Exclusion clauses: Court of Appeal confirms broader approach

A Court of Appeal decision handed down yesterday has upheld the applicability of an exclusion clause covering asbestos liability in a consultant appointment. The decision follows other recent Court of Appeal decisions in adopting a natural and unstrained interpretation of exclusion clauses, free from the application of restrictive default rules. The decision also provides important guidance as to the application of the Canada Steamship principles to the interpretation of exclusion clauses.

Persimmon Homes Limited and Others v Ove Arup & Partners Limited and Anor

Persimmon and its fellow Appellants were part of a consortium of house builders (the “Consortium”) who bought and developed a large site in Wales known as the Barry Waterfront. The Respondents (“Arup”) were also involved with the development, advising and providing professional services initially to the original owners of the Barry Waterfront and then subsequently to the Consortium.

Over a number of years, Arup provided various advisory and design services under a series of contracts; namely:

• The 1996 Appointment - An appointment between Arup and the previous owners of Barry Waterfront;
• The 2007 Contract – A contract between Arup and the Consortium in relation to the purchase the Barry Waterfront site;
• The 2009 Agreement - An agreement between Arup and the Consortium to provide engineering services in 2009 in relation to the development of the site; and
• The 2010 Warranties – Arup provided warranties to each consortium member in relation to services carried out under both the 1996 Appointment and the 2009 Agreement (the “2010 Warranties”).

This case concerns clause 6.3 of the 2009 Agreement and Clause 4.3 of the 2010 Warranties (the “Clauses”) which are, for all intents and purposes, identical providing that:

‘The Consultant’s aggregate liability under this [Agreement/Deed] 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/£5,000,000.00] 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.’

After committing itself to the purchase and development of the site, the Consortium discovered asbestos contamination in greater levels than it had expected. The Consortium brought proceedings against Arup alleging that Arup, inter alia, ought to have advised the Consortium of the presence of asbestos in the nature, extent and quantities found.

As part of its defence to the allegations made by the Consortium, Arup applied to have preliminary issues heard with regards to the applicability of the above exclusion clauses, the last sentence in particular. This was on the basis that, if correct, the proper application of these clauses excluded Arup’s liability for the vast majority of the Consortium’s claim.

The Consortium argued for a restrictive approach to these clauses, contending that they should be restricted to liability "for causing" pollution, contamination or asbestos, and that they should not be interpreted as applying to Arup’s own negligence. The Consortium relied in this regard on the “contra proferentem” rule which allows unclear contract terms to be construed against the party who drafted them or who seeks to rely on them. The Consortium also relied on a well established line of cases dealing with the circumstances in which exclusion or indemnity clauses are to be interpreted as protecting against a party’s own negligent acts (known as the Canada Steamship principles). The Canada Steamship principles indicate that a party’s own negligent acts should not be covered by the general words of an exclusion or indemnity clause where those words are apt to apply to both negligent and non-negligent acts.

The TCC’s approach

As noted in our previous Law-Now (click here), Mr Justice Stuart-Smith agreed with Arup’s interpretation of the exclusion clauses and refused to apply the restrictive rules suggested by the Consortium. The TCC noted that the modern approach to exclusion clauses acknowledges that commercial parties to a contract are free to assign risks as they see fit and exclusion clauses should therefore be given their ordinary and natural meaning in the same way as any other clause of a contract. Default rules, such as contra proferentem should be reserved for cases of genuine ambiguity.

The TCC’s approach in this regard has since been endorsed by the Court of Appeal’s decision last year in the Transocean Drilling case (for our Law-Now on that decision, click here).

The Court of Appeal

In a unanimous decision, the Court of Appeal (led by Lord Justice Jackson) has upheld the TCC’s decision, deciding that:

• Not least for grammatical reasons, the Consortium’s reading of the exclusion clauses was unworkable and did not reflect business common sense with regards to the relationship between the parties.
• The meaning of the clauses was clear and unambiguous and should be given effect to.
• Accordingly, the contra proferentem rule was not relevant.
• The Canada Steamship guidelines are more relevant to indemnity clauses than to exclusion clauses and were “of very little assistance in the present case”. In any event, the possible non-negligent acts identified by the Consortium as falling within the present clauses were fanciful or remote and did not give rise to any inference that negligent acts were not intended to be covered.

More generally, the court supported the TCC’s unrestrictive approach to the interpretation of limitation and exclusion clauses (at paragraph 56):

“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. Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree.”

Conclusion and implications

This decision is the latest in a recent line of authority from the Court of Appeal in relation to the proper interpretation of limitation and exclusion clauses.

In upholding that the wording used to exclude Arup’s liability in relation to claims regarding asbestos, the court agreed that (whilst parties must be express about their intention to exclude liability) the wording of the clauses in this case was sufficiently clear to demonstrate the risk allocation agreed by the parties at the time of the agreements in question. Given that the wording was clear, aids to construction such as the contra proferentem rule and the Canada Steamship principles could not assist the Consortium in arguing that liability had not been excluded.

The decision supports the reasoning in the Transocean decision to the effect that limitation and exclusion clauses should be given their natural meaning and that stretched interpretations should not be used to create ambiguities where there are, in reality, none.

The court’s comments in relation to the Canada Steamship principles are also of note and we are likely to see their use diminish in disputes over exclusion clauses, although their influence in relation to the interpretation of indemnity clauses will remain.

* CMS acted for the successful party in this appeal.

References:

Canada Steamship Lines Ltd v The King [1952] AC 192

Transocean Drilling UK Ltd v Providence Resources PLC [2016] EWCA Civ 372

Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373