Exclusion clause in commercial contracts

July 14, 2017 by
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The interpretation of an exclusion clause in a major commercial contract has given rise to a dispute between a developer and an engineering firm. The English Court of Appeal had to decide over the meaning of an exclusion clause.

The English Court of Appeal’s recent decision provides useful guidance on the interpretation of exclusion and indemnity clauses – Persimmon Homes Ltd v Ove Arup & Partners Ltd & Anor [2017] EWCA Civ 373).

Exclusion and limitation clause

Persimmon Homes hired ARUP, a firm of civil engineers, to provide a variety of professional services in relation to the development of a large site at Barry Quays, Wales. exclusion clause

ARUP’s advice also include questions around asbestos contamination of the site. Persimmon purchased the site in reliance on ARUP’s advice. It later turned out that the development site was contaminated with asbestos. Persimmon sued ARUP for breach of contract and statutory duty, and negligence.

ARUP denied any liability by referring to the warranty and exclusion clauses which stated that:

6.3 The Consultant’s aggregate liability under this 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 £5,000,000.00 (five 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.

This clauses 6.3 was part of the contract term that also required ARUP to take out professional indemnity insurance:

6.1 The Consultant will at its own cost take out and maintain professional indemnity insurance, with reputable insurers carrying out business in the European Union, with a limit of indemnity of not less than £5,000,000 (five million pounds) for any one occurrence or series of occurrences arising out of any one event provided always that:

6.1.1. such insurance shall be in place from the date of this Agreement until no less than 12 years after the completion of the Services;

6.1.2. the insurance premiums in respect of the insurance shall at all times be the responsibility of the Consultant.

The parties were arguing over the meaning of clause 6.3 and whether or not ARUP was liable for damages.

The Plaintiff argued that exemption clause is limited to ARUP having caused the spread of asbestos. In any event ARUP remains liable for negligence because liability for negligence was not expressly excluded. The Plaintiff also pleaded the applicability of the contra proferentem rule.

The English Court of Appeal dismissed the Plaintiff’s arguments as leading to a “bizarre” if not “ungrammatical” result.

Natural meaning of the exclusion clause

The starting point in construing clause 6.3 must be the language of the clause itself. What is the ordinary and natural meaning of the exemption clause and does it leave any ambiguity as to the true meaning of the words?

  • The court interpreted the exemption clause to mean that the:
  • total limit of liability for any cause of action is capped at £12 million;
  • limit of liability relating to pollution or contamination is capped at £5 million; and
    liability for any claim relating to asbestos is excluded.

The court came to this conclusion by also looking at the context of the exclusion clause. The exclusion clause formed part of ARUP’s obligation to take out to take out professional indemnity insurance.

On this point the Court noted that:

“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.”

The Court of Appeal held that ARUP’s liability for negligence was excluded.

Contra proferentem rule

The court decided that the contra proferentem does not apply where to commercial contracts involving parties with equal bargaining power. The rule can only apply if an ambiguity arises about the true meaning of a contractual clause which cannot be resolved by looking at the commercial context and business commons sense of the transaction.

Contra proferentem is a contract interpretation rule. It deals with the situation where a term in a contract is unclear and ambiguous. If the meaning of a term is unclear then the court will decide in favour of the party who had no influence on the drafting of the contract. Courts apply the rule to counteract the unfair bargaining power.

The rule applies in insurance contacts. The insured has usually no influence on the exact terms of the insurance contract. It is more of a take it or leave it situations.
Uncertainty goes against the drafter of the contract if the parties are of unequal bargaining power.

The term translates as “against the offeror”.

Interpreting commercial contracts

Contracts frequently exclude or restrict liability in respect of certain obligations or duties undertaken by one of the parties. Between commercial parties, courts will preserve the parties’ contractual freedom provided they do so in clear and unambiguous terms. Commercial parties are then free to allocation risks and obligations as they see fit.

The decision is available here.

Read more about contact law.