UK: Interpretation Of Exclusion Clauses Found In Commercial Contracts

Last Updated: 25 August 2017
Article by Alice Marques

The Court of Appeal has recently handed down judgment in Persimmon Homes Ltd and others v Ove Arup & Partners Ltd and another1 which confirms that exclusion clauses will be interpreted narrowly when negotiated between parties of equal bargaining power. The effect of this decision is that one of the rules of interpretation that commercial parties often seek to rely on – the contra proferentum rule – in which any ambiguity in a clause is interpreted against the party seeking to rely on it, now has a very limited role in commercial contracts.

The facts

Ove Arup & Partners Ltd and another (Arup) were engaged as civil engineers to the owners of a site in Wales in connection with a regeneration project. Over a number of years Arup provided a variety of services ranging from advisory only to design and supervisory. One of the subjects which Arup was instructed on related to site contamination, albeit that other consultants were also engaged to advise the owners directly on the presence of contaminants including asbestos.

Once the regeneration project had been completed the owners of the site invited tenders for the purchase of the site. Persimmon Homes, Taylor Wimpey and BDW formed a consortium (the Consortium) with a view to putting in a bid for the purchase of the site. Arup was engaged to provide consultant engineering services to the Consortium in relation to the proposed bid, which was ultimately successful.

During the purchase negotiations between the owners and the Consortium, Arup was engaged by the Consortium to provide further ongoing services which included "Geotechnical/Contamination investigation". The agreement between Arup and the Consortium contained the following clause within the Professional Indemnity Insurance clauses:

"The Consultant's aggregate liability under this Agreement 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 (twelve million pounds) with the liability for pollution and contamination limited to £5,000,000 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded."

A similar limitation and exemption clause was found in each of the three individual warranties provided by Arup to each member of the Consortium with the only difference being that Arup's liability in the warranties was said to be limited to £5,000,000 in the aggregate, rather than the £12,000,000 referred to in the Agreement.

A few years after the agreement between Arup and the Consortium, another contractor encountered asbestos on site and the Consortium maintained that the quantity of asbestos was substantially more than they had expected. The Consortium brought proceedings against Arup for negligence, claiming that Arup had failed to identify and report upon the presence and quantity of asbestos earlier.

The proceedings

The Consortium claimed damages against Arup for breach of contract, negligence and breach of statutory duty. Arup denied liability and relied upon the exclusion clause set out above and within the warranties.

Following a trial of preliminary issues, Stuart-Smith J found that there had been a shift in the approach of the courts to limitation and exclusion clauses since the enactment of the Unfair Contract Terms Act 1977 (UCTA) and that in commercial contracts (to which UCTA does not apply) there was a growing recognition that parties should be free to allocate risks as they see fit. Stuart-Smith J considered that the exemption clauses were clear in their meaning and that they represented an agreed allocation of risk between commercial parties. For this, plus other reasons, Stuart-Smith J found in favour of Arup.

The Consortium then appealed to the Court of Appeal on four grounds, one of them being that the contra proferentum rule and the rules governing the construction of exemption clauses remain in place and that Stuart-Smith J had failed to apply those rules to the issue in question.

Lord Justice Jackson who gave the leading judgment dismissed the appeal, and confirmed that:

"In recent years, and especially since the enactment of UCTA, the courts have softened their approach to both indemnity clauses and exemption clauses.... my impression is 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 to exemption clauses.

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..."

Comment

The case makes clear that, where commercial parties have agreed to allocate risk in a certain way, the Court is now likely to approach the construction of exemption clauses robustly.

It is important that exemption clauses are drafted clearly to exclude liability in circumstances intended by the parties.

Footnote

1. [2017] EWCA Civ 373.

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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