Head of General Counsel Services | Commercial | Retail & Consumer
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Exclusion clauses are a key part of a commercial contract. Following the recent judgement in Soteria Insurance Limited (formerly CIS General Insurance Limited) and IBM United Kingdom Limited, the formation and wording of these clauses has once again come under scrutiny by the courts. It is a timely reminder about how to construct and interpret wording around which losses can or cannot be recovered by a party where the other party has failed to meet their contractual obligations.
Wasted expenditure is increasingly regarded as an independent type of loss and should therefore be distinguished from loss of profits, revenue or savings. The calculation of loss of profits requires an assessment of what the outcome would have been under different circumstances and always includes an element of speculation. Wasted expenditure claims, however, are more easily ascertainable as there will be evidence to support the claim, such as invoices and ancillary contracts.
As demonstrated in Soteria Insurance, claims that would have compensated the non-breaching party for being better off fall outside the scope of recoverable losses, but claims to compensate them for being worse off as a result of the default are more likely to be successful.
The Court of Appeal also confirmed in Soteria Insurance that the high court was flawed in reasoning that wasted expenditure was a method of calculating 'lost profits, revenue or savings' on the basis that they are not the same type of loss. This upholds the decision in The Royal Devon and Exeter NHS Foundation Trust v ATOS IT Services UK Ltd  EWHC 2197 (TCC), where the court's view was that wasted expenditure was not impliedly included within lost profits, revenue or savings.
Wasted expenditure is just one limb of an exclusion clause. Soteria Insurance reminds us of some of the other key limbs and how to ensure the clause is drafted in such a way which allows a party to successfully rely on them:
Courts will follow the applicable principles of contract construction when reading an exclusion clause:
Exclusion clauses will continue to be heavily negotiated as there is so much financial risk at stake should a party not meet its contractual obligations. Always take care to consider the possible types of loss you would seek to recover in the unfortunate event of a breach of contract as the courts are more likely to find in your favour where clear, unambiguous drafting is present around exclusions of liability.