Interpreting exclusion clauses: Long-standing guidelines sidelined by senior judges

18 July 2017

Andrew White

Case report: Persimmon Homes v Ove Arup, Court of Appeal 2017.

A dispute over asbestos in a Welsh development project

A Consortium, comprising Persimmon Homes and others, engaged consultants Ove Arup to provide various engineering and other services in connection with the redevelopment of the Barry docks in South Wales. The contract was for a fee of £655,000. Arup's aggregate liability was capped at £12m. Its liability for pollution and contamination was capped at £5m, but the contract also stated that "liability for any claim in relation to asbestos is excluded...".

During the redevelopment, asbestos was discovered on the Barry site by another firm of consultants. The Consortium argued that Arup had negligently failed to identify the existence of the asbestos, and it claimed £2m in damages from Arup to reflect the reduction in value of the site, plus additional costs. Arup's response was to rely upon the asbestos exclusion. How could the Consortium recover any damages at all in the face of Arup's seemingly absolute exclusion of liability?

At the heart of its claim, the Consortium argued that Arup's liability "in relation to asbestos" could arise in two, distinct ways. Firstly, it could in principle arise if Arup failed to detect the presence of asbsetos on the site. But secondly, Arup could also incur liability if it brought asbestos onto the site.

The Consortium argued that Arup's exclusion clause, properly interpreted, only covered the second scenario, and that the clause should read: "liability for causing a claim in relation to asbestos is excluded". Under this interpretation, Arup would indeed be able to avoid liability for spreading asbestos on the site; but Arup would not be able to avoid liability for failing to detect pre-existing asbestos on the site (which is what had allegedly happened here).

The core question in the dispute was whether the Consortium could interpret the exclusion clause in this way?

The Courts' response to the Consortium's arguments

At a hearing which took place in November 2015 the High Court rejected the Consortium's interpretation of the exclusion clause, and held that Arup were not liable. In May 2017, the Court of Appeal unanimously upheld the High Court decision, with the Court's judgment delivered by the very senior Lord Justice Jackson, a recognised construction expert. The Court's reasoning revolved around the following:

The language of such clauses must be given its natural meaning: firstly, the Consortium argued that the exclusion clause must be read in the context of the agreement as a whole, and in particular Arup's warranties, and other exclusion clauses. In that light, adding the words "for causing" made sense. The Court of Appeal disagreed, and simply applied the "natural" meaning of the language to the clause. It held that the words should be taken at face value, and described the outcome of the Consortium's interpretation as "bizarre... ungrammatical... nonsensical...". In short, there was no basis for inserting the words "for causing" into the clause, either as a matter of language or as a matter of "business common sense".

The 'contra proferentem rule' has only a "very limited role" in such disputes: secondly, the Consortium invoked the long-standing English law rule of interpretation known as 'contra proferentem', which requires that any ambiguity in an exclusion clause should be resolved against the party which put forward the clause and seeks to rely upon it. The asbestos exclusion was, in the Consortium's eyes, ambiguous, and it therefore had to be interpreted against Arup. The Court of Appeal dismissed this argument too, arguing that in relation to commercial contracts negotiated between parties of equal bargaining power, the contra proferentem rule now had a "very limited role". As a powerful support for this view, the Court quoted comments by Lord Neuberger (who is currently the head of the Supreme Court) made in 2011, marginalising the rule: "Rules of interpretation such as contra proferentem are rarely decisive as to the meaning of any provisions of a commercial contract. The words used, commercial commonsense, and the documentary and factual context are, and should be, normally enough to determine the meaning of a contractual provision...." (as stated in Victoria Street v House of Fraser (2011)).

A further, long-standing principle of interpretation has been relegated: thirdly, the Consortium placed reliance on a line of English court cases going back to Canada Steamship in 1951, which held that where one party seeks to avoid liability for its own negligence, that position must be spelt out expressly: ambiguity will be resolved against the party relying on the clause. The Court of Appeal concluded that commercial contracting and risk allocation have evolved greatly since the 1950s, notably with a "softening" of the courts' approach to both exclusion and indemnity clauses. The Canada Steamship rule, once seen as fundamental to the interpretation of exclusion clauses, was held by the Court of Appeal to be "of very little assistance" in the present dispute.

Thus, Arup were not liable for any damages to the Consortium.

In reaching this conclusion, the Court provides a soundbite which is highly likely to feature in future disputes over risk and exclusion 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 ...". The Court of Appeal's verdict thus reflects the English law doctrine of 'freedom of contract', in its pure, pristine embodiment.

Take-away messages

  1. The judgment of the Court of Appeal is plainly important for the property development, construction and environmental sectors. But it's important across business contracting generally because of the way the Court chose to sideline some long-standing guidelines on interpretation, on which the Consortium had sought to rely.
  2. This case illustrates, yet again, the importance of clear drafting in contracts, and that the ordinary and natural meaning of language will be given effect: this is the case with exclusion clauses as with other clauses.
  3. Finally, here's an observation for lawyers and business executives outside the UK who are dealing with contracts governed by English law. In my experience, there continues to be widespread surprise at the extent to which English law enables a contracting party to limit or exclude liability. This case is another reminder of just how far a party can indeed go, and the enforceability of such clauses. The Consortium could not rely on a good faith argument to deny Arup the protection of the clause; it could not argue that negligence would neutralise the protection given by the clause; it could not imply a term limiting the scope of the clause; it could not rely on any principle of equity or fairness - and indeed the Consortium did not even propose any of these arguments. What's more, and as we have seen, the Consortium found itself unable even to rely on old-established rules of interpretation to avoid the impact of Arup's clause. Exclusion clauses are at the 'sharp end' of English commercial law - potentially sweeping in their impact, and now, more than ever, to be taken at face value.

Overall lesson

Contracting parties under English law simply must enter risk allocation negotiations with their eyes wide open, and alert to the hazards and challenges, as well as the opportunities.

Case: Persimmon Homes and others v Ove Arup [2017] EWCA 373

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