Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited

An exclusion of liability for loss of profit, revenue or savings does not, without clear language, exclude wasted expenditure caused by repudiatory breach. Wasted expenditure is a distinct and readily ascertainable form of loss, although its recovery rests on a rebuttable presumption that the expenditure would have been recouped through contractual performance.

Separate contractual liability caps are cumulative where distinct losses arise under the corresponding services. A claimant must nevertheless identify loss attributable to each service before invoking its cap. Contractual requirements to dispute invoices promptly may also require any equitable set-off relied upon to justify non-payment to be asserted within the stipulated period.

IBM contracted to implement and manage a new IT system for CISGIL. Following serious delay, IBM purported to terminate the agreement for non-payment of a £2.9 million milestone invoice. CISGIL treated that termination as a repudiatory breach and claimed substantial wasted expenditure.

O’Farrell J held in [2021] EWHC 347 (TCC) that IBM had wrongfully repudiated the agreement and that CISGIL had established £122 million of wasted expenditure. She nevertheless held that the expenditure was excluded by a clause excluding loss of profit, revenue and savings. She awarded net damages of £12,998,390 on other claims.

CISGIL appealed on the exclusion clause and applicable liability caps. IBM relied on a respondent’s notice disputing repudiation and causation. The principal question was whether the exclusion of profit, revenue and savings also excluded wasted expenditure.

1. Appeal allowed unanimously. Clause 23.3 did not exclude CISGIL’s wasted expenditure. Its natural meaning excluded specified losses, including profit, revenue and savings, but contained no reference to wasted expenditure. Clear and obvious language was required to exclude such a valuable and ordinary remedy for repudiatory breach. The first-instance construction therefore could not stand: paras 55–90.

2. Wasted expenditure and lost profit, revenue or savings are distinct forms of loss. The former comprises expenditure actually incurred in reliance on performance and is usually ascertainable from records. The latter depends upon counterfactual benefits and may be speculative. The rebuttable presumption that expenditure would have been recouped through contractual performance supplies the juridical basis for recovery; it does not convert wasted expenditure into a claim for profit, revenue or savings: paras 65–89.

3. Clause 23.5 created separate and additional liability caps for distinct parts of IBM’s services. The caps were capable of cumulative operation. CISGIL nevertheless had to identify loss attributable to each service. Its established expenditure related to implementation, and no specific wasted cost was shown for managed services. Only the implementation-services cap applied, producing net damages of £80,574,168: paras 91–105.

4. The milestone invoice was disputed in good faith. An invoice is disputed when the claim it makes is expressly or implicitly challenged or not accepted. The recipient’s statement that it could not accept the invoice without the contractually required purchase-order number was sufficient. A mistaken but genuinely held and reasonably arguable contractual position did not amount to bad faith: paras 118–140.

5. The prevention principle did not apply because CISGIL had complied with the contractual procedure for disputing the invoice. IBM’s purported termination was therefore wrongful: paras 141–145.

6. Although academic, CISGIL’s alternative set-off argument failed. The payment machinery required all reasons for non-payment, including equitable set-off, to be notified within seven business days. The right of set-off was not excluded, but its exercise against an invoice was subject to that procedure: paras 146–160.

7. IBM’s alternative causation case was rejected. It had not been pleaded, opened or supported by evidence addressing the relevant counterfactual of successful contractual performance. It could not first be advanced through closing submissions and then determined on appeal: paras 161–179. IBM’s respondent’s notice was dismissed.

1. Court of Appeal (Civil Division): In [2022] EWCA Civ 440, the court unanimously allowed CISGIL’s appeal on the exclusion clause, applied only the implementation-services liability cap, and dismissed IBM’s respondent’s notice.
2. Technology and Construction Court: In [2021] EWHC 347 (TCC), O’Farrell J held that IBM had wrongfully repudiated the contract and that CISGIL had established £122 million of wasted expenditure, but held that the expenditure was contractually excluded. She awarded net damages of £12,998,390 on other claims.