Why a comprehensive exclusion of loss clause should cover 'wasted expenditure' - and how employers should resist.
The Court of Appeal decision in Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited (February 2022 Court of Appeal) contains a short but important point for those drafting exclusion clauses - especially those that seek to exclude indirect and consequential costs, loss of profits, loss of opportunity, etc.
In short, the party wishing to exclude liability should consider adding the words ’any wasted expenditure’ to the list of losses to be excluded. That is because, as found by the Court of Appeal, such losses are likely to be of a different type to those usually listed under the 'indirect and consequential' wording.
Soteria was not a construction case. It involved the provision by IBM of an IT system for Soteria. The project was substantially delayed and was later terminated, with each side blaming the other. The High Court judge found that IBM was at fault. The case then went to the Court of Appeal on the issue of damages. Soteria claimed for its 'wasted expenditure' costs, being some £34.1 million paid to IBM and other third party suppliers in the expectation that IBM would provide them with the much-improved IT system that they wanted. The £34.1 million included financing costs.
IBM relied on an exclusion clause in the contract. This said that neither party should be liable to the other for any “Losses” that were indirect or consequential. ‘Losses’ was defined as 'All losses, liabilities, damages, costs and expenses including reasonable legal fees…'. The clause also excluded loss of profit, revenue, savings, data, goodwill and reputation.
One might think that that was a very comprehensive exclusion. Nevertheless, the Court of Appeal held that it was not sufficient to exclude liability for the £34.1 million and that Soteria could therefore claim for its wasted expenditure. Why was that?
Coulson LJ, a construction law judge, drew a distinction between two types of loss.
The first type included losses such as loss of profit, revenue or savings – in general, consequential losses. These, he said, were all of a similar kind, and were generally considered to be types of consequential losses.
‘They are claims which involve a consideration of a variety of counterfactuals: what benefits would the contract have brought if it had been performed? What savings would have been made? What additional revenue would have been earned by the new IT system? What additional profits would have been made as a result of the improvements? Because they depend on hypotheticals, they inevitably involve at least an element of speculation. Here, of course, because the new IT system was never installed, nobody could have been certain about the answers.’
By contrast, said Coulson LJ, claims for wasted expenditure were ’an entirely different animal’.
'….if the victim of a breach of contract has spent money in anticipation that the contract would be performed, then his or her loss is easy to ascertain: there will be invoices, contracts, receipts and the like. This type of loss is the opposite of speculative: it is precisely ascertainable. It is a pure accounting exercise. Perhaps for that reason, such claims are not usually regarded as claims for consequential loss.'
Soteria was therefore entitled to claim for its wasted expenditure and was not bound by the exclusion clause.
So if a party wishes to tighten up an exclusion clause, it should specifically include ’wasted expenditure’ as part of the excluded losses.
Applicability to construction and engineering contracts
In JCT DB 2016, exclusion of the Contractor’s liability for 'loss of use, loss of profit or other consequential loss' is limited to the amount (if any) in the Contract Particulars. NEC4 has a similar optional clause (X18). The FIDIC Red Book 2017 and the I Chem E Red Book 2013 both exclude liability for both parties for lost profits, indirect and consequential losses and other losses. None of these mention wasted expenditure.
A wasted expenditure claim could arise in construction context where, for example, an employer engages a contractor or a consultant to deal with a specialist element of a process plant project; incurs substantial upfront costs on the project generally; and then discovers that the contractor or consultant is unable to provide the services required to make the plant functional. If the contract is then terminated, there will be abortive wasted expenditure, depending on how much, if any, of the project can be salvaged.
How should employers respond to attempts to exclude liability for wasted expenditure?
Employers will be faced with consultants and contractors who now seek to bring ’wasted expenditure costs’ into the long list of excluded losses. Their best argument in response is that the main purpose of an exclusion clause is to protect the consultant or contractor against hypothetical losses that are difficult to calculate at the time when the contract is made. Such clauses, it may be argued, should not exclude liability for readily ascertainable costs of Coulson LJ’s second type - including wasted expenditure costs.