UK: Court Of Appeal Confirms More Relaxed Approach To Exclusion Clauses In Commercial Contracts

Last Updated: 17 July 2017
Article by Gordon Drakes and Susan Jones

In the recent case of Persimmon Homes Ltd and others v Ove Arup & Partners Ltd, the Court of Appeal confirmed that the contra proferentem rule, the rule requiring any ambiguity in an exclusion clause to be resolved against the party seeking to rely on it, now has a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power and should only be applied in cases of genuine ambiguity as to meaning.  The Court also suggested that the guidelines for interpreting exclusion clauses set out in the 1952 Canada Steamship case were now more relevant to indemnity clauses than exclusion clauses in commercial contracts.

The facts

Over a number of years, Arup advised a consortium that developed a site known as Barry Quays in Cardiff. Having initially assisted with site investigations in connection with the consortium's bid to purchase the site, Arup entered into a further contract with the consortium after its purchase to provide design and development services in relation to the site's development (2009 Agreement). Arup also agreed to give each member of the consortium a collateral warranty in relation to its services (2010 Warranties).

When groundworks for the development revealed a greater quantity of asbestos contamination than had been expected, the consortium claimed that Arup had been negligent in failing to identify and report its presence at an earlier stage and sought recovery of damages for the increased cost of dealing with it. Arup argued that its liability "for any claim in relation to asbestos" had been expressly excluded in both the development agreement and the collateral warranties. Relying on the contra proferentem rule, the consortium argued that the exclusion clauses should be interpreted strictly and should only exclude Arup's liability "for causing" the spread of asbestos, not liability arising out of it's negligent failure to advise on the extent of its existence. 

At first instance, the court agreed with Arup, finding that the clauses were "entirely clear" in excluding all liability relating to asbestos, whether arising from negligence or not. It also found that the contra proferentem rule did not apply as it should only be used "last resort" in those cases where the true meaning could not be ascertained from the natural meaning of the relevant words.

The consortium appealed, reasserting its original arguments as to the meaning and strict interpretation of the exclusion clauses and claiming that the court had erred in failing to apply contra proferentem rule and the Canada Steamship guidelines.

The Court of Appeal decision

The Court of Appeal unanimously upheld the first instance court ruling that all liability for claims relating to asbestos were excluded, including liability arising from negligence. If found that:

  • the language used by the parties was clear;
  • the application of business common sense did not support the consortium's assertion that the wording meant "for causing";
  • as there was no ambiguity as to the meaning of the exclusion clauses, neither the contra proferentem rule nor the Canada Steamship guidelines were relevant; and
  • even if the Canada Steamship guidelines did apply, liability for negligence was still excluded because:

    • the wording of the clauses was wide enough on their ordinary meaning to cover negligence in advising about the extent of asbestos on the site; and
    • as it was not possible to think of any "non-negligent" claim the parties could not sensibly have been agreeing that the only liability excluded in relation to asbestos would be for non-negligent breaches. In reaching its conclusion, the Court confirmed that, these days, the contra proferentem rule had a very limited role in elation to commercial contracts negotiated between parties of equal bargaining power. It also noted that, in recent years (and particularly since the enactment of the Unfair Contract Terms Act 1977) the courts had softened in their approach to both indemnity and exemption clauses and suggested that, insofar as the Canada Steamship guidelines still survived, in relation to commercial contracts, they are more relevant to indemnity clauses than exclusion clauses since such clauses form "part of the contractual apparatus for distributing risk": "Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree."

Conclusion

Whilst this case highlights the importance of ensuring that exclusion clauses are clearly drafted, the Court of Appeal decision reflects an increasing willingness by the courts to interpret broadly and enforce exclusion clauses agreed by commercial parties of equal bargaining power where they are part of the process of apportioning risk between them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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