Last year we reported on the case of Transcoean Drilling v Providence Resources (see a copy of our original Law-Now here) which decided that an exclusion clause for “loss of use” did not preclude a claim for wasted costs arising from another party’s culpable delay. This decision was overturned by the Court of Appeal earlier this month, providing useful guidance as to the interpretation of similar exclusion clauses. In this Law-Now we consider the implications for construction contracts.

Transocean Drilling UK Ltd v Providence Resources plc

For a detailed summary of the Court of Appeal’s decision, please see our earlier Law-Now here. In brief terms, the Court of Appeal was asked to determine whether “spread costs” incurred by the Contractor as a result of the Company’s breach of contract were excluded by an exclusion clause for loss of use. Spread costs were taken to mean the costs of personnel, equipment and services contracted from third parties which were wasted as a result of delay. 

The critical words of the exclusion clause (clause 20) were: 

" ... loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption…" 

The Court of Appeal held that:

  • The High Court in Transocean had been wrong to use the contra proferentem principle to interpret the exclusion clause (whereby if the contractual interpretation is not clear, the provision is construed against the person who drafted it or is seeking to rely on it). This principle has no part to play where the meaning of the words is clear nor in relation to a clause which favours both parties equally, especially where they are of equal bargaining power.
  • The High Court had also been wrong to give a narrow interpretation to clause 20 by reference to the principle that neither party should be presumed to have abandoned common law remedies for breach of contract without the use of clear language (known as the Gilbert Ash line of authority). That rule also has no part to play where the meaning of the words is sufficiently clear and particularly in the context of an exclusion clause where the question is not whether the parties intend to abandon common law rights, but to what extent.
  • The starting point in construing an exclusion clause must be the language of the clause itself and the words used by the parties should be given their ordinary and natural meaning. In this instance, the words in brackets after “loss of use” made it clear that “loss of use” was intended to have a wide meaning and so clause 20 was sufficiently broad to cover spread costs.

Implications for construction contracts

The Court of Appeal’s decision is of interest as suggesting a more liberal approach to the interpretation of exclusion clauses than has been adopted by the Commercial Court of late. We have previously commented on a potential difference in approach between the Commercial Court and the TCC with regard to exclusion clauses and it would appear that the TCC’s slightly more liberal approach is to be preferred. A recent example is Persimmon Homes v Ove Arup & Partners where the TCC upheld an asbestos exclusion clause, noting that the applicable rules of interpretation were essentially the same when interpreting an exclusion clause or any other provision of a contract and that “default rules” such as contra proferentum should only be used as a “last resort” (please click here for our Law-Now on this decision). 

The Court of Appeal’s decision does, however, leave some areas for further debate. The court emphasised that clause 20 was different from a normal exclusion clause because the parties had equal bargaining power and the contract reflected a “detailed and sophisticated scheme for apportioning responsibility for loss and damage of all kinds, backed by insurance.” Furthermore, it was also central to the court’s decision that the words “loss of use” had been expressly elaborated to give the clause a clear meaning. It remains to be seen whether the words “loss of use” on their own are sufficient to exclude claims for “spread costs” which in a construction context might comprise prolongation costs, non-productive overtime or other categories of cost arising from delay. One might also envisage less than equal bargaining positions in a typical construction context which might also affect the correct interpretation of a given clause. 

A further “loss of use” exclusion is due to be considered by the Court of Appeal later this year in Scottish Power v BP. This is also an appeal from a decision of the Commercial Court in which a narrow interpretation of the words “loss of use” was applied, although in this instance the words appeared on their own and were not amplified by parenthesis (please click here for our Law-Now on the originalScottish Power decision). 

Pending the outcome of this further appeal, those involved in the negotiation of construction contracts should give careful consideration to the meaning of the words “loss of use” appearing in exclusion clauses. The literal meaning of these words is wide and contractors will be concerned to ensure that they do not cut across any rights which may otherwise exist for the recovery of delay related costs. Employers on the other hand will be concerned to ensure that these words do not upset any agreed risk allocation with regard to compensation for delay or defective work.