The Court of Appeal has found, unanimously dismissing the appeal, that an exclusion clause in an engineering services contract was effective such that it excluded liability for failing to identify and report on asbestos at a site. The reasoning of a Court of Appeal was that the clause was clear and made commercial common sense. On that basis, the canons of construction relating to exclusion clauses were rejected.
The case concerned a waterfront site in Wales, earmarked for development by the appellant consortium of housebuilders. The respondent, Ove Arup, provided various advisory services over an extended period time pursuant to a series of contracts, identified by the Court as: (i) 1996 appointment; (ii) 2007 contract; (iii) 2009 agreement; and (iv) 2010 warranties.
In July 2012, asbestos was discovered at the site and the consortium pursued Ove Arup for breach of contract and negligence. Ove Arup denied it was liable and sought to rely on the exclusion clause in the contracts. The case therefore focused on the correct interpretation of clauses 6.3 of the 2009 agreement and 4.3 of the 2010 warranties which stated as follows:
6.3. 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.
4.3. The Consultant'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 Consultant's negligence) shall be limited to £5,000,000.00 (five million pounds) with the liability for pollution and contamination limited to £5,000,000.00 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.
At first instance, the judge held, dismissing proceedings following a trial of the preliminary issue, that the words "Liability for any claim in relation to asbestos is excluded" excluded each and every claim asserted in the claimant consortium's particulars of claim. He confirmed the recent softening of the Court's approach to limitation and exclusion clauses since the Unfair Contract Terms Act 1977 came into force. The judge highlighted the Court's willingness in commercial contracts to allow parties to allocate risks as they see fit.
The Court of Appeal was asked to consider the canons of construction and whether the exemption clauses extended to negligence by Ove Arup. The appellants relied on the contra proferentem rule (i.e. that any ambiguity in an exemption clause to be resolved against the party who put the clause forward) and referred the court to the line of case law following Canada Steamship Lines Ltd v The King  AC 192 relating to the interpretation of exemption clauses. The consortium's interpretation was that the asbestos exclusion should be interpreted to mean "Liability for causing any claim in relation to asbestos is excluded".
The respondent's case was that the interpretation proffered by the consortium did not make sense – Ove Arup having been engaged to investigate and advise in respect of the site, in part on contamination, and that the possibility of Ove Arup causing contamination through "clumsy investigation" could not have been the intended purpose of the exclusion.
The Court confirmed that in commercial contracts, negotiated between parties of equal bargaining power, the contra proferentem rule has a very limited role, per K/S Victoria Street v House of Fraser (Stores Management) Ltd  EWCA Civ 904;  Ch 497 and Transocean Drilling UK Ltd v Providence Resources PLC  EWCA Civ 372;  2 Lloyd's LR 51.
Lord Justice Jackson, who delivered the leading judgment, preferred the respondent's interpretation, citing four reasons as follows [para 48]:
The respondent's interpretation accorded with the natural meaning of the words used;
The appellants' interpretation created a "bizarre, if not ungrammatical" reading of the clause in question;
The appellants' interpretation was nonsensical, in that Ove Arup could have no liability if asbestos contamination occurred through "clumsy investigation" but liability could attach if asbestos was not discovered but left in place; and
The clauses were clearly intended to limit liability, to the extent of insurance cover in place.
Lord Justice Jackson noted in his judgment that "in major construction contracts the parties commonly agree how they will allocate the risks between themselves and who will insure against what" and "[e]xemption clauses are part of the contractual apparatus for distributing risk." . He considered that the parties, through the clauses referred to above, agreed (a) what risks Ove Arup would accept and insure against; and (b) what risks Ove Arup would not accept and would not insure against - the fees being charged and which the consortium agreed to pay took account of those risks and allowed for the cost of professional indemnity insurance.
The decision confirms that the courts have softened their approach to both indemnity clauses and exemption clauses. On the basis of this decision, an exemption clause that does not refer directly to negligence may now be more likely to be successful in excluding liability for negligence. It is worth stressing that matters will still considered by the Court on a case by case basis. It is clear, however, that the Court, in reaching any decision, will take into account the intention of the parties and, in particular, consider how risk and insurance has been addressed in the contract.
The decision supports the reasoning and approach in the Court of Appeal Transocean decision last year, namely that clauses seeking to limit or exclude liability should be given their natural meaning. This decision raises the prospect that the long standing guidelines advanced by the Court in Canada Steamships, "in so far as they survive" (as Lord Justice Jackson put it), are perhaps no longer applicable to limitation and exclusion clauses but remain good law for indemnity clauses.