A recent Court of Appeal judgment has considered exclusion clauses within an IT dispute and a party’s ability to claim for wasted expenditure when implementation of an IT project runs into difficulties.

Background

The case concerned a contract for the supply of an IT system which excluded liability for “indirect or consequential losses, or for loss of profit, revenue, savings (including anticipated savings), data … 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”.  The system was delayed and towards the end of the contractual term the supplier terminated for the customer’s non-payment of an invoice in the sum of £2.9m.  The customer had attempted to dispute the invoice, relying on the delays to the project, but the supplier treated the non-payment as a repudiatory breach.  The customer claimed damages of £132m representing its wasted expenditure.

Decision

At first instance it was found that the supplier had wrongfully terminated the contract and the customer, in principle, had a claim for wasted expenditure.  However, it was also found that such a claim was entirely excluded by the exclusion clause in the contract.  The customer appealed on the construction of the exclusion clause.

The Court of Appeal held the judge had incorrectly found that the exclusion clause excluded the customer’s wasted expenditure clause relying on the following reasons:

Natural and Ordinary Meaning: “wasted expenditure” did not appear in the exclusion clause  and the wording used did not cover it.    Furthermore, as the parties had included some specific examples within the clause and chosen not to include wasted expenditure, the court said that, on the principles of construction, the parties cannot have intended to exclude liability for wasted expenditure;

Clear Language: the court noted that, “the more valuable the right, the clearer the language of an exclusion will need to be”.  A claim for wasted expenditure by the customer was one of the most likely claims and therefore wording needed to exclude this claim would need to be clear and obvious however, in this case, no wording was included at all;

Types of Loss: the court noted that loss of profit, revenue and savings included losses of a similar kind as they all compensated the customer for the benefits it expected to derive as a result of the new IT system.  However a wasted expenditure claim compensates the customer for being worse off as a result of the breach and therefore the exclusion clause did not include these kind of losses;

Loss of Bargain: The clause did not operate to exclude types of loss such as the need to re-procure an IT system from another supplier. If it did, a claimant would be left with limited recourse for its loss of bargain which would be harsh and unfair;

Previous decision: the first instance judgment was in direct contrast to an earlier decision with no accepted reason for distinguishing the two cases.

Summary

The decision has provided some welcome clarity on the contractual construction of exclusion clauses and in particular claims their relationship with claims for wasted expenditure.  Overall, the decision

 shows that the court is primarily concerned with the natural and ordinary meaning of words used and if the language is unclear or ambiguous it will be construed against the party seeking to rely on it.  If

 the parties wish to exclude liability for wasted expenditure then they must do so in clear terms – themore valuable the right, the clearer any exclusion clause must be.