In the case of Soteria v IBM, the High Court decision came in for some heavy criticism for interpreting the words in a way most lay people would not understand. The Court of Appeal has now given its ruling.
Soteria (previously Co-Op in this case) had sought an expensive new IT system from IBM to run its insurance business. The value of the system to Soteria was tens of millions of pounds. There was a dispute over whether the IT system did what it should and there were serious delays. Soteria refused to pay an invoice and IBM purported to terminate the agreement.
The High Court sided with Soteria in finding that the system was not adequate.
The High Court also heard Soteria's claim for damages against IBM. However, Soteria's claim was much reduced because of an exclusion of liability for loss of profit, loss of revenue and loss of savings. The High Court had interpreted this phrase as applying to Soteria's wasted expenditure on the IT system. Its logic was that expenditure fed into profits and, as profits were excluded from being claimed, so was expenditure.
Many lawyers found the interpretation hard to understand. They also believed that loss of profits was effectively a future (and hard to quantify) loss, whereas wasted expenditure was a different type of loss altogether, and was more closely related to the item that had not been delivered.
The Court of Appeal has unanimously overturned the High Court's ruling. The Higher Court has decided that wasted expenditure was something different from lost profits. Soteria could therefore claim for its wasted expenditure.
The Court of Appeal had four grounds for this:
Lawyers and commercial parties will breathe a collective sigh of relief from the Court of Appeal decision. To interpret an exclusion of loss of profits as including the wasted expenditure in a project would have widened the exclusion significantly and not left much to be claimed in the event of a breach. It was surely not what the parties had intended. The Court of Appeal decision is a victory for common sense.
A couple of other learning points: