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Court of Appeal Rules in Favour of a Natural Meaning of Contractual Limitation of Liability Clause

on Tuesday, 07 June 2016.

Transocean Drilling UK Limited v Providence Resources Plc, Court of Appeal

Summary

The Court of Appeal has given effect to the natural words used in a contract between two parties that were in dispute, rather than straining to find a meaning that was least palatable to the party seeking to rely on the limitation of liability clause.

The Facts

This contract was between the owner of a drilling rig and a drilling contractor. The rig had problems and the parties ended up in a dispute, so they pulled the contract out of the drawer. They turned to the liability clause to see who was liable and for how much.

The High Court decided that the contractor was at fault. The contractor appealed, based on the wording used in the contact.

The Court of Appeal Decision

The Court of Appeal reversed the High Court's decision. The wording actually used in the contract defined consequential loss (so any other legal interpretation was irrelevant) and the contract provided that losses arising from the contract were allocated in a particular way, regardless of cause. The Court should follow what the parties had agreed. The Court pointed to the importance of the parties being of equal bargaining power.

Referring to the Supreme Court case of Arnold v Britton, it was important to give effect to the language chosen by the parties in the contract. The starting point had to be the language used in the contract.

The Court of Appeal went on to consider the principle of 'contra proferentem'. This is where words are construed against the party who proffers them or puts them forward, and this rule is used in limitation of liability clauses to minimise the chances of parties avoiding their responsibilities. The rule has sometimes been used to create strained interpretations to stop the effect of the liability clauses. Doubt has been cast over the extent of the contra proferentem rule and this case has involved a further narrowing of the principle.

The Court said here that the rule should only be used where language is ambiguous - and only in those cases would courts choose the meaning that is less favourable to the party who introduced the clause, or in whose favour it operates. However, the rule does not apply where the clause favours both parties equally.

Comment

This decision may be seen as being restricted to the unusual facts - where parties of equal bargaining power had agreed to allocate liability regardless of fault, and therefore the liability clause was truly mutual on paper and in reality. The contra proferentem rule will still apply in some situations. The key thing that contracting parties must always do is to ensure that clauses are written clearly - if they want to limit their liability, the safest option is to leave no room for doubt as to the intended meaning with clear drafting.


For more information, please contact Paul Gershlick on 01923 919 320.

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