The Court of Appeal holds that an exemption clause is wide enough to exclude liability for negligence for a failure to identify asbestos.

In Persimmon Homes Ltd v Ove Arup & Partners Ltd the Court of Appeal held that an exemption clause providing that "liability for any claim in relation to asbestos is excluded" was drafted sufficiently widely to exclude liability for negligence where the party relying on it had allegedly failed to identify asbestos at an early stage. In doing so, the court held that there is no need to approach such clauses in commercial agreements with "horror or with a mindset determined to cut them down". It also reiterated that the contra preferentem rule now has a very limited role in the interpretation of commercial contracts negotiated between parties of equal bargaining power. Facts

In 1992 Ove Arup & Partners Limited and Over Arup & Partners International Limited (Arup) were engaged by government agencies to provide engineering and environmental services in connection with the regeneration of land by the old docks in Barry, Wales. After completion of the project, a consortium comprising Persimmon Homes Limited, Taylor Wimpey UK Limited and BDW Trading Limited submitted a tender to purchase the site. The consortium engaged Arup to provide consultant engineering services.

The consortium purchased the site in September 2007 and sent a letter of intent to Arup in October 2007, pursuant to which it appointed Arup to perform some – but not all – of the services that they had discussed in an earlier proposal. In September 2009 the parties entered into a written contract of engagement by which Arup was engaged to provide further engineering services.

Clause 6.3 of the 2009 agreement provided that:

"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 £12m (twelve million pounds) with the liability for pollution and contamination limited to £5m (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded."

Arup also entered into individual deeds of warranty with each of the three consortium members. Clause 4.3 of the warranties was drafted in very similar terms to Clause 6.3 of the 2009 agreement (the only difference being that liability was capped at £5m).

In July 2012 another contractor engaged by the consortium discovered asbestos on the site. The quantity of asbestos was substantially more than the consortium had expected and it believed that Arup had been negligent in failing to identify the asbestos at an early stage. It issued proceedings against Arup, alleging breach of contract, negligence and breach of statutory duties as a result of the discovery of the asbestos.

High Court decision At a trial of the preliminary issues, the High Court considered whether the words "Liability for any claim in relation to asbestos is excluded" in Clause 6.3 of the 2009 agreement and Clause 4.3 of the warranties excluded liability for each claim asserted by the consortium. If the answer was no, it considered whether Arup's liability for each claim was limited to £5m under both the 2009 agreement and the warranties.

The High Court answered both questions in Arup's favour.

Appeal The consortium appealed to the Court of Appeal on four grounds:

  • The phrase "liability for pollution and contamination" in the first sentence of the exemption clauses meant liability for causing pollution and contamination, not liability in connection with pollution and contamination.

  • The phrase "liability for any claim in relation to asbestos" in the second sentence of the exemption clauses should also have been construed that way, as asbestos is a sub-category of pollution and contamination.

  • In any event, the second sentence of the exemption clauses did not exclude liability for negligence.

  • The contra proferentem rule and the rules governing the construction of exemption clauses remain in place and the judge had erred in failing to apply them.

Grounds 1 and 2 The court broke down the exemption clauses into three limbs:

  • an overall limit of liability;

  • a limit on liability for pollution and contamination; and

  • an exclusion in relation to asbestos.

The consortium argued that the word "for" in the second and third limbs had a causative connotation, such that they meant "for causing". On the other hand, liability arising from a failure properly to advise about a pre-existing, in situ state of contamination or asbestos (as they were alleging against Arup here) was not a liability "for" contamination or asbestos, but for failing to advise about a state of affairs. In other words, it claimed that the third limb excluded only claims for causing the spread of asbestos.

Arup contended that this interpretation did not make sense. To the extent that it was being engaged to investigate and advise on contamination (a small part of the scope of its services), the parties were clearly talking about Arup's potential liability for failing to identify contamination. The chances of Arup causing contamination by moving asbestos from one place to another because of clumsy investigation procedures could not possibly have been the target of the second limb.

The court agreed with Arup, noting that its interpretation was consistent with the natural meaning of the words used. If "for" meant "for causing", the last sentence of the exemption clauses would become "Liability for causing any claim in relation to asbestos is excluded" which was bizarre, if not ungrammatical. It would also be nonsensical for the parties to agree that Arup would not be liable if asbestos was moved from one part of the site to another, but would be liable if it were left in place.

Finally, the clauses containing the exemption clauses also set out the professional indemnity insurance which Arup was required to take out. The exemption clauses were clearly intended to limit Arup's liability to the extent of the insurance cover, so it was absurd to interpret the second and third limbs as being confined to claims for moving contamination from one place to another. Both the language used by the parties and any application of business common sense led to the same conclusion.

Grounds 3 and 4 The contra proferentem rule requires any ambiguity in an exemption clause to be resolved against the party who put the clause forward and relies on it. Referring to Lord Neuberger's summary in K/S Victoria Street v House of Fraser (Stores Management) Ltd, the court noted that in relation to commercial contracts negotiated between parties of equal bargaining power, the rule now has a limited role. The court held that the meaning of the exemption clauses was clear and the contra preferentem rule did not affect their interpretation.

The consortium also sought to rely on the Privy Council's guidelines in Canada Steamship Lines Ltd v The King [1952] AC 192 which provided that if a clause does not expressly refer to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence. If they were, the court must then consider whether the damage sought to be excluded could be based on some ground other than negligence. The other ground must not be so fanciful or remote that the party relying on the clause "cannot be supposed to have desired protection against it". If such other ground exists, this would prevent the party relying on it to exclude liability for negligence.

The court noted that following the introduction of the Unfair Contract Terms Act, the courts have softened their approach to both indemnity clauses and exemption clauses and in commercial contracts the Canada Steamships guidelines were now more relevant to indemnity clauses than exemption clauses. The court held that exemption clauses are part of the contractual apparatus for distributing risk and "there is no need to approach such clauses with horror or with a mindset determined to cut them down". It held that the Canada Steamships guidelines were of little assistance in this case.

In any event, even if the court was wrong about that, the exemption clauses still excluded liability because the words in their ordinary meaning were wide enough to cover negligence by Arup in advising about the extent of asbestos on site. Further, it was impossible to think of any non-negligent ground of claim relating to asbestos which the parties might have had in mind which was not "fanciful or remote".

The meaning of the two exemption clauses was clear and neither the contra proferentem rule nor the case law came to the consortium's rescue. The appeal was dismissed.

Comment This decision provides a reminder that the contra preferentem rule is largely redundant for the purposes of interpreting clauses in commercial contracts. As Neuberger pointed out in K/S Victoria Street, the natural meaning of the words used, commercial sense and the documentary and factual context remain the key tools for construction. In circumstances where the courts consider that the parties can account for risk by adjusting their charges and taking out appropriate insurance, they discourage attempts to cut down their natural meaning, even where they are widely drafted.

However, while the Court of Appeal also cast doubt on the Canada Steamship guidelines on exemption clauses, it did not go so far as to hold that they are unequivocally obsolete, as it was able to reach the same outcome even when applying them.

A copy of the judgment can be found here.