The Great Escape? A fresh look at exclusion clauses

Has there been a quiet(ish) revolution in the Courts’ approach to contract interpretation, and is this of importance only to lawyers? There has been and, yes, we should all be aware.

The Court of Appeal’s recent decision which concerned an exclusion clause intended to limit liability for claims could have a serious effect on the interpretation of such clauses in negotiated agreements, and particularly far reaching consequences where they are not clearly drafted.

The principles of interpretation normally applied by the Courts go back to the 1950s, when recognised guidelines for excluding liability for negligence were formulated. The general rule (and this still applies in the fullest sense to contracts between businesses and consumers, thanks to the Consumer Rights Act 2015), is that disputes over badly drafted exclusion or limitation provisions will be decided against the party relying on them. This includes either the party who produces the drafting for its own benefit, or the party relying on the clause to the disadvantage of the other.

The requirement for reasonableness in the Unfair Contract Terms Act in the 1970’s provided grist to the mill of those wanting to defeat limitations and exclusions, especially in relation to commercial contracts between equal parties.

Has there been a quiet(ish) revolution in the Courts’ approach to contract interpretation, and is this of importance only to lawyers? There has been and, yes, we should all be aware.

This traditional approach of construing an exclusion clause against the party relying on it was reinforced by the Court of Appeal last year in The Hut Group Ltd v Nobahar- Cookson which concerned the time allowed for the notification of management account warranty claims in a share purchase agreement. The seller relied on an exclusion clause in the agreement, arguing that the buyer’s claim was time barred as it did not notify the seller on “becoming aware” of its claim. The seller maintained that “becoming aware” meant that the buyer should have given notification when it received the management accounts as these formed the factual grounds for the claim, even if the buyer was unaware at the time that they did so.

The Court disagreed with the seller’s argument and, following the established rule, applied the narrowest possible interpretation against the seller by deciding that time only began to run when the buyer became aware that it had an a proper basis for a claim.

This should have settled the point - all ambiguous drafting of exclusion clauses would be interpreted against the party relying on them. However, in Persimmon Homes Limited v Ove Arup Partners in May this year, the Court allowed consulting engineers to a consortium of successful bidders who purchased a regeneration site in Wales to escape liability for negligence concerning findings of asbestos in reliance upon a clause which stated that “liability for any claim in relation to asbestos is excluded”, even though the clause made no actual reference to the exclusion of negligence.

The Court seemed to disregard the well-worn path of strictly interpreting exclusion clauses against the party relying on them by allowing them off the hook for negligence

Unsurprisingly, the Court noted that similar clauses are a normal part of risk allocation in construction projects and had no difficulty with the language of the clause, or using business common sense to reach its decision. However the Court seemed to disregard the well-worn path of strictly interpreting exclusion clauses against the party relying on them by allowing them off the hook for negligence.

Whilst the general rules of ascertaining the meaning of unclear contract wording (as opposed to those specifically concerning exclusion clauses) remain unaffected by this case, where are we now if we want to negotiate some sort of contractual limitations in our building contracts or professional appointments? Is it possible to be certain of protection if things do go slightly (or even badly) wrong?

Although, as they say, the only two things in life that are absolutely certain are death and taxes, following a few simple principles might maximise your chances of achieving the result you intend: First, do not forget that the normal rules contract interpretation will apply and the relevant clause must always be clearly and unambiguously drafted, and secondly, despite Persimmon, it is still sensible to negotiate the clause very carefully if you may have to rely upon it to the disadvantage of the other party.