Exclusions of liability within Construction

Exclusions of liability are some of the most important clauses in any contract you sign up to...

The recent decision of the Court of Appeal in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440 provides important guidance on the construction of exclusion clauses and demonstrates the costly consequences of failing to expressly include the right heads of loss. Andrew Cullyer, Litigation Executive specialising in construction disputes, explains more about what happened in this case and how to get the contract right.

Case summary

It is difficult to give a better introduction to this case than the one LJ Coulson provided himself:

“The primary issue in this case concerns the proper construction of an exclusion clause. Whilst that may sound a little unexciting, the parties are agreed that at least £80 million turns on the construction of that one clause of the contract.

The underlying litigation concerned an IT system to be provided by … ("IBM") to … ("CISGIL") which was very late and, ultimately, not delivered at all. …”

The relevant clause of the contract in question stated:

"Subject to clause 23.2 and 23.4, neither party shall be liable to the other or any third party for any Losses arising under and/or in connection with this Agreement (whether in contract, tort (including negligence), breach of statutory or otherwise) which are indirect or consequential Losses, or 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) even if such Losses were foreseeable and notwithstanding that a party had been advised of the possibility that such Losses were in the contemplation of the other party or any third party"

Upon first look, this exclusion clause may seem very comprehensive and would appear to cover every possible sort of loss that could arise, providing that loss was not directly caused by IBM. However, CISGIL was claiming a significant sum for “wasted expenditure,” which was money spent by CISGIL on the premise that IBM would install a functioning IT system, which IBM did not do.

The question for the Court of Appeal was whether the loss of wasted expenditure was included within this clause?

In the first instance, the High Court had concluded that it was excluded within the clause and therefore, CISGIL’s claim for wasted expenditure failed, as essentially the High Court concluded it was exactly the same sort of loss as those anticipated by the exclusion clause.

The Court of Appeal emphasised, with reference to a previous case, that clear express words are needed to show that the specific right to damages has been excluded and the more significant the right, the clearer the language will need to be.

The Court also considered the two principle approaches to claiming damages. Normally in contract law, the primary entitlement is to damages that would put you in the position you would have been in had the breach of contract not occurred. However, the Court also recognises damages, in the alternative, to compensate the claimant for money spent in reliance on a contractual benefit being provided, which is wasted because the contractual benefit never materialises. This is called wasted expenditure.

In its analysis and judgment, the Court therefore reversed the High Court’s decision, in summary, for the following 5 reasons:

• The clause did not expressly say, nor could be construed to mean or include, “wasted expenditure.”
• Exclusion clauses are to be read strictly and express words are required to cover the type of loss claimed to be excluded and they were not present here.
• Wasted expenditure is a fundamentally different type of loss to “loss of profit, revenue, savings,” It could have been expressly excluded and there are examples of it being so excluded. This was specifically the case because wasted expenditure does not require any degree of estimation to ascertain the loss, unlike a loss of profit claim for example.
• That the clause did not exclude all damages for loss of bargain and could not be construed as so doing.
• Wasted expenditure could not be included within the idea of profits just because there was presumption that some wasted expenditure would be recouped where profits are made.

These may read like five different ways of essentially saying the same thing, however they are not. What they do is show that the court will not readily enforce total exclusions of liability, that exclusions in your contract must be absolutely clear, and such exclusions should be carefully limited so as not to exclude the total loss of bargain.

It therefore followed that there was no exclusion of these losses, which were subject to a partial contractual cap and limited therefore to circa £80 million.

There are two points to take away from this:

1. Avoid breaking the contract in the first place; and
2. If you are going to rely on an exclusion clause, make sure it covers the loss claimed.

 To have your questions answered on your construction project or if you wish to bring a claim against a party involved in your construction project, you can contact Andrew Cullyer today on 023 8071 7482 or email andrewcullyer@warnergoodman.co.uk.

For general Litigation or Dispute Resolution enquiries, contact Eleanor Brander on 023 8071 7429 or email EleanorBrander@warnergoodman.co.uk.