Insurance company wins £80m contract dispute with IBM

IBM has been ordered to pay an insurance company £80m following a contract dispute.

Stephanie Johnson Senior Associate Solicitor in our dispute resolution team reports on this recent case.

It had agreed to provide Soteria Insurance Ltd with an IT system over a 10-year period. After a series of delays, Soteria refused to pay a “milestone” invoice presented by IBM. 

Relying on the non-payment, IBM terminated the contract, and the IT system was never delivered. 

Soteria alleged that IBM had wrongfully repudiated the contract and sought £132 million in damages for wasted expenditure flowing from the repudiation. 

It also sought damages for breach of warranty and delay. 

IBM argued that it had been justified in terminating the contract and it counterclaimed for the sum due under the invoice. 

At trial, the judge found that IBM had wrongfully repudiated the contract, but that Soteria was unable to claim for wasted expenditure because of an exclusion clause. 

Soteria appealed against the judge’s construction of the exclusion clause. 

The Court of Appeal ruled that the judge had been entitled to find that Soteria had disputed the invoice in good faith and that IBM could therefore not rely on the non-payment to justify its termination of the contract. 

However, she had erred in construing the exclusion clause as precluding the buyer from recovering its wasted expenditure. The contract defined “losses” widely and carved out specific types of loss in respect of which liability was excluded: “loss of profit, revenue [or] savings”.

The clause did not exclude a claim for expenditure wasted because of the other party’s repudiatory breach.

The judge clearly found that Soteria acted fairly and honestly and did not conduct itself in a way that was commercially unacceptable or calculated to frustrate the purpose of the contract.  However, because of a contractual cap on damages, it was limited to recovering only £80.5 million.

If you would like more information about the issues raised in this article or any aspect of contract law, please contact Stephanie on 01228 516666 or click here to send her an email.