Failed IT Project Claims: What Losses Can Your Business Recover?

When an IT project fails, the financial impact can extend far beyond the amount paid to the original supplier. This is a key point in failed IT project claims.

A business may have spent money trying to repair the system, engaged additional consultants, paid staff to carry out manual workarounds or incurred the cost of replacing the failed solution altogether. There may also be lost sales, delayed projects or other operational losses.

However, a failed IT project may have cost a business £500,000. That does not necessarily mean the business can recover £500,000 from the supplier.

A successful claim will usually require the business to show that the supplier breached the contract. It must also show that the breach caused the particular loss it is claiming and that the loss is legally recoverable.

Contractual liability caps and exclusions can also have a significant effect on the amount ultimately recovered.

This guide looks specifically at the losses that may arise from a failed software or IT project and the issues businesses should consider when calculating the value of a potential claim.

What is the purpose of damages in failed IT project claims?

Damages are intended to compensate the business

The general purpose of contractual damages is compensation rather than punishment.

In broad terms, the court will usually seek to put the innocent party in the financial position it would have been in if the supplier had properly performed the contract. This is subject to rules concerning causation, remoteness and mitigation.

For a failed IT project, that means the starting point is not simply how much the business is unhappy with the supplier. The business needs to identify the financial consequences caused by the supplier’s breach.

Loss needs to be analysed

It is usually beneficial to break the claim into specific categories.

For example, the business may have incurred £80,000 repairing defective work, £150,000 appointing a replacement supplier and additional internal costs dealing with the consequences of the failure.

The business may need to consider each category separately to establish why it incurred the cost and whether it is recoverable.

The business must mitigate its loss

The law expects a business to take reasonable steps to reduce its loss. It cannot usually recover loss that it could reasonably have avoided. It is not required to take unreasonable, disproportionate or speculative steps, and the reasonable cost of attempting to mitigate may itself be recoverable, even if the attempt is unsuccessful.

Suppliers often argue that the business failed to mitigate. The business should therefore record the reasons for remedial and replacement decisions at the time it makes them.

Can you recover money paid to the original IT supplier?

Potentially.

Where the business paid substantial fees for work that the supplier never delivered or that was materially defective, those payments may form part of the financial claim. However, the position is not always as simple as asking the supplier to repay everything the business has paid.

Consider what value the business actually received

A failed implementation may still have produced some usable software, licences, documentation or completed work.

If the business has received and retained genuine value, the court may need to take that into account when assessing damages.

Equally, a supplier should not necessarily be entitled to keep the full project price where the work delivered has little or no usable value to the customer.

The appropriate analysis will depend on the nature of the breach, what was actually delivered, and the remedy being pursued.

Damages and recovery of the price are different remedies

Recovering money paid to the supplier is not always a claim for damages. Where the business has terminated for repudiatory breach and has received none of the benefit it paid for, it may be able to claim the price back as a restitutionary claim for total failure of consideration.

That remedy generally applies only where the failure is total rather than partial, so it will often be unavailable where the business has received and retained some usable work. In other cases, the court is more likely to treat the payments as part of a damages claim.

Can you recover the cost of fixing defective software?

Reasonable remediation costs may be recoverable

Where defective work can realistically be corrected, the reasonable cost of putting it right may form part of the claim. This could include fees paid to another developer, specialist consultants or technical advisers brought in to identify and remedy the supplier’s failures.

It is important to work out whether the remedial expenditure was reasonably required because of the original supplier’s breach.

Keep a clear record of why the work was necessary

The original supplier may later argue that the business carried out unnecessary improvements rather than genuine remediation. It is therefore useful to keep scopes of work, technical reports, quotations and invoices. These should show what needed correcting and why.

Where possible, remedial work should distinguish between restoring what the original supplier should have delivered and additional improvements the business has chosen to make.

Can you recover the cost of replacing the failed IT system?

Potentially, but replacement costs often require careful analysis.

If the original system cannot reasonably be repaired, the business may have little commercial choice but to procure another solution.

The reasonable cost of replacement may therefore form part of the losses caused by the breach.

The replacement must be commercially reasonable

The supplier may challenge the claim if the replacement solution is significantly more expensive than the system it was contracted to provide.

For example, if the failed project concerned a relatively limited platform but the business uses the opportunity to purchase an enterprise-wide replacement with substantially more functionality, it may be difficult to attribute the entire new cost to the original breach.

That does not mean the business has to purchase an identical replacement.

It means the business should be able to explain the additional expenditure as a reasonable response to the project failure.

Can you recover money spent on external consultants?

Often, where those costs were reasonably incurred as a consequence of the supplier’s breach.

Businesses dealing with a serious technology failure commonly appoint external specialists to understand what has gone wrong.

Where the costs are directly connected with investigating or remedying the supplier’s failures, they may potentially form part of the claim.

The business should retain invoices and engagement documents and record why it needed the external assistance.

Can you recover the cost of internal staff and management time?

Potentially, although these claims need to be evidenced properly.

Failed IT projects can consume a lot of time. Staff may need to attend recovery meetings, correct data, carry out manual processes, deal with customers or work with replacement suppliers.

Keep records of the time spent dealing with the failure

A claim for internal staff costs needs more than a general statement that the project took up a significant amount of management time.

The business should be able to explain which employees had to leave their usual duties and what they did. It should also explain how much time they spent and how this disrupted the business. Relevant work might include correcting corrupted data, organising recovery work or managing operational workarounds.

Timesheets, meeting records, internal emails and a clear calculation based on employment costs can help support the claim. A broad estimate prepared long after the event is likely to be more difficult to substantiate.

Existing salaries do not automatically prevent recovery

The fact that employees would have been paid anyway does not necessarily prevent a claim.

However, the business will generally need to demonstrate that the supplier’s breach caused significant disruption and took staff away from their normal activities. Simply applying an hourly rate to every meeting connected with the project will not necessarily establish a recoverable loss.

Time spent dealing with the operational consequences of the failure should also be distinguished from time spent preparing and pursuing the legal claim. The latter is generally a litigation costs issue rather than a separate claim for damages.

Can you recover lost profits or anticipated savings?

Potentially, but these claims can be more difficult to establish than costs already incurred.

A business may have commissioned a new system to increase sales, reduce staffing costs or improve the efficiency of its operations. If the supplier’s breach prevented those benefits from being achieved, the resulting lost profits or savings may be relevant to the claim.

However, the business must establish the financial position it would have been in if the contract had been properly performed. It must also check whether the contract excludes liability for those categories of loss.

Lost profits are also subject to the rule on remoteness. Broadly, they are recoverable only if they were within the reasonable contemplation of both parties when they made the contract (Hadley v Baxendale). A supplier that knew the system was intended to generate particular sales or savings is more exposed than one that was simply supplying generic software.

The business must also prove the loss with reasonable certainty. Where the loss depends on uncertain future events, the court will assess it as best it can, but the business should expect to support its figures with credible evidence.

Expected benefits need a credible financial basis

There is an important distinction between a demonstrable financial loss and an optimistic forecast.

A claim should explain how the promised functionality would have generated the additional profit or saving, when that benefit would have arisen and what costs the business would have incurred in achieving it.

Existing trading figures, project business cases and financial forecasts may help support that analysis. The calculation should focus on the benefit actually lost, rather than treating every missed sales opportunity or projected increase in revenue as recoverable profit.

What is wasted expenditure?

Wasted expenditure is money spent in anticipation of the contract being performed which has been wasted because of the supplier’s breach.

In an IT project, this may include project-related costs and time devoted to an implementation that ultimately fails. Depending on the circumstances, a wasted expenditure claim may provide an alternative way of assessing the business’s loss rather than trying to prove the profits or savings that the system would have generated.

It is not simply another label for every cost associated with an unsuccessful project. The expenditure must genuinely have been wasted, and the claim remains subject to the applicable rules on damages.

Where a business claims wasted expenditure, the court will generally presume that the business would have recovered the expenditure if the supplier had performed the contract. It is then for the supplier to show that the business would have made a loss in any event, for example because the system would not have generated enough benefit to cover its cost. This is one reason wasted expenditure claims can be attractive where lost profits are difficult to prove.

An exclusion of lost profits does not necessarily exclude wasted expenditure

This distinction was important in Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440.

The Court of Appeal held that a contractual exclusion covering loss of profits, revenue and savings did not, on its wording, exclude the customer’s claim for wasted expenditure following IBM’s repudiatory breach.

The decision does not mean that wasted expenditure can never be excluded. It means that the precise wording matters. Businesses should not automatically treat an exclusion of lost profits as excluding a separate claim for wasted expenditure.

The decision also illustrates that a financial cap can still limit what a business recovers, even where an exclusion does not apply. Businesses should therefore always review the cap and the exclusions together.

Can failed IT project claims include several different types of loss?

A claim may include several categories of loss, but the business cannot recover compensation twice for the same financial harm.

For example, a business may need to consider supplier payments, wasted implementation costs and the additional cost of procuring a replacement system. The business should not simply add those figures together without checking whether they overlap.

Similarly, a claim for wasted expenditure and a claim for the expected benefits of performance may represent alternative ways of valuing the same lost bargain. The appropriate approach is to identify a consistent calculation of the business’s actual loss, rather than selecting the largest figure under every heading.

A claim may also include interest on the sums awarded. The court has a discretion to award interest on damages (section 35A of the Senior Courts Act 1981), and the contract may contain its own provisions on interest.

How the Jonathan Lea Network can help with failed IT project claims

The value of a failed IT project claim is not necessarily the total amount spent on the project. It depends on the breach, its financial consequences, the evidence available and the terms of the contract.

At The Jonathan Lea Network, we can help you assess the contractual position, identify the potentially recoverable losses and prepare a clear, commercially focused claim.

This may involve reviewing the supplier’s agreement, distinguishing wasted expenditure from remediation and replacement costs, assessing liability restrictions and organising the evidence needed to support the claim.

Our aim is to help you understand both the legal merits and the commercial value of pursuing the dispute, so that you can make an informed decision about the next steps.

Frequently asked questions: failed IT project claims

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.