Introduction

In our April 2022 issue ‘You are forewarned – “fundamental, deliberate and wilful” breaches can fall within the ambit of liability limiting provisions!’, we have brought your attention to an English case whereby exemption clauses were held to apply to deliberate repudiatory breaches if the wording in a contract is sufficiently clear to cover any breach. Recently, in Soteria Insurance Limited (formerly CIS General Insurance Limited) v IBM United Kingdom Limited [2022] EWCA Civ 440, the English Court of Appeal (the “Court”) has further clarified the applicable principles in the area of exclusion of liability clauses and ruled that “wasted expenditure” does not equate to “loss of profit”, and hence, if a contractual party wishes to exclude its liability on wasted expenditure, one should use clear and obvious exclusionary words to that effect.

Background

In 2015, the respondent (“IBM”) had contracted with the appellant (“CISGIL”) for the provision of an IT system and 10-year management service (the “Contract”). Serious delays occurred and the IT system was not delivered. Subsequently in 2017, when IBM issued an invoice of £2.9m (the “Invoice”), CISGIL disputed it and refused to pay. IBM purported to exercise its contractual right of termination based on CISGIL’s failure to pay the Invoice.

CISGIL sued IBM alleging that the purported termination by IBM was wrongful repudiation of the Contract and claimed for £132m damages in respect of its wasted expenditure arising out of the alleged wrongful repudiation.

The lower court’s decision

The trial judge held that since the Invoice was disputed, pursuant to the Contract, the purported termination for non-payment of the Invoice was unlawful, and hence, IBM had wrongfully repudiated the Contract. The trial judge was satisfied that CISGIL had established a claim for wasted expenditure, namely expenditure incurred by CISGIL in the expectation that IBM would perform the Contract and provide CISGIL with an improved IT system, and valued it at £122m. However, the trial judge held that such claim for wasted expenditure was excluded in its entirety as it was excluded by the exclusion clause of the Contract (the “Exclusion Clause”) which reads:

“…neither party shall be liable to the other or any third party for any Losses…or for loss of profit, revenue, savings…”.

“Losses” is further defined to include:

“All losses, liabilities, damages, costs and expenses including reasonable legal fees on a solicitors/client basis and disbursements and reasonable costs of investigation, litigation settlement, judgment, interest”.

The Court’s ruling

In reaching the conclusion that the trial judge was wrong and the Exclusion Clause did not cover wasted expenditure, the Court had made the following important observations:-

1.       Although “Losses” was widely defined in the Contract, the Exclusion Clause had carved out specific types of loss to be excluded. As a matter of the language used, the natural and ordinary meaning of “loss of profit, revenue, savings” did not cover wasted expenditure.

 

2.       By citing lines of authorities on contractual construction, the Court has repeatedly emphasized that the purpose of contractual interpretation is to determine what a reasonable person with all the background knowledge would have understood what the parties meant by the language used. As authorities ruled that in interpreting exclusion clauses, courts will start with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, unless rebutted by clear express words. The Court noted that the more valuable the right, the clearer the language will need to be. Furthermore, the more extreme the consequences for excluding or modifying the liability that would otherwise arise, the more such clauses should be clearly and unambiguously expressed. Without making any reference to wasted expenditure in the Exclusion Clause, the Court was not convinced that such obvious and common type of damages was excluded.

 

3.       It was commercially understandable for parties to exclude “loss of profit, revenue, savings” which were all of a similar kind, namely, the consequential loss which was speculative and thus difficult to estimate in advance. However, as wasted expenditure was ascertainable, it was usually not regarded as consequential loss and exclusion of which should have been expressly made.

 

4.       The Exclusion Clause was intended to exclude some types of loss flowing from an underlying loss of bargain such as “loss of profit, revenue, savings”, but not to exclude other types of loss such as re-procurement costs and wasted expenditure.

 

5.       The Court has observed that although wasted expenditure could be recouped out of profits or savings or revenue had the contract been performed, it does not mean a claim for wasted expenditure is equating to or impliedly included within the scope of “loss of profits, revenue, savings”.

Hong Kong Court’s approach

In Hong Kong, when construing an exclusion clause, the courts generally look for clear wording which unambiguously sets out the intention of the parties regarding the allocation of risk between them. Apart from the “rules of construction” which require courts to construe standard exemption clauses against the party putting them forward (i.e. the contra proferentem rule), there is one further consideration to bear in mind - the court in its task of interpretation should look at the exclusion clause broadly as a whole, in the same way as any business person would in assessing the allocation of risk.

In a commercial situation, the courts usually recognize the parties themselves as the best judges of their own and the courts will intervene only when strictly necessary. In Carewins Development (China) ltd v Bright Fortune Shipping Ltd & Anor [2009] 5 HKC 160, a carrier relied on an exclusion clause on a bill of lading which excluded liability on “misdelivery”. The court considered the word “misdelivery” is capable of being read to mean a delivery made in error to a wrong person or to a wrong place, expressly extended by the clause to cover negligent errors, but not covering a conscious delivery to a recipient without presentation of an original bill of lading. In drawing this conclusion, Justice Ribeiro opined that the more serious that the consequences of a breach of contract would or might be, the clearer must the language of exclusion be before there could be attributed to the parties a consensus that the sufferer’s right to compensation was excluded. In such situation, the surest way to exclude liability for its breach was to do so by a specific rather than general form of words.

Although Carewins Development dealt with an exclusion of a fundamental breach, while Soteria Insurance Limited dealt with an exclusion of a particular head of loss, they both reflect the courts’ modern approach to the construction of exclusion clauses, namely, the more extreme the consequences are, in terms of excluding or modifying the liability that would otherwise arise, then the more stringent the court's approach should be in requiring that the exclusion or limit should be clearly and unambiguously expressed.

Looking forward

In recent years, it seems that the courts have softened their approach to exclusion clauses when looking at contracts between commercial parties and have focused more on their commercial rationale and how the parties intended to allocate risks. The parties are free to make their own bargains and it is the court’s duty to interpret and give effect on the wordings and clear intention of the parties’ agreement. It is worth noting that the courts in Carewins Development and Soteria Insurance Limited left open the possibility of allowing an exclusion  clause to exclude liability if sufficiently clear language is used.

In light of the decision in Soteria Insurance Limited, it is anticipated that the courts will take a strict approach to the construction of exclusion clauses, requiring express rather than implied provisions to deprive a party of a remedy that would otherwise arise as of right. It is advised that parties should seek legal assistance when negotiating exclusion clause with the counter-party.

One has to bear in mind that the fairly commonplace exclusion of loss of profits, revenue and savings will not by itself prevent an injured party from recovering its wasted expenditure, and for that right to be lost, the exclusion clause will need to be expressed in much clearer terms.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2022