Court case focuses on contractual liability and ramifications for exclusion clauses
A recent court case involving a “disastrous IT project” has focused attention on the extent of contractual liability and the important ramifications for exclusion clauses.
The case CIS General Insurance v IBM  EWHC 347 (TCC) was Identified by The Lawyer as one of the ‘Top 20 cases’ of 2020, and involved an 8-week trial of liability and quantum with hundreds of pages of submissions on intricate legal, factual and technical issues.
The judgement is of particular interest in its treatment of ‘pay now, dispute later’ clauses and the exclusion of liability (wasted costs) within a contract.
Mrs Justice O’Farrell who delivered her decision in the Technology and Construction Court (TCC), described the case, revolving around an IT implementation project, as essentially one concerning “a claim for wasted costs and damages arising out of the termination of a contract for a new information technology system.”
Although the Court found in favour of Cooperative Insurance Services General Insurance Limited (CISGIL) the company only recovered around £16 million. CISGIL claimed £128 million for wasted expenditure as IBM had promised to implement the IT solution it required, but this was deemed to be equivalent to a claim for “loss of profits, revenue or savings”, which was an excluded loss and therefore not recoverable.
The case reiterates the importance of carefully following contractual termination processes as IBM was deemed not to have done this and was, therefore, held to be in repudiatory breach of the contract.
IBM’s limitation of liability clause excluded liability for wasted costs, so were not recoverable. The contractual cap on IBM’s liability also applied, despite the fact IBM was held to be in repudiatory breach of the contract.
CISGIL’s claim for breach of the warranty and for IBM failing to report on the true state of the project was also dismissed. However, IBM was in breach of the contract for delay of key milestones and in breach of its reporting obligations in respect of those delays. CISGIL was awarded only £15,887,990 in respect of IBM’s breaches of contract, which was equal to the agreed cap on liability. IBM was entitled to set off the amount of its invoice at £2,889,600.
Mrs Justice O’Farrell concluded, “The project was a failure. The parties abandoned, unfinished, a project that had consumed costs in excess of £120 million, leaving them with a system offering little or no value and substantial financial losses.”
The effect of this recent decision could impact the prospects of a claim whenever the relevant contract contains an exclusion for “loss of profits” by altering the allocation of risk between the contracting parties.
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