Court of Appeal Case Sounds Warning - Draft Liability Clause as You Intend It
When something goes wrong in a contract, the parties pull the contract out of the drawer. Who is responsible for what, and what caps and exclusions on liability are there?
At that stage, the party looking to minimise its liability - usually the supplier - normally hopes that the drafting is watertight. The other party may hope that there are holes in the liability armoury.
There is a long-established of the rule of contra proferentem. This means that an ambiguity, even a small one, would be interpreted against the party looking to rely on the liability clause. Recently, that rule has been softened, as the courts have increasingly looked to uphold the business common sense meaning of the clause, and not get a party out of a bad bargain.
The second highest court in the land - the Court of Appeal - has now considered this principle again.
Facts
The case of Persimmon Homes Ltd v Ove Arup & Partners Ltd concerned a dispute about consortium that wanted to regenerate some land. They engaged Ove Arup to provide civil engineering services, starting with contamination investigation. The agreement stated that Ove Arup's aggregate liability including for negligence had a cap, with liability for pollution and contamination subject to a different cap. All liability for any asbestos claim was stated to be excluded. It was later found that there was in fact asbestos on the land. The consortium sued Ove Arup for failing to report on the asbestos.
Court Decisions
The High Court decided that liability for asbestos was excluded, and the Court of Appeal has upheld that decision. The argument that the consortium made was that the word 'for' meant that Ove Arup had no liability if it caused the asbestos contamination, and this did not apply to issues over negligence for failing to discover that it existed. The Court of Appeal ruled that such a construction and use of the words would be absurd. It applied the natural meaning of the words and business common sense.
The Court went on to say that commercial contracts allocate risk between the parties and exemption clauses are part and parcel of that. Where one party accepts certain risks, that is often reflected in the price and who bears insurance. The Court of Appeal said that the contra proferentem rule had a very limited role now in respect of commercial contracts negotiated between parties of equal bargaining power, the rule should only be applied where there is ambiguity in meaning.
As well as deciding against applying the language strictly against the party looking to rely on the exclusion clause, the Court also refused to apply another longstanding rule in liability clauses - the Canada Steamship principle. This principle is that if a party wants to exclude or limit liability for 'negligence' when there might be some other liability arising, there must be clear reference to 'negligence' or it would not be excluded. However, failure to do so here in respect of the asbestos claim was not fatal. The court said that the need expressly to refer to 'negligence' was more appropriate in an indemnity clause than an exclusion clause.
What This Means for Organisations
This is yet another case in a growing list where the courts are giving effect to the intention of the parties and the clear intention used. They are giving no weight to traditional legal mechanisms that can re-write the contract and get a party out of a bad bargain because they had failed to use appropriate words.
What this means is that parties need to draft what they mean and not look to rely on a get out later. Getting clear, unambiguous drafting is key.