Case Alert - [2018] EWCA Civ 62

Court of Appeal re-affirms that exclusion clauses in commercial contracts do not have to be construed narrowly

In Impact Funding v AIG Europe, the Supreme Court confirmed that exclusions clauses in insurance policies should not always be construed narrowly. In this case, the Court of Appeal has confirmed that the same approach applies to exclusion clauses in general contracts too.

In construing an exclusion clause in a master services agreement, it was noted by the Court of Appeal that the traditional approach of the courts towards exclusion clauses was one of hostility, which began to change with the passing of the Unfair Contract Terms Act 1977 (and an acceptance by the courts that such clauses are an integral part of pricing and risk allocation in commercial contracts).

However, the courts have also recognised that a clause which is drafted too broadly might be entirely ineffective because it would be unreasonable to exclude fraud. As a result, it has become common to include a fraud carve-out in exclusion clauses to reflect "the commercial common sense that a contracting party may be prepared to assume the risk of negligence by his counterparty, but not the risk of fraud." (as per Jacob J in Thomas Witter Limited v TBP Industries [1996]). In the context of the clause in this case, the Court of Appeal held that a fraud would be a relevant fraud if "an allegation of fraud is a necessary ingredient of the legal basis on which loss is claimed".

In reaching that conclusion, the Court of Appeal rejected an argument that the judge's interpretation of the clause had rendered certain parts of the contract redundant or superfluous: "the argument from redundancy seldom carries much weight because, as it has been graphically put, drafters frequently employ linguistic overkill and try to obliterate the conceptual target by using a number of phrases expressing more or less the same idea".