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Exclusion Clauses in Commercial Contracts

July 2017 - Issue 95

Introduction

The Court of Appeal’s recent decision in the case of Persimmon Homes v Ove Arup [2017] EWCA CIV 373 signalled a potentially significant development in the interpretation of exemption clauses. The case concerned who was liable for additional costs incurred by the late discovery of unexpected quantities of asbestos on a building site. The decision reinforces the court’s recent willingness to champion “business common sense” and to uphold contractual terms agreed between commercial parties of equal bargaining strength.

What happened?

Persimmon initially engaged Arup to assist with site investigations to inform their bid in relation to a site in Barry, Wales, which included advice in relation to asbestos contamination. Post purchase, Persimmon entered into a contract with Arup to provide design and development services in relation to development of the site.

Persimmon purchased the site in reliance on Arup’s advice, however, when the groundwork for the development commenced in 2012, Persimmon found a greater quantity of asbestos contamination on site than they had expected. Persimmon claimed that Arup had been negligent in failing to identify and report the presence of asbestos at an earlier stage and sought to recover damages for the increased cost of dealing with the asbestos. Arup denied liability. 

The contractual exemption clause in question stated: ‘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.’

Persimmon argued that the wording of the clause restricted liability only for the engineer spreading asbestos – not for negligent failure to alert Persimmon to existing asbestos on site, stating that the words “liability for any claim in relation to asbestos” should be read as “liability for causing any claim in relation to asbestos”. 

The Technology and Construction Court judge in the first instance held, amongst other things, that it was entirely clear that the clause in question excluded all liability relating to asbestos, whether arising from negligence or not. The case then went to the Court of Appeal where the main issue to determine was whether the last sentence of the clause, “liability for any claim in relation to asbestos is excluded”, excluded Arup from liability for asbestos, which it may have negligently failed to identify.

Decision

The Court of Appeal was asked to decide whether the exclusion clause exempted Arup from all liability for asbestos related losses suffered by Persimmon.

Persimmon argued that it did not because –

The court reasoned that –

In a unanimous decision, the court rejected the appeal and upheld the Technology and Construction Court’s decision –

Jackson LJ, giving the judgment of the court, concluded that both the language used by the parties and any application of business common sense led to the same conclusion. The wording did not mean “for causing the spread of”.

Conclusion

The contra proferentem rule now has a limited role especially in relation to commercial contracts negotiated between parties of equal bargaining power. The modern approach here is to apply the rule only where there is a genuine ambiguity in the wording of a contract that is equally capable of bearing two competing meanings. The Court of Appeal reinforced this trend and found that the circumstances for application of the rule were not present in this case.

This case is the latest in a line of cases where the courts prioritise commercial parties’ autonomy to allocate liability and risk as they see fit. It is now well established that any ambiguity in a non-negotiated clause is resolved against the party that put the term forward, because a party who imposes terms on another must make those terms clear and should suffer the consequences if it fails to do so.

Furthermore, the court considered the Canada Steamship case to be of little assistance to it, and suggested that, insofar as they survive at all the guidelines in that case are, at least in relation to commercial contracts, more relevant to indemnity clauses rather than exclusion clauses. In any event, even if the Canada Steamship guidelines did apply, the court determined that the last sentence of the clause still excluded liability for negligent acts.

While practitioners should ensure that exclusion clauses are clearly drafted and considered in the immediate and wider context, this Court of Appeal decision reflects the increasing judicial willingness to interpret and enforce exclusion clauses agreed by commercial parties of equal bargaining power. It supports a line of recent cases evidencing a more modern approach to interpretation of exclusion clauses, and confirms that the contra proferentem rule now plays a very limited role in relation to the interpretation of commercial contracts.

These subtle changes should help make the law of England and Wales and our Business and Property Courts an attractive choice, particularly when compared with other jurisdictions.

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