Interpreting an exclusion clause in a commercial contract can be a fertile area for dispute and the courts are often left to resolve the disagreement between the parties where there are ambiguities in the drafting. In determining which meaning should be preferred the courts have often considered whether the contra proferentem rule remains relevant to the interpretation of an exclusion clause.
The contra proferentem principle essentially states that if there is any doubt about the meaning or scope of an exclusion clause, the ambiguity should be resolved against the party seeking to rely on the exclusion clause on the basis that parties are not lightly to be taken to have intended to cut down the remedies the law provides for breach of contract, unless the contract contains clear words to that effect. In the case of exclusion clauses this means the narrower interpretation should be applied.
However this principle has largely fallen away, particularly in relation to commercial contracts made between sophisticated parties which are usually negotiated on both sides. There is a growing recognition that parties to commercial contracts should be free to allocate risks as they see fit.
In the recent case of Persimmon Homes v Ove Arup [2017], the Court of Appeal has declined to apply the contra proferentem rule to an exclusion clause in a major commercial contract.
Persimmon Homes, Taylor Wimpey and BDW Trading were part of a consortium of developers who purchased and developed a large site in Wales near Cardiff. Arup were engaged as engineers on the project.
Arup was involved over many years in various capacities under a number of agreements. Asbestos was subsequently discovered on the site and Persimmon believed that Arup had been negligent by failing to identify and report the presence of asbestos at an early stage. Accordingly Persimmon sought damages for breach of contract, negligence and breach of statutory duty. The following contract and warranty wording became central to the case (the Exclusion Clause):
“The Consultant’s aggregate liability under this [Agreement/Deed] whether in contract, tort (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the Consultant’s negligence) shall be limited to [£12,000,000.00/£5,000,000.00] with the liability for pollution and contamination limited to £5,000,000.00 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.”
Arup denied liability for a number of reasons, and argued that the Exclusion Clause excluded their liability (if any) in respect of the asbestos.
Persimmon argued that “liability for” meant “liability for causing” pollution, contamination or asbestos and the Exclusion Clause should be interpreted narrowly, in accordance with the contra proferentem principle.
The judge at first instance found against Persimmon, on the basis that the wording of the clause represented an agreed mechanism to allocate risk. It was nonsensical to suggest that the clause was aimed at the possibility that Arup might cause contamination during their investigations of the site. The judge referred to recent case law limiting the effect of the contra proferentem rule, and held that the court’s task was “essentially the same” when interpreting exclusion or limitation clauses as for any other contractual provision.
The Court of Appeal agreed stating:
- The contra proferentem rule now had a very limited role in relation to commercial contracts negotiated between parties of equal bargaining strength.
- In so far as the contra proferentem rule remained relevant, it was now more applicable to indemnity clauses than to exclusion clauses.
- There was no need to approach exclusion clauses with horror or with a mind-set determined to cut them down. It is sensible mechanism to allocate risk.
Lord Justice Jackson noted that, in major commercial contracts, parties commonly agree how to allocate the risks between themselves and who will insure against what. Contractors and consultants would no doubt reflect the degree of risk that they take on in the fees that they charge.
So, it is clear that the courts consider that the literal and natural meaning of the words used in the clause is to be of primary importance in interpreting exclusion clauses. If the wording used supports more than one meaning, the relative “commerciality” of the possible interpretations of the clause and/or the extent to which they uphold the purpose of the clause should be considered. It will only be in circumstances where the wording is truly ambiguous, that the courts will be prepared to consider the application of the contra proferentem principle. This approach supports the growing judicial trend of supporting freedom of contract, and standing by the literal meaning of the words used and/or the commercial intention of the parties. Contracting parties should therefore ensure that exclusions clauses are drafted in clear and unambiguous terms so that their intended application is clear.
