In a judgment handed down just before Christmas, the Court of Appeal reiterated some common principles of construction of contracts:

  • there is a presumption that the words used in a clause should be given their ordinary and popular meaning
  • a commercial contract, such as an insurance policy, should be construed in accordance with sound commercial principles and good business sense
  • the commercial object of the contract as a whole, or the particular clause in question, will be relevant in resolving any ambiguity in the wording
  • in a case of true ambiguity, the construction which produces the more reasonable result should be preferred

The court also commented that ambiguity is not the same as difficulty of construction. The question whether or not a clause is ambiguous on the one hand, and the rules of construction which apply to resolve the ambiguity on the other hand, are frequently merged. It is essential that the clause in question is ambiguous before the rules can be applied; and this is the same as for the rule that an ambiguous clause will be construed against the party who put the clause forward (one aspect of the "contra proferentum" principle).

The specific clause in question was contained in an employer's liability and public and product liability policy. It excluded liability for claims arising out of "the failure of any fire or intruder alarm switchgear control panel or machinery to perform its intended function".

The court held that the exclusion referred separately to each of fire alarms, intruder alarms, switchgears, control panels and machinery. It was not limited to the switchgear, control panel and machinery which formed part of a fire or intruder alarm. This interpretation was, according to the Court of Appeal, the one which made the most business sense. And because there were "rational grounds" for preferring this construction, the Court of Appeal was not prepared to fall back on construing the policy against the insurer (who put the clause forward).

In this particular case, the loss occurred after failure of a fire protection system to properly deploy. The court considered whether or not the fire protection system as a whole was "machinery" within the exclusion clause. They concluded that it was not. Rather it was a system made up of constituent elements, some of which were machinery and some of which were not. In other words, the fact that a piece of equipment contains machinery does not make the equipment itself machinery. So, if the problem with the system was caused by a failure of a constituent element which was machinery, it would be excluded. If it was caused by a part which was not machinery, it would not be excluded.

Further reading: Reilly v National Insurance and Guarantee Corporation Ltd [2008] EWCA Civ 1460

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The original publication date for this article was 15/01/2009.