Caps on liability and other matters from the Soteria appeal

Soteria v IBM (Court of Appeal) [2022]

Whilst the focus in the appeal in this case was naturally on the impact of the ‘loss of profit’ exclusion, the appeal court judgment had some interesting points to make on other aspects.


In addition to the primary focus of the Soteria appeal, (see our previous report ), a number of other questions were addressed in the judgment of the Court of Appeal namely:-

  1. What was the applicable liability cap that applied to Soteria’s claim?
  2. Did Soteria validly dispute the relevant IBM invoice within the stipulated timeframe
  3. Did Soteria have valid rights of set-off in equity?

The contract contained provisions limiting liability of which the pertinent provisions of clause 23.5 were:-

“the Supplier's aggregate liability to the Customer:

(a) for the Implementation Services, shall be limited to 150% of the Charges paid and/or [that] would have been payable by the Customer if the Implementation Services had been performed in full

(e) Arising otherwise under and/or in connection with this Agreement shall be limited to the greater of:

i) £15.7 million; or

ii) 125% of the total Charges paid and/or would have been payable for the Managed Services in the 12 month period immediately preceding the first cause of action arising.”

The question was whether (a) and (e) applied in aggregate or as mutually exclusive alternatives

Paragraph 11.7 of a schedule to the contract required Soteria to pay within 7 Business Days of receipt, correctly prepared invoices properly submitted unless Soteria disputed the invoice in good faith in accordance with paragraphs 11.11 and 11.12. Paragraph 11.11 required the Customer to notify IBM within 7 Business Days if it disputed an invoice. Clause 11.12 contained an express right to withhold payment of any invoice that had been disputed in accordance with clause 11.11. The question here was whether the 7 day time limit had been complied with and whether the dispute had been raised in good faith.

The final issue was whether (and to what extent) the contractually agreed mechanism for disputing invoices excluded equitable rights of set-off that can permit a contracting party to raise its own general damages claim as a justification for not settling a supplier’s invoice.


Issue 1. This essentially came down to the meaning of the word ‘otherwise’ in sub-clause (e). The court held that the two clauses were cumulative and not mutually exclusive and dealt respectively with the two key elements of the services, namely Implementation Services and Managed Services. If distinct claims could be established in relation to both elements, then the clause limits could be aggregated. Aggregation did not, however, apply automatically. As a matter of fact, Soteria had not demonstrated any loss in relation to the Managed Services element hence why the damages awarded were capped at £80million.

Issue 2. The Court of Appeal found that at the point a junior Soteria employee emailed IBM within the 7 Business Day time limit saying “[Soteria] cannot accept this invoice for payment” there was, self-evidently a dispute in the plainest terms. It did not matter that the dispute was based on a procedural technicality, namely the absence of a Purchase Order number (which Soteria had themselves failed to provide). The time limit specified by the contract had therefore been complied with. The court expressed the view that breach of an obligation of good faith requires evidence of bad faith. If Soteria genuinely believed it had the right to refuse to pay the invoice in question there was no bad faith even if, ultimately Soteria’s belief turned out to be misplaced.

Issue 3. It was common ground that there was no provision anywhere within the Agreement which explicitly confirmed the continued applicability of equitable rights of set-off or, conversely, expressly purported to exclude such rights. However, the Agreement did specify a mechanism for disputing invoices which had the effect of preventing Soteria subsequently exercising an equitable right of set-off if it had failed to dispute the invoice within the required 7 day period. So the equitable right of set-off remained but on condition that the point was raised within the 7 day period specified for notifying the dispute.

Points to Note:

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