The Court of Appeal of England and Wales has signalled a potentially significant development in the interpretation of exemption clauses - the effect of which is to underscore the importance of ensuring that contracts accurately reflect the allocation of risk.

At issue in Persimmon Homes v Ove Arup [2017] EWCA CIV 373 was who was liable for additional costs incurred by the late discovery of unexpected quantities of asbestos on a building site.

The relevant contract included an exemption clause (with emphasis added):

The Consultant's aggregate liability under this Agreement whether in contract, tort (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the Consultant's negligence) shall be limited to £12,000,000 (twelve million pounds) with the liability for pollution and contamination limited to £5,000,000 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.

The developers argued that the wording of the clause restricted liability only for the engineer spreading asbestos - not for negligent failure to alert the developer to existing asbestos on site. In effect, the words 'liability for any claim in relation to asbestos' should be read as 'liability for causing any claim in relation to asbestos'.

But the Court of Appeal disagreed (as had the earlier court), on grounds both of the language used and the application of business common sense. Indeed, the Court went so far as to say that the alternative construction was “bizarre, if not ungrammatical".

Of wider application, however, is the Court's approach to the developers' contention, relying on the contra proferentem rule and case law, that the clause in question did not exclude liability for negligence because this was not expressly stated.

“Interpretation against the draftsman" and other fables

The contra proferentem rule requires any ambiguity in an exemption clause to be resolved against the party who put the clause forward and relies upon it. It now has a limited role especially in relation to commercial contracts negotiated between parties of equal bargaining power.

In these contexts, both in New Zealand and in the UK, the modern approach is to apply the rule only where there is a genuine ambiguity in the wording of a contract that is equally capable of bearing two competing meanings.[1] The Court of Appeal reinforced this trend and found that the circumstances for application of the rule were not present in this case.

Canada Steamships - no longer full steam ahead?

The Court also considered the presumption stated by the Privy Council in Canada Steamships Lines Ltd v R [1952] AC 192, that (unless stated otherwise) an exemption clause is not intended to apply to liability for negligence. As there was no such statement in the exemption clause in this case, the Court could have relied upon the Canada Steamships judgment.

But instead the Court of Appeal concluded that the Canada Steamships rules were “of very limited assistance" and commented that “at any rate in commercial contracts, the Canada Steamships guidelines (in so far as they survive) are now more relevant to indemnity clauses than to exemption clauses".

The Court went onto comment that:

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.

What next for New Zealand?

The Canada Steamship principles have been applied in New Zealand in the past,[2]albeit in cases that largely predate the modern acceptance of contextual interpretation. It will be interesting to see whether the New Zealand courts take a similar approach to the Canada Steamships principlesin future.

In the meantime, it is imperative that commercial advisers obtain appropriate legal advice on the limitation of liability.