IBM hit with £80m judgment for wasted expenditure

The Court of Appeal has awarded £80.5m against IBM. This is an interesting case. Not only the result, but also the court’s assessment of the liability provisions. Other buyers and sellers of IT should take note.

In 2015, CIS General Insurance entered into a Master Services Agreement for IBM. This was for IBM to implement a new IT solution for £50m with management services for an extra £126m over 10 years.

Serious delays occurred to the project for which IBM was responsible and things finally came to a head. CIS refused to pay the latest invoice for £3m. IBM purported to terminate the contract for non-payment. CIS argued that IBM was not entitled to do so and treated this action as a repudiatory breach by IBM.

This type of termination and counter-termination is standard and, indeed, the High Court judge agreed with CIS’s reasoning. The judge also agreed that CIS had incurred wasted costs of £122m as a result of IBM’s repudiation, including £34m paid to IBM for no discernible benefit. The judge said the contract excluded a claim for wasted expenditure; otherwise, she would have awarded CIS £80.5m. Instead, she awarded £16m for IBM’s delays and then reduced this by the £3m outstanding invoice.

CIS appealed to the Court of Appeal. This was a complex case and I am simplifying things here to extract the key points and am excluding extraneous detail. The key liability provisions of the contract were as follows:

  • Exclusion of claims for loss of profit, revenue, savings, loss of data, goodwill and reputation
  • Liability from Implementation Services capped at 150% of the charges
  • Liability from Management Services capped at 125% of the charges
  • Indemnity of £5m for data protection and £3m for regulatory fines

The Court of Appeal said the High Court judge was wrong to construe the drafting to prevent CIS from recovering wasted expenditure. It said: “The more valuable the right, the clearer the language of any exclusion clause will need to be.” The wording contained no express exclusion.

IBM argued CIS would have wasted this money anyway because of a change in strategic direction by CIS’s parent company, but the Court of Appeal ignored this. However, it dismissed CIS’s higher claim to include management services since IBM’s failure to implement the solution meant that it had not started to manage that solution.

So the Court of Appeal allowed CIS’s claim for “wasted expenditure” but capped it under the express wording to £80.5m.

This case is a valuable reminder to check your contracts. Obviously, for a project worth as much as this, you’ll get your contract lawyers to pore over the wording. But there is much to consider for smaller value projects too.

If you need advice, contact me f.jennings@teacherstern.com or +44 (0) 20 7611 2338.

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