Excluding liability – the Court’s current approach

• United Kingdom

• Litigation and dispute management
• Industrials

19-07-2017

Exclusion of liability clauses are often the subject of complex litigation between companies in the Diversified Industrials sector. In this article, we look at the up-to-date law on contractual interpretation and the court’s current approach in relation to exclusion of liability clauses in commercial contracts.

In recent years, the issue of contractual interpretation has been the subject of a number of cases in the English courts, including Arnold v Britton & others [2016] 1 All ER 1. In what has become the leading case on contractual interpretation, the Supreme Court confirmed that the correct approach to interpreting a contractual term was to start with the words, with less emphasis to be placed on the previously favoured ‘commercial common sense’ approach. The Supreme Court set out seven factors to consider in interpreting a contractual provision, which include:

0. commercial common sense should not be not be invoked to undervalue the importance of the language of the provision to be construed;
0. common sense was not to be invoked retrospectively – the fact that a contract had worked out badly for one party was not a reason to depart from the natural meaning; and
0. the court should be slow to reject the natural meaning of a provision simply because it was imprudent for one of the parties to have agreed.

If the clause in question is an exclusion of liability clause, these general rules apply as they would in relation to the interpretation of other clauses. The approach to interpreting exclusion clauses was recently considered by the Court of Appeal in Persimmon Homes & others v Ove Arup & Partners Limited & others [2017] EWCA Civ 373, where the Court of Appeal also gave some further useful guidance on the extent to which the contra proferentem rule should be taken into account in commercial contracts.

In this case, the Claimants were a consortium of developers purchasing a site. Prior to the purchase of the site, the Defendants had assisted the Claimants with their site investigation and, after the purchase, were engaged by the Claimants to provide design and development services.

The Claimants subsequently discovered asbestos contamination on site, which had not been identified by the Defendants. The Claimants consequently sought damages for breach of contract, negligence and breach of statutory duty on the basis that the Defendants’ failure to report the asbestos caused two types of loss: 1) the purchase price paid by the Claimants for the site was too high; and 2) the late discovery of asbestos at the site had caused the Claimants to incur additional costs.

Amongst other things, the Defendants sought to rely on an exclusion of liability clause contained within the parties’ contract, which stated that “liability for any claim in relation to asbestos is excluded". On appeal, the court was asked to consider whether the judge at first instance had been correct in deciding that this clause, when read in context, excluded all liability relating to asbestos, including liability arising from negligence.

The Court of Appeal upheld the first instance decision. Applying the natural meaning of the words used, all of the Defendants’ liability, including in negligence, was excluded. In circumstances where the words of the clause were clear and the contract was negotiated between commercial parties of equal bargaining power the contra proferentem rule did not impact this decision.

This case serves as a clear statement by the courts that they can and will interpret exclusion clauses strictly, and that the contra proferentem rule has a limited role in the interpretation of exclusion clauses in commercial contracts. It is also a reminder to contracting parties to consider the drafting of exclusion clauses carefully.

On a separate note, the specialist civil courts and lists of the Chancery Division are in the process of being re-branded to the “Business and Property Courts of England and Wales”. The aim is to enhance the connection between the specialist legal work undertaken in the regions and in London by allowing for more flexible cross-deployment of judges with the requisite expertise to sit on appropriate business and property cases. The re-brand is currently being rolled out across the country in London, Birmingham, Manchester, Leeds, Bristol and Cardiff, with likely future expansions to Newcastle and Liverpool. Cases are expected to be issued as Business and Property Court cases from 2 October 2017.