Court of Appeal rules on the construction of exemption clauses

Developers sought to claim against their engineers following the discovery of asbestos on the site. The parties had entered into two agreements, under which the engineers agreed to take out professional indemnity insurance and to limit their overall liability. The agreements also contained an exemption clause which provided that "liability for any claim in relation to asbestos is excluded".

The developers sought to argue that the exemption clause should be read as reading "Liability for causing any claim in relation to asbestos is excluded" (emphasis added). The Court of Appeal held that that argument was wrong, because of the language used and also because of the application of business common sense.

The Court of Appeal then went on to consider the construction of exemption clauses generally and focused on a passage in the Privy Council decision of Canada Steamship v The King [1952], in which it was said that if there is no express reference to negligence in the clause, the court must consider if the words used are wide enough to cover negligence (and, if so, whether the head of damage may be based on some ground other than that of negligence). The Court of Appeal held that that passage is now more relevant to indemnity clauses rather than exemption clauses: "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". Accordingly, the canons of construction set out in Canada Steamship were of very little assistance here.

The Court of Appeal also held that the contra proferentem rule has a very limited role now where the contract is a commercial contract, negotiated between parties of equal bargaining power.