A brief summary of the principles, recent developments and practical tips relating to the interpretation of exclusion clauses.
- Clauses that seek to exclude or limit the liability of a party for breach of contract or misrepresentation have always been the subject of close scrutiny by the courts.
- Any clause seeking to limit or exclude one party’s liability will be read “contra proferentem”, that is construed so that any doubt about the meaning is decided against the party seeking to rely upon the clause.
- Exclusion clauses have frequently been found not to exclude liability for negligence where it was not expressly mentioned. This follows the decision in Canada Steamship Lines Ltd v The King which held that clear express words were required before the court would accept that a party had agreed that its counterparty would not be liable for negligence.
- In Persimmon Homes Ltd v Ove Arup and Partners Ltd, the Court of Appeal considered whether the contra proferentem rule was to be applied when interpreting a clause excluding liability for asbestos claims.
- In line with the shift in the approach of the courts to exclusion clauses, the court emphasised the parties’ freedom to allocate risks as they saw fit and agreed with the first instance court that “the exception clauses represent an agreed allocation of risks between the parties. Their meaning is clear. The courts should give effect to that meaning”.
- Based on the natural and ordinary meaning of the words and business common sense, the court found that a clause in a construction contract excluding liability for any claim in relation to asbestos was sufficient to exclude liability for negligence. The Canada Steamship guidelines were of very little assistance in the interpretation of the exclusion clause as, in commercial contracts, the guidelines “are now more relevant to indemnity clauses than to exemption clauses”.
- Regarding the role of the contra proferentem rule, the court stressed that in order for the rule to apply, an ambiguity in the exclusion clause is required. If the clause is clear, the contra proferentem rule does not have any effect. In particular, in relation to commercial contracts, negotiated between parties of equal bargaining power, the court noted “the rule now has a very limited role”.
What this means
- In recent years, the courts have softened their approach to exclusion clauses when looking at contracts between commercial parties and have focused more on their commercial rationale and how the parties intended to allocate risks.
- Exclusion clauses are part of the contractual apparatus for distributing risk and the courts have shown a willingness to uphold exclusion clauses in contracts negotiated between commercial parties. The court will not approach them “with a mindset determined to cut them down”.
- Courts will give clear words in exclusion clauses their natural meaning. If the language and meaning of an exclusion clause is clear, it bars a party from calling the contra proferentem rule to the rescue, more so in the context of a commercial contract negotiated between parties of equal bargaining power.
- Although in this case the words of the exclusion clause were held to encompass liability for negligence without using that word, it is still wise to expressly limit or exclude liability for negligence if that is the desired effect of the clause.
For a more detailed analysis of the decision in Persimmon Homes Ltd v Ove Arup and Partners Ltd, see our article.