Interpreting limitation and exclusion of liability provisions

Last month the Judge in charge of the Technology and Construction Court handed down Judgment in Persimmon Homes Ltd & others v Ove Arup & Partners Ltd & another [2015] EWHC 3573 (TCC).  The Judgment concerned in part the interpretation to be given to limitation and exclusion of liability provisions within Arup appointments/warranties. It is a useful summary of well established principles concerning how the Courts approach interpreting such provisions.  It also illustrates the increased weight given by the Courts, when they decide interpretation disputes, to the parties’ decisions on risk allocation.

Summary of the Facts

Arup advised a consortium that developed a site at Barry Docks in Cardiff.  When site works commenced asbestos was discovered.  The consortium brought a claim against Arup for breach of contract and negligence – it being alleged that Arup had failed to warn the consortium of the asbestos.

The relevant limitation and exclusion of liability provisions were in the following Clause 6.3:

“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 £12,000,000.00 (twelve million pounds) with the liability for pollution and contamination limited to £5,000,000.00 (five million pounds) in the aggregate.  Liability for any claim in relation to asbestos is excluded.”

A central issue was whether the final sentence of the provisions excluded liability for negligence.

Why There was an Issue to be Decided

At first blush, it might seem odd that such a debate could even arise.  However, there is a line of authorities that where there is no express reference to negligence in an exclusion clause, the Court must consider whether the words used are wide enough to cover such an  exclusion.  Further, if a doubt arises on this point it must be resolved by the Court in favour of the other party.  The consortium also ran the argument that asbestos liabilities were a sub-set of pollution and contamination liabilities.

Courts approach interpretation questions with the presumption that neither party intends to abandon any remedies for a contract’s breach, and that it will be inherently unlikely that the parties intend there will be no sanction for non-performance.  However, it is also firmly settled that if clear words are used in an exclusion clause they are to be given effect to.

The Court’s Decision

Ultimately, the Court found in Arup’s favour ie that the last sentence of Clause 6.3 excluded liability for claims relating to asbestos, whether in negligence or otherwise.  Further, that asbestos liabilities did not form part of pollution or contamination liabilities.  However, it was held that, even if they did, the exclusion would operate to carve out and exclude asbestos liabilities.

The Court reiterated that in its objective search for ascertaining the intention of the parties, its touchstone must be its determination of “what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to have meant.”  The rules of interpretation emphasised in the Judgment as being applicable were that:

  1. “The enquiry will start, and usually finish, by asking what is the ordinary meaning of the words used”.
  2. The interpretation of exclusion or limitation provisions is essentially the same as when the Court interprets any other provision of a contract.
  3. Deference will be given to the parties to commercial contracts apportioning risk as they see fit (as opposed to the Court importing its notion of commerciality).  Material here was that Clause 6 was dealing with professional indemnity insurance and a set of provisions addressing the obtaining of insurance and the allocation of risk.  It is typically the case that, under professional indemnity policies, cover for asbestos will be excluded (unless it is the subject of a policy endorsement/additional premium) and/or such asbestos cover as is provided will be for a reduced limit to that generally applicable to the policy.
  4. Reference by the Courts to “business common sense”, in order to decide a dispute over the “proper” interpretation, will be treated with caution.  This is because, on any particular facts, the answer may differ depending upon which party is being asked that question.
  5. Here, the Court rejected the consortium’s argument that it was for Arup to put forward a sensible rationale for why it should be able to exclude asbestos liabilities.  Rather, “the proper question [was] whether the implications of Arup’s interpretation shows that it is inconsistent with business common sense.”  The Court was not attracted to the argument that the exclusion of asbestos liability was devoid of commercial purpose.  This was in part because any failure by Arup of its asbestos responsibilities would, irrespective of liability not thereby attaching to Arup, have still put it on risk of having its appointment terminated.

The Judgment in Context

In the past couple of years there have been several decisions on interpreting limitation and exclusion liability provisions that have rejected applying a literal interpretation of those provisions.  Those judgments all endorse the principles outlined above but, as with most interpretation disputes, are fact sensitive.  The answer reached by a Court will depend upon it taking stock of its view of all the matters just noted. This explains why, on this occasion, the last sentence of the limitation provisions was applied at face value.

The Judgment illustrates yet again the importance of drafting these types of provisions clearly and the criticality of the precise words used.  Part of the Court’s reasoning was that “any claim in relation to [asbestos pollution or contamination]” was a wider exclusion than an exclusion simply of liability for asbestos pollution or contamination.  Against the backdrop of last year’s Supreme Court decision in Arnold v Britton, the Judgment is an example of the Courts’ approach on interpretation questions tending to now be to give greater weight than before to the selected wording of the provisions.

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.