When drafting contracts, contracting parties will often consider particular eventualities that could lead to them being out of pocket. They are keen to limit their own liability through the use of exclusion clauses. In the same vein, they will often attempt to use indemnity clauses to ensure that it is clear which losses are accepted and can be claimed. Interpretation of contracts can be a tricky business with the courts over the years adopting different approaches so it is good to see these most recent cases on contractual interpretation adopting a consistent approach namely that of business common sense teamed with an analysis of the objective meaning of the words used, the aim of which is to ensure that the effect of such clauses actually reflect what the contracting parties have agreed.

If we look first at a recent case on exclusion clauses:

1. Persimmon Homes Limited -v- Ove Arup & Partners Limited [2017] EWCA Civ 373

Background

Persimmon, property developers, instructed Arup as civil engineers in connection with a construction project in Barry, Wales which included the provision of advice in relation to possible asbestos contamination at the site. When negotiating the contract, the parties expressly considered what would happen if Arup had been negligent when providing Persimmon with the services. This eventuality was covered by professional indemnity insurance, so the clause under this heading stated that:

‘[Arup]’s aggregate liability under this deed whether in contract, tort, (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the [Arup]’s negligence) shall be limited to £5 million with the liability for pollution and contamination limited to £5 million in the aggregate. Liability for any claim in relation to asbestos is excluded.’

Nothing obviously contentious there but an express exclusion clause relating to asbestos. Persimmon purchased the site relying upon Arup’s advice. You know what is coming next...

Dispute over the construction of the clause

Subsequently asbestos was discovered on the development and Persimmon alleged that that Arup had been negligent by failing to identify and report the asbestos on the site. Arup sought to rely on the express wording of the exclusion clause - ‘liability for any claim in relation to asbestos is excluded.’The Court of Appeal was called upon to determine whether the exclusion clause exempted Arup for asbestos-related losses suffered by Persimmon. Arup’s case was that the exclusion clause alleviated it from all liability whereas Persimmon asserted that the word ‘for’ had a causative connotation such that it means ‘for’ in the sense of meaning ‘for causing’ the spread of asbestos and that it did not exclude liability for failing to advise/identify asbestos. Persimmon also alleged that the clause did not expressly exclude liability for negligence in respect of asbestos.

Persimmon sought to rely on the doctrines of contra proferentem i.e. any ambiguity in the interpretation of an exclusion clause should be resolved against the party seeking to rely upon it - in this case Arup - and the rule in Canada Steamship Lines -v- The King [1952]AC 192 which is traditional authority for the proposition that the very clearest of words are required to exclude liability for negligence.

The court rejected Persimmon’s assertion that the clause was ambiguous. The court stressed that ‘any application of business common sense’ lead to this conclusion along with examining the natural language of the clause. It upheld the ordinary meaning of the exclusion clause and that it would be nonsensical to reach any other finding.

In rejecting the arguments put forward to apply the contra proferentem rule and the rule in Canada Steamship, it was held that the contra proferentem rule will now be of little application in respect of contracts negotiated between parties with equal bargaining position and that the Canada Steamship case was of more relevance now to indemnity clauses than to exclusion clauses, the court stating: ‘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.’

As such, the exclusion clause was valid and Persimmon could not pursue Arup for any claim in relation to the asbestos. The courts have once again recognised commercial parties’ ability to allocate liability and risk between themselves. Rainy Sky rules!

Looking then at the interpretation of indemnities:

2. Wood -v- Capita Insurance Services Limited [2017] UKSC 24

Background

Wood sold his company, an insurance broker specialising in insurance for classic cars, to Capita. The sale agreement had considered what would happen if the company was fined by financial organisations for conduct which had happened prior to the sale of the company. The indemnity clause stated that Wood would indemnify Capita against losses and claim ‘imposed on or required to be made by [the company] following and arising out of claims or complaints registered with the [FSA, the Financial Services Ombudsman, or any other authority]...pertaining to any mis-selling or suspected misselling of any insurance....’.

Wood had also provided the usual warranties relating to regulatory compliance in the sale agreement but the time for bringing claims for breach of warranty had lapsed so that the only remedy available to Capita was under the indemnity clause.

Dispute over the construction of the clause

After the sale of the company, it was discovered that the company had historically been misleading customers, so the company selfreported the miss-selling to the FSA. No customers had complained but the FSA ordered that the customers would need to be compensated, which in total cost £1.35 million. Capita claimed that the indemnity clause covered this scenario, and so Wood would need to compensate Capita. Wood’s position was that the claim was outside the scope of the indemnity as the loss had arisen from self-reporting by the company rather than as a result of a claim or complaint from a customer.

Capita’s claim was rejected. It was held that the indemnity clause only applied when it was ‘arising out of claims or complaints’. There were no ‘claims or complaints’ as the company had reported itself to the FSA. As such, the literal interpretation of the clause meant that the indemnity clause had not been triggered. Wood did not need to compensate Capita.

As to the approach to contract interpretation, the Supreme Court confirmed that the decisions in Arnold -v- Britton [2015] UKSC 36 and Rainy Sky SA -v- Kookmin Bank [2011] UKSC 50 were essentially saying he same thing, namely that the approach to contract interpretation is a single exercise that requires striking the balance between the indications given by the language used, having regard to the contract as a whole and the implications of competing constructions (the business common sense approach).

It was held that : ‘it is necessary to place the clause in the context of the contract as a whole, to examine the clause in more detail and to consider whether the wider relevant factual matrix gives guidance as to its meaning in order to consider the implications of the rival interpretations.’

In this case, Capita did have another avenue in which to pursue Wood. Wood had given warranties on regulatory compliance, but these had expired. If Capita had discovered the miss-selling in time, then it would have been entitled to compensation. As such, it was held that the contract reflected the commercial intention between the parties.

Guidance

What can you take away from these most recent decisions on contract interpretation?

  1. The starting point when looking at a contractual interpretation point is considering the ordinary and natural meaning of the words in the clause
  2. Consider whether the natural meaning of the clause reflects what the parties have intended to be agreed
  3. The courts are keen to enforce what has actually been agreed between the parties so that ‘business common sense’ applies
  4. The application of these principles will not save a party who has simply made a bad bargain