Court of Appeal decision casts doubt on principles requiring narrow interpretation of exclusion clauses

The Court of Appeal has found that an exclusion clause in an engineering services contract was effective to exclude any liability on the part of the defendant engineers for identifying and reporting on asbestos on a development site. This was based on the clear wording of the clause and commercial common sense. The traditional principles or canons of construction relating to exclusion clauses had no part to play: Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373.

In interpreting exclusion clauses, the courts have traditionally applied certain principles which tend toward a narrow construction, in particular: (i) the contra proferentem rule, which provides that any ambiguity should be resolved against the party who put the clause forward and relies upon it; and (ii) the so-called Canada Steamship guidelines, which essentially provide that clear words are required to exclude liability for negligence, and that the court will not interpret a clause to cover negligence if there is some other head of damage it might realistically have been intended to cover (eg strict liability in relation to a statutory duty).

In recent years, however, the courts have tended to cast doubt on the extent to which these principles remain applicable, at least where the clause is clear and unambiguous. This latest decision continues that trend, emphasising that the words used, the relevant context, and commercial common sense should normally be sufficient in determining the meaning of a contract term. The decision suggests that the tendency to assume exclusion clauses must be construed narrowly may be seen by the courts as outdated. As the Court of Appeal commented: 

"In major construction contracts the parties commonly agree how they will allocate the risks between themselves and who will insure against what. Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down." 

However, for those who want to ensure their clause is effective, the practical advice remains to use clear and unambiguous drafting, rather than seeking to rely on general wording. Rachel Lidgate and Maura McIntosh, a partner and a professional support consultant in our disputes team, outline the decision below. For more on exclusion clauses, see Defining your liability in advance: Liquidated damages, limitation and exclusion clauses, the sixth edition in our contract disputes practical guides series.

Background

The claimant developers brought a claim against the defendant engineers alleging that they had negligently failed to identify and report on asbestos on their development site. The defendant relied on exclusion clauses in the development contract and associated warranties (with identical wording). 

Each of these clauses was found in a section of the relevant contract headed "Professional indemnity insurance", which provided that the defendant would maintain professional indemnity insurance of not less than £5 million per event. The relevant clauses stated that the defendant's liability for pollution and contamination would be limited to £5 million in the aggregate and that: "Liability for any claim in relation to asbestos is excluded."

The question of whether the exclusion clauses excluded liability for the claims was tried as a preliminary issue. The High Court found that they did, essentially on the basis that the clauses represented an agreed allocation of risks between the parties, their meaning was clear, and the courts should give effect to that meaning. The claimants appealed. 

Decision

The Court of Appeal dismissed the appeal, Jackson LJ giving the lead judgment with which Beatson and Moylan LJJ agreed.

The court rejected the claimants' argument that the exclusion clauses should be interpreted as covering only liability for causing pollution or contamination, or the spread of asbestos, rather than a failure to identify it. This conclusion was based on both the natural meaning of the words used and application of business common sense since, as the court put it, it would be nonsensical for the parties to have agreed that the defendant was not liable if asbestos was moved from one part of the site to another, but liable if it was left in place. It was also supported by the fact that the relevant clauses were clearly intended to limit the defendant's liability to the extent of the insurance cover. In that context it was absurd to read the exemption clauses as confined to claims for moving contamination from one place to another (given that the defendant was engaged to investigate and advise on contamination).

The claimants contended that, even if the exclusion clauses were not limited to causing the spread of asbestos, they were not wide enough to exempt the defendant from liability. They relied on the contra proferentem rule and the Canada Steamship guidelines, outlined above. The Court of Appeal rejected the claimants' argument on both bases.

Firstly with regard to contra proferentem, the court commented that in relation to commercial contracts, negotiated between parties of equal bargaining power, that rule now has a very limited role. The court referred to recent Court of Appeal authorities which suggest that the words used, commercial sense and the documentary and factual context should normally be enough to determine the meaning of a contract term (see K/S Victoria Street v House of Fraser [2011] EWCA Civ 903 and Transocean Drilling v Providence Resources [2016] EWCA Civ 372). Here, the court said, the meaning of the clauses was clear, and the contra proferentem rule had no impact.

In relation to the Canada Steamship guidelines, the court commented that since the Privy Council's decision in Canada Steamship Lines v The King [1952] AC 192, there had been a long runnning debate as to the effect of the decision and the extent to which it was still good law. The court commented that in recent years the courts had softened their approach to both indemnity clauses and exemption clauses. Jackson LJ said his impression was that, at any rate in commercial contracts, the Canada Steamship guidelines (in so far as they survive) are now more relevant to indemnity clauses than exemption clauses – as he noted, there is a difference between excluding liability for your own negligence and agreeing to compensate another party for the consequences of its negligence. The guidelines were, he concluded, of very little assistance in the present case. But even if that was wrong, it did not help the claimant. There was no non-negligent ground of claim relating to asbestos that the parties might realistically have had in mind in agreeing the clause.

Rachel Lidgate
Rachel Lidgate
Partner
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+44 20 7466 2418
Maura McIntosh
Maura McIntosh
Professional support consultant
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+44 20 7466 2608

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