In a recent decision on contractual interpretation relating to an exclusion clause, the Court of Appeal confirmed that, if necessary to resolve ambiguity, exclusion clauses should be narrowly construed: Nobahar-Cookson & Ors v The Hut Group Ltd [2016] EWCA Civ 128.

The court reached this conclusion on the basis that parties are not lightly to be taken to have intended to cut down the remedies the law provides for breach of contract, unless the contract contains clear words to that effect. This principle is of similar effect to the traditional rule that exclusion clauses should be construed "contra proferentem". However, the Court of Appeal in this case rejected that underlying rationale for the principle that exclusion clauses should be construed narrowly, saying it has nothing to do with the identification of the party putting forward the clause or seeking to rely upon it.

Joanne Keillor, a senior associate in our dispute team, outlines the decision below. For more information on how the courts interpret contracts, see our guide What does your contract mean? How the courts interpret contracts, which forms part of our series of contract disputes practical guides.

Background

The case arose out of a dispute between the sellers and the buyer of a sports nutrition business "MyProtein". After the sale, the buyer brought a claim against the sellers under the Share Purchase Agreement ("SPA") for breach of warranty with regards to the accuracy of the sellers' accounts. However, the SPA included a clause which excluded liability for breach of warranty if a claim was not brought within a specified time period:

"The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter."

There was a dispute as to the interpretation of the words "aware of the matter", as this triggered the beginning of the 20 Business Day notice period. The court had to choose between three alternative constructions of the phrase, namely awareness of (a) the facts giving rise to the claim; (b) that there might be a claim under the warranties; or (c) of the claim, in the sense of an awareness that there was a proper basis for the claim.

At first instance, Mr Justice Blair accepted the buyer's submission that the narrowest construction, construction (c), was most consonant with the wording of the clause and with commercial sense. This was not however on the basis that the clause should be construed contra proferentem. Both parties had provided warranties and the contract imposed similar time limits on both parties; accordingly, he said, "there is no reason to apply such a canon of construction to mutual rights and limitations".

On the facts, the judge found that the notice had been given in time.

Decision

The Court of Appeal unanimously dismissed the sellers' appeal, although applying different reasoning to Blair J. The leading judgment was given by Lord Justice Briggs.

The court heard arguments from both parties as to the application of the contra proferentem principle, which the judge had rejected. Counsel for the sellers argued that the contra proferentem principle is not now regarded as of any significant weight for the purpose of construing commercial contracts, and that it is a principle of interpretation of last resort, citing recent dicta in support, including the following passage from Lord Neuberger MR in K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] Civ 904:

"…such rules are rarely if ever of any assistance when it comes to construing commercial contracts. Quite apart from raising abstruse issues as to who is proferens (and, in particular, whether the issue turns on the precise facts of the case or hypothetical analysis), "rules" of interpretation such as contra proferentem are rarely decisive as to the meaning of any provisions of a commercial contract. The words used in a commercial sense, and the documentary and actual context, are, and should be, normally enough to determine the meaning of a factual provision."

However, Briggs LJ pointed out that none of the authorities cited by the sellers were about exclusion clauses, and other recent decisions had continued to affirm the principle that, if necessary to resolve ambiguity, they should be narrowly construed, including in relation to commercial contracts. The underlying rationale for this principle of narrow construction had, Briggs LJ said, nothing to do with the identification of the proferens, either of the document as a whole or of the clause in question, nor of the person seeking to rely upon it. It was, rather, because the parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect.

Briggs LJ clarified that this approach to exclusion clauses is not now regarded as a presumption or "special rule" that is applied mechanistically when interpreting exclusion clauses. He held that, as with the modern approach to interpretation, "the court must still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means", but where ambiguity remained, this principle would apply to provide a narrower construction of the exclusion clause in question.

Applying his approach to the facts, Briggs LJ found that there was significant ambiguity as to the meaning of the clause when applying the general principles of interpretation. He regarded any construction of the clause that provided that the notice period began where the buyer became aware there might be a claim (interpretation (b)) as too uncommercial to have been intended.

In choosing between interpretations (a) and (c), Briggs LJ adopted the narrower interpretation (c). He held that the purpose of the clause was to prevent the buyer from pursuing claims previously undisclosed. This purpose was aligned with an interpretation which focused upon the awareness of a claim rather than the facts. He supported this interpretation by stating that the sellers' proposed interpretation would deprive the buyer of its contractual entitlement for no sensible purpose – for the clause to be given such an effect, clearer wording would be needed.

Briggs LJ did also find that a purposive interpretation of the clause alone would "on a fairly narrow balance" lead him to the same conclusion, although he found that this was significantly reinforced by the application of the principle of narrow construction. He said that whilst in this case the two approaches therefore happily marched hand-in-hand, the older canons of construction do continue to assist the court where all else fails.