Contractual myths laid to rest
It is the lot of the lawyer to suffer what clients consider to be their ‘helpful suggestions’, often crumbs of comfort vaguely recalled from the law modules of Architecture degrees, CIOB courses and MBAs, not to mention Wikipedia. A prime candidate is the ‘Contra Proferentem’ doctrine, which is often raised in connection with terms which the parties have agreed but which one of them subsequently finds objectionable. However, the case of Persimmon Homes Ltd v Ove Arup and Partners Ltd [2017] EWCA Civ 373 illustrates that in a business context, the objecting party is more likely to have to ‘like it or lump it’.
Let’s define terms. Contra Proferentem means “interpretation against the draftsman", and can apply where a term is ambiguous. Pursuant to this rule, the ambiguity should be resolved by adopting a meaning which works against the interests of the party that proposed the wording and relies upon it. The doctrine is most commonly applicable in situations involving standard contracts, i.e. very often in construction disputes!
In Persimmon v Ove Arup, Arup had formerly been involved in remediation of land at the old docks in Barry, South Wales under a contract with Associated British Ports. A consortium including Persimmon Homes Limited subsequently purchased the site. In 2009 Arup were engaged by the Consortium on ACE (Association of Consulting Engineers) terms to provide consultant engineering services under a formal appointment. That appointment provided:
“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."
Separate warranties to each of the consortium members contained a similar term. Unforeseen asbestos was encountered during 2012, and the quantity was substantially more than the Consortium had expected. They alleged that Arup’s failure to advise properly caused two types of loss. First, if properly advised, the Consortium would have bought the site for £51 million, rather than £53 million, and second, the late discovery of the asbestos caused the Consortium to incur additional costs which they could have avoided. The Consortium issued proceedings against Arup, alleging breach of contract, negligence and breach of statutory duties.
The issue in the appeal was whether that clause, when read in context, excluded Arup’s liability for any asbestos which they allegedly negligently failed to identify, and if not, whether Arup’s liability for each claim was limited to £5 million. The TCC had ruled on these questions as a preliminary issue in December 2015 and held that that the exemption clause barred all claims concerning asbestos.
The Consortium argued that TCC was wrong, and in the Court of Appeal (‘CA’) its first line of attack concerned the meaning of “… the liability for pollution and contamination…” and “Liability for any claim in relation to asbestos is excluded." respectively. It contended that "…liability for pollution and contamination" meant liability for actually causing pollution and contamination, not liability in connection with pollution and contamination. Further, because asbestos is a sub-category of pollution and contamination, “Liability for any claim in relation to asbestos…” should be construed in the same way. The Consortium was essentially saying that the limitations and exclusions of liability only applied to causing contamination, rather than failing to detect contaminants.
Arup contended that this did not make sense, since it had been engaged to investigate and advise on the presence of contamination, so the parties must have envisaged this clause applying to Arup's potential liability for failing to identify contamination. Moreover, if the Consortium’s interpretation were accepted, then these limitations and exclusions would only apply to causing contamination (a remote prospect) but would fail to address the issue of negligent surveys. That did not make sense in the context of clauses concerning liability caps linked to professional indemnity insurance. The CA agreed with Arup; the Consortium’s interpretation was illogical.
The Consortium also invoked a much cited Privy Council case, Canada Steamship v The King [1952] AC 52, which says that limitation and exclusion clauses should be construed against the party which proposes those terms, and if they did not contain explicit reference to negligence, and could be construed as excluding liability for some other cause of loss (unless it was fanciful or remote), then liability for negligence would still bite.
The CA rejected this too; the Canada Steamship guidelines were held to be ‘more relevant’ to indemnity clauses than to exemption clauses and, in relation to exemption clauses, Lord Justice Jackson said, “57 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. Contractors and consultants who accept large risks will charge for doing so and will no doubt take out appropriate insurance. Contractors and consultants who accept lesser degrees of risk will presumably reflect that in the fees which they agree.”
For completeness though, the CA did go on to apply the Canada Steamship principles and it decided that the exemption clause’s failure to explicitly refer to the possibility of a negligent breach by Arup did not mean that it could not cover Arup’s own negligence; its natural meaning was clear. Where the possibility of other ‘non-negligent’ breaches were concerned, on investigation the possibility of a non-negligent breach of statutory duty was fanciful, and “The parties cannot sensibly have been agreeing that Arup's only liability in relation to asbestos would be for non-negligent breaches of those regulations.”
The Consortium’s last throw of the dice deployed the old favourite, the contra proferentem rule, which it said should apply because the clauses contained ambiguity, and should therefore be construed against Arup who put it forward and relied on it. What is surprising about the CA judgment, and makes it worthy of comment, is the brevity with which this argument was dismissed in two short paragraphs, and the limited applicability of the rule itself was illustrated: “52.... In relation to commercial contracts, negotiated between parties of equal bargaining power, that rule now has a very limited role.”, and in this case “53 In my view the meaning of clauses 6.3 and 4.3 is clear. The contra proferentem rule does not impact upon the resolution of the preliminary issues in this case.”
To be fair, in driving the nail into the coffin of the doctrine in commercial cases, Jackson LJ was building on two recent CA cases, K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904 and Transocean Drilling UK Ltd v Providence Resources PLC [2016] EWCA Civ 372 (in which the leading judgment was given by Lord Justice Moore-Bick, who has just been appointed to lead the Grenfell Tower enquiry).
Finally, the coup de grace: “61… Let me now draw the threads together. The meaning of the two exemption clauses is clear. Neither the contra proferentem rule nor the case law on exemption clauses can come to the rescue of the claimants. Clause 6.3 of the 2009 agreement and clause 4.3 of the warranties exclude liability for all the Consortium's pleaded claims in respect of asbestos….”
What does this mean for you or your business?
4-0 to Arup then. In the context of two sophisticated parties and the rigour of contract law today, this verdict was not a surprise.
Today, where the parties are of equal bargaining power, the courts are unlikely to interfere with the parties’ agreed allocation of risk. Where the courts have to, they will apply the natural meaning of the words of an exemption clause, without recourse to the contra proferentem principle.
This decision illustrates the continuing division in the law as it applies to commercial parties of equal bargaining power on the one hand, and consumers and (possibly) SME’s on the other. The former are expected to negotiate to protect their own interests and take the consequences if they do not, and the latter may take comfort from unfair contract terms legislation and rules of construction like contra proferentem, which may help when their contracts are ambiguous or silent on certain outcomes.
What do you need to be doing now?
You need to ask yourselves whether you can really afford to enter into increasingly complex contracts, which you will do as your business grows, without first obtaining legal advice. If you do not you are actually gambling on whether, in the event of a dispute, the court will accept that there is inequality of bargaining power between you and your opposite number, and whether you should be able to rely on those canards you learnt a long time ago. Many will no longer be relevant to what your business does now. You know where to find us.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.