Contra proferentem is a legal principle which, broadly speaking, means that where there is ambiguity in a contract, a clause will be construed against the party who put it forward and seeks to rely upon it.
But in its recent judgment in Persimmon Homes Limited and Others v Ove Arup & Partners Limited and another [2017] EWCA Civ 373, the Court of Appeal has suggested that the effect of the rule in commercial contracts should now be restricted.
Background facts
The claimants were members of a consortium formed to bid for the purchase of a site in Barry docks, South Wales, with a view to developing it for commercial and residential use.
The defendants were civil engineers who had originally been engaged by the owner of the site to advise and supervise on its regeneration prior to sale; and who were subsequently engaged by the claimants to act as consultant for the purposes of their bid for the site.
The claimants succeeded in their bid and purchased the site for £53 million in September 2007. In 2009, the claimants engaged the defendants (among other engineering contractors) to provide further engineering services for the development of the site, including "geotechnical / contamination investigation". In 2012, when excavation commenced, the groundworks contractor found substantial quantities of asbestos.
High Court proceedings
In 2014, the claimants brought proceedings against the defendants for breach of contract, negligence and breach of statutory duty. They contended that the asbestos discovered on site was significantly more than expected, and that the defendants had been negligent in failing to identify and report on the asbestos at an early stage. As a result the claimants said they had overpaid for the site by £2 million, and that the late discovery had caused them to incur additional costs.
In their defence, the defendants referred to a clause which was contained both in the 2009 agreement between the claimants and defendants, and in the individual warranties given by the defendants to each of the claimants. The clause read as follows:
"Liability for any claim in relation to asbestos is excluded".
The defendants said this clause excluded liability for all the claims brought against them by the claimants. The High Court ordered a trial of preliminary issues to determine, as a matter of principle, whether the clause excluded liability for each and every claim asserted in the claimants' particulars of claim.
High Court decision
At first instance, the judge held that the exclusion clause exempted the defendants from liability for the claims asserted by the claimants. In commercial contracts to which the Unfair Contract Terms Act 1977 does not apply, parties should be free to allocate risks as they see fit, and this clause was an example of that. The clause barred all claims relating to asbestos. Its meaning was clear and the court should give effect to it.
Court of Appeal
The claimants appealed the decision to the Court of Appeal. They contended that:
- In context, the phrase "liability for any claim in relation to asbestos" meant "liability for causing the presence of asbestos" - the clause therefore excluded liability only for causing the spread of asbestos, not for failing to advise on its presence;
- Even if the clause was not as narrow as they contended, it was not wide enough to exclude liability for negligence; and
- The judge erred in failing to apply contra proferentem rules.
In delivering the leading judgment, with which Beatson and Moylan LJJ agreed, Jackson LJ considered first the natural meaning of the exclusion clause, and then other 'rules' of contractual construction.
Natural meaning of the clause
Jackson LJ identified that the exclusion clause in the agreement and the warranties had three separate limbs:
- an overall limit of liability of £12 million;
- a limit on liability for pollution and contamination of £5 million; and
- an exclusion in relation to asbestos.
The parties agreed that the overall limit on liability (limb (i)) applied to all the claimants' pleaded claims, but there was dispute as to the meaning and effect of limbs (ii) and (iii) of the exclusion clause.
The claimants argued that in limbs (ii) and (iii), the phrase "liability for" meant "liability for causing". The limit on liability "for pollution and contamination" was a limit on liability for causing pollution and contamination. Asbestos was effectively a sub-category of pollution and contamination, and so the exclusion of liability for asbestos (limb (iii)) was an exclusion of liability for causing asbestos contamination. They argued that the parties could not have intended to exclude liability for any asbestos claim, only for causing asbestos contamination.
Jackson LJ held that the defendants' interpretation of the clause followed its natural meaning. The effect of the claimants' submissions was that the parties had agreed that the defendants would not be liable for causing the spread of asbestos by moving it from one place to another, but that they would be liable simply for leaving it in place. That was nonsensical. Both language and business common sense led to the conclusion that the defendants' interpretation of the clause was right - on its natural meaning, it excluded all claims relating to asbestos, not only claims for causing the spread of asbestos.
It was also relevant that the limits were tied to the insurance obligations on the defendants under the 2009 agreement and the individual warranties.
That effectively dealt with the case as a matter of routine interpretation, but the Court went on to consider the contra proferentem rule.
Contra proferentem
In the alternative, the claimants submitted that the exclusion clauses should be construed against the defendants on the basis of contra proferentem, and/ or that they were not wide enough to exempt the defendants from liability for negligence.
Following the judgments of Lord Neuberger MR in K/S Victoria Street v House of Fraser (Stores Management) Limited [2011] EWCA Civ 904 and Lord Justice Moore-Bick in Transocean Drilling UK Ltd v Providence Resources PLC [2016] EWCA Civ 372, Jackson LJ held that "in relation to commercial contracts, negotiated between parties of equal bargaining power, [the contra proferentem rule] now has a very limited role." Hoorah to that!
Quoting Lord Neuberger MR, he said "the words used, commercial sense, and the documentary and factual context, are, and should be, normally enough to determine the meaning of a contractual provision". Hoorah again.
The contra proferentem rule therefore had no impact on construction of the exclusion clause in this case.
Excluding negligence
Jackson LJ then turned to look at case law on excluding liability for negligence, starting with Canada Steamships Lines Ltd v The King [1952] AC 192. In that case, the court held that where there was no express reference in an exclusion clause to negligence, in interpreting the clause the court must ask first whether the exclusion is wide enough to cover negligence, and second whether it could reasonably have been intended to cover a head of damage other than negligence (in which case it would be construed to cover only that head of damage other than negligence).
Although he found the Canada Steamships guidelines of limited assistance in this case, Jackson LJ found that the wording of the exclusion clauses was wide enough to exclude liability for negligence, and it was not possible to think of any other non-fanciful ground but negligence the parties could have desired to exclude by the clause. Accordingly the clause was effective to exclude the defendants' liability for all the asbestos related claims brought by the claimants.
Although the Court did not address the so-called Canada Steamships guidelines in the same blunt way that it did the contra proferentem rule, it is clear that the Court found it, again, of limited assistance as a rule of interpretation in the 21st century.
Comment
The case is an illustration of the courts' approach to the interpretation and construction of contracts - that the rules on interpretation, under Arnold v Britton & Ors [2015] UKSC 36 and Wood v Capita Insurance Services Ltd [2017] UKSC 24, give the courts all the room they need to interpret contracts as the words and the context requires, leaving no room remaining for archaic 'canons' of interpretation such as the contra proferentem rule and the Canada Steamships guidelines.
In particular, the Court of Appeal was firmly of the view, and anxious to state, that sophisticated commercial parties are free to allocate risks between them as they see fit (which the insurance provisions in the 2009 agreement and the individual warranties had clearly and properly achieved); and the court will not allow rules of contractual construction to get in the way of the parties' language and business common sense.
Jackson LJ noted in particular that the disputed wording appeared in a clause headed "professional indemnity insurance". It was clear that the parties had considered this wording in the context of allocating and insuring for risk, and exemption clauses are, he said, "part of the contractual apparatus for distributing risk". The clauses reflected those risks the defendants were prepared to accept (and insure against) and those which they were not. Asbestos fell into the latter category.
He also recognised that the fees charged by the defendants would allow an element for the cost of insuring against those risks they accepted, and that the fees would no doubt have been greater had asbestos been a risk the defendants were accepting and insuring against.
So, contra proferentem at last bites the dust, This is no loss, as recently it has only ever been used if there was no better argument available; and it's perhaps one less thing to worry law students with on week one of the contract law module at university.