Exclusion of liability for loss of profit

Soteria v IBM (Court of Appeal) [2022]

Ever since it was issued last spring, the original High Court judgment in this case, as to the effect of a loss of profit exclusion clause, has been highly controversial and much criticised. The overturning of that decision is to be welcomed not least because it accords more with normal use of language.


The facts are as previously reported in our report of the original High Court judgment

Soteria (previously Co-op General Insurance or ‘CIS’) appealed the finding that a ‘loss of profit’ exclusion prevented its claim in respect of wasted expenditure. This single issue had a very material financial impact of around £80million.

The original judge had decided that the loss of profit exclusion in clause 23.3 of the contract excluded in its entirety Soteria’s claim for wasted expenditure including fees paid to IBM. The items of wasted expenditure which, on the original High Court judge's ruling, clause 23.3 excluded, broadly consisted of items of expenditure (including £34.1 million paid to IBM and other large sums paid to third party suppliers) incurred by Soteria in the expectation that IBM would perform their contractual obligations and provide them with a much-improved IT system. There was also a significant claim for financing costs.


The Court of Appeal emphasised that the starting point for any damages claim is the compensatory principle, namely that a party who suffers loss as a result of breach of contract is entitled to be placed in the same situation, with respect to damages, as if the contract had been performed.

It then went on to say that when a claimant claims damages in consequence of the other side's repudiation, there is a choice. The claimant can either claim its loss of profits or, alternatively, its wasted expenditure. If the claim is for wasted expenditure, it is not limited to the expenditure incurred after the contract was made but can also include the expenditure before the contract, provided it was reasonably in the contemplation of the parties as likely to be wasted if the contract was breached.

The Court of Appeal gave a number of separate reasons why the original judge was wrong to conclude that the loss of profit exclusion precluded Soteria from recovering its claims for wasted expenditure following IBM’s repudiation of the contract.

  1. The ‘natural and ordinary meaning of the words used’. As a matter of language, the description of the types of losses being excluded, were not apt to cover or include “wasted expenditure”. As the judge said, “In my view, the fundamental difficulty, which IBM never addressed, let alone surmounted, is that claims for “wasted expenditure” were not excluded by the terms of clause 23.3 because those words are simply not there”.
  2. The more valuable the right, the clearer the language of any exclusion clause will need to be; the more extreme the consequences, the more stringent the court must be before construing the clause in a way which allows the contract-breaker to avoid liability for what may be his catastrophic non-performance. There was nothing in clause 23.3 to suggest that the costs, which Soteria inevitably incurred in the expectation that [the contract] would be completed satisfactorily, would somehow be irrecoverable if IBM repudiated that contract. There were no relevant exclusionary words, let alone clear and obvious ones.
  3. Loss of profit claims are inevitably difficult for the potential contract-breaker [and, indeed, the counterparty] to estimate in advance. They can be notoriously open-ended. As the judge said, “Claims for loss of profit, revenue and savings are types of potential loss which, because of problems of speculation and ascertainment, are routinely excluded by clauses like clause 23.3”. On the other hand, claims for wasted expenditure are an entirely different animal. If the victim of a breach of contract has spent money in anticipation that the contract would be performed, then its 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. The claims that would have compensated Soteria for being better off as a result of the new IT system were excluded; the claims to compensate them for being worse off as a result of the non-provision of the IT system were not. That struck a fair commercial balance as between the parties.
  4. The characterisation by the original High Court judge of “wasted expenditure” as a method of calculating “lost profits, revenues or savings” was said to involve “an unjustified leap of reasoning”. Whilst lost profits is one method of calculating damages for the loss of the bargain, a claim for wasted expenditure is simply a different method of calculating such damages. That does not make wasted expenditure a method of assessing or claiming lost profits.

Points to Note:

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