Exclusion Clauses: negotiate your heads of loss carefully to maximise recoverable losses

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.

A focus on wasted expenditure

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 [2017] EWHC 2197 (TCC), where the court's view was that wasted expenditure was not impliedly included within lost profits, revenue or savings.

Wider interpretation points

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:

• The court will consider the precise language used; clear express words should be used to ensure a particular type of loss is covered.
• The more valuable the right, the clearer the language of any exclusion clause will need to be. In Soteria Insurance, the right to reclaim £34million in anticipation of an IT system that never materialised was such a large amount that the exclusion needed to be clear and obvious. This suggests a valuable right includes those rights leading to large sums of money.
• In its analysis, the court will consider what the loss of the underlying bargain was. In Soteria Insurance the bargain was not solely the savings, revenues and profit but the loss of an entire IT system.

Courts will follow the applicable principles of contract construction when reading an exclusion clause:

• Emphasis on the language the parties used and what a reasonable person would have understood the parties to meant (Rainy Sky SA v Kookmin Bank [2011] UKSC 50)
• Focus on the meaning of the relevant words in their documentary, factual and commercial context (Arnold v Britton [2015] UKSC 36)
• In balancing the language and the implications, the court must consider the quality of the drafting of the clause (Wood v Capita Insurance Services Limited [2017] UKSC 24)
• There is a presumption that neither party intends to abandon any remedies for its breach unless clear express words used to rebut the presumption (Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] AC 689)

Conclusion

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.