Court of Appeal confirms that clauses excluding liability should be interpreted narrowly when there is ambiguity

In the recent case of Nobahar-Cookson & Others v The Hut Group Limited [2016] EWCA Civ 128, the Court of Appeal considered the correct interpretation of an ambiguous exclusion clause contained within a warranty in a Share Purchase Agreement.  The Court concluded that the clause should be interpreted narrowly.

The clause in dispute stated that the sellers would not be liable for any claim under the warranty unless the buyer served notice of the claim within 20 Business Days after becoming "aware of the matter”.

The parties disputed the date on which the buyer should be considered to be "aware of the matter".  The Court had to determine whether the buyer was "aware of the matter" when it was:

  • aware of the facts giving rise to the claim (even if it was unaware that those facts did actually give rise to a claim);
  • aware that there might be a claim under the warranties; or
  • aware of the claim, in the sense of having an awareness that there was a proper basis for the claim.

The Court considered the principle developed from the case of Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] AC 689 that, in construing an exclusion clause, the Court will start with the presumption that the parties are not lightly to be taken to have intended to cut down the remedies available for breach of important contractual obligations and that clear express words should be used in order to rebut that presumption.

Applying the Supreme Court's decision in the recent case of Arnold v Britton [2015] AC 1619, the Court of Appeal confirmed that the natural meaning of language is the best guide to interpretation.  It therefore considered initially whether the correct interpretation of the clause could be resolved by examining the wording of the provision, but concluded that a linguistic, contextual and purposive analysis of the provision did not provide clarity.  In these circumstances, the Court held that ambiguities in the exclusion clause should be resolved by applying the narrowest of the available interpretations.

The commercial purpose of the clause was also considered by the Court.  It was found that the likely purpose of the clause was to prevent the buyer from "pursuing claims previously kept up its sleeve".  Therefore, the interpretation of the clause should focus on the buyer's awareness of the claim and not its understanding of the underlying facts. 

Consequently, the third potential interpretation put forward by the parties was preferred – that the buyer was not "aware of the matter" until it was aware that there was a proper basis for a claim.

The Court of Appeal also considered that a party was unlikely to have intended to limit the remedies available to it without using clear words to that effect.  It found that the seller's preferred interpretation of the provision would have, for no sensible purpose, eroded the buyer's entitlement to claim for breach of warranty to such an extent that it would require clearer words than were used in the contract to achieve that result.

From a practical perspective, the case is a reminder of the importance of parties using clear words when drafting contracts, particularly exclusion clauses, to avoid uncertainty and ensure that clauses have the intended effect.