Article

Limited role for contra proferentem rule in the interpretation of commercial contracts

Published Date
Jun 27, 2017
In a dispute over the scope of an exemption clause in a construction contract, the Court of Appeal declined to apply the contra proferentem rule, emphasising its very limited role when interpreting a commercial contract between parties of equal bargaining power. The Court of Appeal noted obiter that the rule might still be relevant to indemnity clauses in commercial contracts: Persimmon Homes Limited & ors v Ove Arup & Partners Ltd & anr [2017] EWCA Civ 373.

Development of the contra proferentem rule for exemption and indemnity clauses

The contra proferentem rule, which requires any ambiguity in an exemption clause or indemnity clause to be resolved against the party who put the clause forward and relies upon it, originates in English law from the Privy Council decision in Canada Steamship Lines Ltd v The King [1952] AC 192. Over the years the contra proferentem rule has been extensively debated and the principles set out in Canada Steamship have tended to be applied more loosely in the form of guidelines rather than a strict rule. 

In particular, the English court has favoured a more commercial, and less mechanistic, approach to the application of Canada Steamship when interpreting indemnity clauses and exemption clauses falling outside the scope of the Unfair Contract Terms Act 1977.  In K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904, the Court of Appeal held that the contra proferentem rule was rarely decisive as to the meaning of a commercial contract; the words used, commercial sense, and the documentary and factual contexts were normally enough to determine the meaning of a contractual provision. A similar approach was taken in the Court of Appeal’s decision in Transocean Drilling UK Ltd v Providence Resources PLC [2016] EWCA Civ 372.

Exclusion of liability for asbestos

A consortium of property developers including Persimmon brought damages claims against Arup, the project consultant, for failing to identify large quantities of asbestos on a development site in South Wales.  Among other defences, Arup relied on a contractual exemption clause which stated that “liability for any claim in relation to asbestos is excluded”, and that “liability for pollution and contamination [is] limited to £5,000,000.00”. 

Persimmon argued that the exemption clause should be interpreted to apply only to liability for asbestos, pollution and contamination “caused” by Arup and that Arup’s potential negligence in failing to identify asbestos would not be covered by the exemption clause.

First instance: interpretation of exclusion or limitation clauses essentially the same as any other clause

At first instance, Mr Justice Stuart-Smith referred to recent case law doubting the application of the contra proferentem rule to commercial contracts, and concluded that, as the law currently stood, the court’s task was essentially the same when interpreting exclusion or limitation clauses as for any other contractual provision. 

Applying these principles, the judge rejected Persimmon’s arguments and held that the clauses in question were not restricted to liability for asbestos, pollution and contamination “caused” by Arup.  They excluded all liability relating to asbestos whether relating to negligence or not. The judge noted that where contract terms (including exclusions or limitations of liability) were agreed by business people capable of looking after their own interests and allocating risks, then the court should be very slow to disturb or to characterise the agreement as unbusinesslike.

Court of Appeal: very limited role for the rule when interpreting commercial contract

The Court of Appeal upheld the judge’s decision, which accorded with the natural meaning of the language used by the parties and business common sense.  The Court of Appeal declined to apply the contra proferentem rule here.  Referring to its previous decisions in K/S Victoria Street v House of Fraser and Transocean Drilling v Providence Resources, the Court of Appeal noted that the contra proferentem rule now had a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power. 

However, the Court of Appeal drew a distinction between the rule’s application to exemption clauses and indemnity clauses.  It accepted that, as a general principle, exemption clauses were part of the contractual apparatus for allocating risk in commercial contracts. There was no need to approach such clauses with a mind-set determined to cut them down. But the Court of Appeal did not extend the same reasoning to indemnity clauses and commented, obiter, that in so far as the Canada Steamship guidelines survived, they were now more relevant to indemnity clauses.

Comment

The Court of Appeal’s decision in Persimmon Homes v Ove Arup confirms the increasing acceptance by the English court that commercial parties are entitled to agree to limit or exclude liability as a risk-allocation tool.  While the Court of Appeal left open the possibility that the contra proferentem rule might still apply to indemnity clauses in commercial contracts, in practice it seems that for both exemption and indemnity clauses, much will turn on ordinary principles of interpretation of the wording in its context.  This serves as a reminder of the value of careful drafting of such clauses during negotiations.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.

 

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Litigation, Arbitration and Dispute Resolution

Commercial and Contract Disputes

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