Contra proferentem: when to exclude an exclusion cause

The contra proferentem rule broadly states that where there is doubt about the meaning of a contract, the words will be construed against the party who put them forward. This is because a party who imposes terms on another must make those terms clear and should suffer the consequences if it fails to do so. In R v Canada SS Lines Ltd [1952] AC 192 (“Canada Steamship”) a three stage approach was set out in relation to clauses purporting to exclude liability for negligence:

  1. Where wording is clear and unambiguous liability will be excluded;
  2. Where wording is general, any ambiguity will be resolved against the party relying on the clause; and
  3. Where negligence is the only possible basis of liability, it may be excluded by general wording; where this is not the case, only non-negligent liability will be excluded, unless it is too remote.

The courts have used both the contra proferentem rule and Canada Steamship to strike down numerous exclusion clauses. However, the introduction of the Unfair Contracts Terms Act 1977 (“UCTA”) has led to the defeat of exclusion clauses in many contracts through different means. UCTA applies to contracting business parties, where one party deals on the other’s written standard terms of business. Where this is the case, UCTA states that an exclusion clause will only be valid to the extent that it was a fair and reasonable clause to have been inserted having regard to the circumstances which ought to have been known to the parties at the time of contracting. UCTA doesn’t apply to negotiated clauses and excludes various types of contract such as insurance and employment contracts, many company related contracts or contracts relating to interests in land. Nonetheless, when required to interpret exclusion clauses in commercial contracts to which UCTA does not apply, the courts have tended to look more to the intentions of the parties and have demonstrated a softening in their approach to strict literal interpretation, since the introduction of UCTA.

The recent case of Persimmon Homes Ltd and others v Ove Arup & Partners Ltd and another [2017] EWCA has clarified the courts’ approach to exclusion clauses in commercial contracts to which UCTA does not apply. It has confirmed a limited role for the contra proferentem rule and Canada Steamship, in favour of respecting the parties’ freedom to allocate risk as they see fit.

Persimmon Homes, Taylor Wimpey and BDW Trading were part of a consortium of site developers (“Developers”). Arup were engaged as engineers on the project. Following the discovery of asbestos on the site, the Developers sought damages from Arup for negligence based on Arup’s failure to identify and report the presence of asbestos on the site.

Arup denied liability in respect of any asbestos related claim and argued that in any event it was excluded by the following exclusion clause, incorporated into both the contract for development of the site and the collateral warranties given to the Developers:

“Liability for any claim in relation to asbestos is excluded”.

The Developers argued that the words “liability for” had a causative meaning and therefore only excluded liability for causing asbestos or the spread of it. They argued that the exclusion clause should be restricted accordingly, relying on the “contra proferentem” rule and so should not exclude liability arising from a failure to advise about pre-existing asbestos.

The judge at fist instance found in favour of Arup, noting the “increasing recognition that parties to commercial contracts are and should be left free to apportion and allocate risks and obligations as they see fit, particularly where insurance may be available to one or other or both parties to cover the risks being so allocated” (paragraph 25). The judge also noted the more lenient approach of the courts to upholding exclusion clauses since the enactment of UCTA.

The Court of Appeal agreed, adding:

  • That the language used by the parties and the application of business common sense should be the main determinants of the scope and meaning of exclusion clauses in commercial contracts. On this basis it was nonsensical to suggest the exclusion clause was predicated on the possibility that Arup might cause contamination during site investigation.
  • That 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” (paragraph 57).
  • The contra proferentem rule had a very limited role with regard to commercial contracts negotiated between parties of equal bargaining strength.
  • That Canada Steamship was of no relevance, and the guidelines “(in so far as they survive) are now more relevant to indemnity clauses than to exemption clauses” (paragraph 56). Lord Justice Jackson justified this distinction saying that “it is one thing to agree that A is not liable to B for the consequences of A’s negligence. It is quite another thing to agree that B must compensate A for the consequences of A’s own negligence.”

The decision represents the latest in a recent chain of judgments from the Court of Appeal and the Supreme Court (see Impact Fuding v AIG Europe Insurance Ltd [2016] UKSC 57) regarding the correct interpretation of limitation and exclusion clauses in commercial contracts negotiated between parties of equal bargaining strength. In short, these clauses will now be interpreted in the same way as any other provision in the contract. Contracting parties should now more than ever ensure that exclusion and limitation clauses are drafted in clear and unambiguous terms so that the intended application is clear.

This article was written by Paul Herbert, Partner, Corporate, with assistance from Georgie Sharpley, Trainee Solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.