Soteria Insurance Ltd (formerly CIS General Insurance Ltd) v IBM United Kingdom Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Coulson,Lord Justice Phillips,Mr Justice Zacaroli |
| Judgment Date | 04 April 2022 |
| Neutral Citation | [2022] EWCA Civ 440 |
| Docket Number | Case No: A1/2021/0803 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 440
Lord Justice Coulson
Lord Justice Phillips
and
Mr Justice Zacaroli
Case No: A1/2021/0803
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BUSINESS AND PROPERTY COURT
TECHNOLOGY AND CONSTRUCTION COURT (QBD)
MRS JUSTICE O'FARRELL
Royal Courts of Justice
Strand, London, WC2A 2LL
Bankim Thanki QC, Michael Lazarus & Laurentia de Bruyn (instructed by Addleshaw Goddard LLP) for the Appellant
Nigel Tozzi QC, Adam Kramer QC, Matthew Lavy & Iain Munro (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for the Respondent
Hearing Dates: 23 & 24 February 2022
Judgment Approved
This judgment was handed down remotely by circulation to the parties' representatives by email and released to BAILII and the National Archives. The date and time for hand-down is deemed to be 10.30am on 4 April 2022
INTRODUCTION
The primary issue in this case concerns the proper construction of an exclusion clause. Whilst that may sound a little unexciting, the parties are agreed that at least £80 million turns on the construction of that one clause of the contract.
The underlying litigation concerned an IT system to be provided by the respondent (“IBM”) to the appellant (“CISGIL”) which was very late and, ultimately, not delivered at all. The judge found that IBM was responsible for those critical delays [657]. Towards the end of the contract, a dispute arose in respect of an IBM invoice, in the sum of £2.9m, relating to milestone Application Gate 5 (“the AG5 invoice”). The invoice was not paid and, in the events that followed, the contract was terminated. Each side blamed the other for that termination.
CISGIL commenced proceedings against IBM alleging that IBM had wrongfully repudiated the contract. Their principal claim was for damages in the sum of £132 million in respect of their wasted expenditure arising out of the alleged wrongful repudiation. CISGIL also had separate multi-million pound claims for breaches of warranties and in respect of the delays. IBM defended the claims on the basis that they had been entitled to terminate the contract because of the non-payment of the AG5 invoice. They also counterclaimed the £2.9m due by reference to the AG5 invoice.
Including reading time, the trial before O'Farrell J (“the judge”) lasted 35 days. In a clear and painstaking judgment ( [2021] EWHC 347 (TCC)), running to a total of 754 paragraphs, the judge held (amongst other things) that:
a) IBM had wrongfully repudiated the contract;
b) CISGIL had established a claim for wasted expenditure in consequence of that repudiation. Subject to separate arguments about the exclusion clause and the contractual cap, the judge valued that claim at £122 million;
c) However, that claim for wasted expenditure was excluded in its entirety by operation of clause 23.3 of the contract;
d) CISGIL were entitled to recover damages of £15,887,990 in respect of additional costs and losses as a result of IBM's other breaches of contract;
e) IBM were entitled to set-off against that figure the sum of £2.9m referred to above;
f) CISGIL were therefore entitled to recover damages in the net sum of £12,998,390 together with interest.
CISGIL sought permission to appeal on the issue of the proper construction of clause 23.3. I granted permission to appeal on that construction issue on 23 June 2021. If the judge was wrong as to the proper construction of clause 23.3 there was a separate issue as to the precise sum due to CISGIL. That was because of the operation of contractual cap clauses which the judge did not need to address (because of her construction of clause 23.3). There were originally three possible options as to the sum due, but that dispute has since narrowed. CISGIL say that the caps allow them to increase their recovery to £96m odd; IBM say that the correct increase would be to £80m odd. There is no appeal in respect of the sums awarded or refused by way of damages in relation to CISGIL's other claims for breach of contract.
Following the grant of permission to appeal, IBM issued a Respondent's Notice. I accept that this was a valid Notice because it sought to uphold the judge's order for other reasons. However, the main ‘other reason’ relied on by IBM went back into the heart of the 35 day trial, because IBM challenged the judge's conclusion that CISGIL had repudiated the contract when they purported to rely on the non-payment of the AG5 invoice to terminate the contract. The judge said that, because the AG5 invoice had been challenged, in accordance with the contract, within the stipulated 7 Business Days, the purported termination for non-payment of that invoice was unlawful and amounted to repudiation. Of course, if IBM's challenge was right, and they had been entitled to terminate, then the issue about the true construction of clause 23.3 would not matter, because CISGIL would not be entitled to any damages for repudiation at all. In addition, IBM sought to raise an entirely separate causation issue, to the effect that the expenditure was wasted, not as a result of the termination of the contract, but because of what it called “a change of strategic direction” by CISGIL's parent company after the repudiation.
Just to emphasise the way in which this appeal has rather drifted away from the simple dispute about the construction of one clause, in response to IBM's challenge to the judge's conclusion on repudiation, CISGIL countered by asserting that their alternative basis for alleging repudiation by IBM at the trial – which the judge rejected – should have been upheld. That concerned CISGIL's alleged right to set-off their claims (for delay and for IBM's other breaches of contract) against the AG5 invoice. If that counterargument is right, then that would give CISGIL another route back to the wasted expenditure claim. In this way, in one way or another, the parties sought to reactivate many of the major issues between them that were debated and resolved by the judge at trial.
In hearing this appeal, therefore, this court must be astute to avoid the submissions becoming a vehicle for the re-argument of disputes of fact. The trial was the proper place for those matters to be resolved: it was, in Lewison LJ's memorable phrase “the first and last night of the show”: see Fage UK Ltd v Chobani Ltd and another [2014] EWCA Civ 5. The court must also avoid what he called “island hopping”, particularly where the potential issues of fact arose primarily, not out of the appeal (where permission would have been necessary), but out of the Respondent's Notice (where it was not).
The number of issues before this court also raised the question of sequence. The logical order in which to address the issues may have been to deal with the repudiation and causation issues first, and then turn to the construction issue, because it would only be if the repudiation and causation issues were resolved against IBM that the construction and cap issues would be relevant. However, neither party made their submissions in that order, and I have concluded that it would be inappropriate to allow the Respondent's Notice to dictate proceedings to that extent. This was, after all, an appeal about the construction of a particular clause in the context of the contract as a whole.
Accordingly, having set out the factual background and the issues, I deal with the construction issue first ( Section 4 below). I then deal with the other matter raised by CISGIL in the Appellant's Notice, namely the issue as to the applicable cap on damages ( Section 5). That will lead to a conclusion on the appeal, subject to the matters raised by and in response to the Respondent's Notice. Thereafter, I deal with those matters: the repudiation issue ( Section 6), the set-off issue raised in response ( Section 7), and the causation issue ( Section 8). There is a short summary of my conclusions in Section 9. I am very grateful to leading counsel, and their respective teams, for their assistance and for largely avoiding the potential pitfalls illustrated by Lewison LJ in Fage.
THE FACTUAL BACKGROUND
In about 2014 CISGIL, whose business was the underwriting and distribution of general insurance products, decided to purchase and implement a new IT solution for its business. This was known as Project Cobalt. On 16 June 2015, CISGIL entered into a contract with IBM for the supply of the new IT system for CISGIL's insurance business and for management of the system for a term of 10 years.
The contract comprised a Master Services Agreement (“the MSA”), and two other documents dealing with the detail of the services to be provided by IBM: the Implementation Statement of Work (“Implementation SOW”) which covered the provision of the new IT system; and the Managed Services Statement of Work (“Management SOW”), which covered the subsequent management services which IBM would provide, over a 10-year period, once the new IT system had been installed. The Implementation SOW set out the cost of supply and implementation of the new IT system in the total sum of £50.2m, with a schedule showing how that sum was broken down and when the various stage payments would be made. The Management SOW identified the total figure for the management services over the 10-year period at £125.6m.
The MSA provided for IBM to deliver the new operating platform substantially before the long stop date of 31 December 2017. There were various staged completion dates: 30 April 2016 (later extended to 30 May 2016) for the home insurance platform (“Release 1 Go Live Date”); 15 August 2016 for the motor insurance platform (“Release 2 Go Live Date”); and October 2017 for the longstop date by which the historic customer data would...
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