excluded a claim for wasted expenditure as it did not refer to such costs and they did not fall within the natural and ordinary meaning of “loss of profit, revenue or savings”.
Lord Justice Coulson stated “the more valuable the right, the clearer the language of any exclusion clause will need to be”.
As a result of the Court of Appeal’s decision, IBM’s liability to Soteria increased from £13m to £80m. It is likely that IBM will now seek to appeal the decision to the Supreme Court.
The Court of Appeal’s decision is significant as it sets precedent that a strict approach should be taken when interpreting exclusion clauses. Wasted expenditure is a distinct form of direct loss which can arise from termination of a contract and parties wishing to exclude it from liability should do so expressly with precise drafting. Ambiguous wording of an exclusion clause could be the difference between £13m and £80m liability.
Insight from Neil Falconer, Intellectual Property specialist and Eve McBride Trainee Solicitor. For more information contact Neil or Eve on 03330 430350.