Liability exclusion clauses – Court of Appeal guidance on interpretation

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A trip to the Court of Appeal illustrates that failure to expressly exclude liability for negligence can lend to uncertainty and litigation.

The case

A consortium of developers (the Consortium) engaged Ove Arup & Partners (Arup) to provide engineering and environmental consultancy services in relation to the regeneration of a development site in South Wales. It emerged later that the site was contaminated by asbestos and the Consortium brought a negligence claim against Arup. However, the contractual agreements between the parties contained an exclusion clause which stated (among other things) that “liability for any claim in relation to asbestos is excluded”.

Perhaps unsurprisingly, Arup argued that this exclusion clause gave it a complete defence to the Consortium’s claim and the court at first instance found in Arup’s favour. The Consortium appealed. The key issue for the Court of Appeal to decide was whether, on a proper interpretation of the exclusion clause, it excluded liability for negligence.

The decision

The Court of Appeal upheld the lower court’s decision and, in doing so, gave some useful guidance on the interpretation of liability exclusion clauses and their enforceability.

In reaching its decision, the court considered the Privy Council’s decision in the 1952 case of Canada Steamship Lines v The King and the, now classic, three-stage test for interpreting clauses of this type. However, the court expressed the view that, “insofar as they survive”, these guidelines are now more relevant to indemnity rather than exclusion clauses.

The court also rejected the contention that any special rules apply to exclusions negotiated between businesses with equal bargaining power. Instead, exclusion clauses are to be treated like any other provision of a contract and the court’s task is to “identify what a reasonable person having all the background knowledge which would reasonably have been available to the parties would have understood the parties to mean”. Adopting this approach, the Court of Appeal had no difficulty deciding that the wording of the clause was wide enough to cover negligence and that this is what the parties must have intended.

The court also held that the contra proferentem rule now has a very limited role to play where the contract is a commercial one, negotiated by parties of equal bargaining power.

Comment

The decision in Persimmon Homes Ltd v Ove Arup & Partners Ltd reflects the increasing reluctance of the courts to interfere with exclusion clauses negotiated between businesses of equal bargaining power and the diminishing significance of the contra proferentem rule when interpreting such contracts. As the Court of Appeal observed:

“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 [for the court] to approach such clauses with horror or with a mind-set determined to cut them down”.

That said, and from a practical perspective, it will always be safer to expressly exclude liability for negligence, if this is what is intended. As this trip to the Court of Appeal illustrates, failure to do so can lead to uncertainty and, no doubt expensive, litigation.

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