Exemption clause spared the axe

02 Jun 2017

Persimmon Homes Ltd v Ove Arup [2017] EWCA Civ 373

In the recent Court of Appeal judgment in Persimmon Homes Ltd v Ove Arup, an exemption clause in favour of consulting engineers (seeking to limit liability for pollution and contamination and exclude liability for asbestos) has come under judicial scrutiny as the court decided whether it should wield the proverbial axe to it. It is a decision well worth looking at when it comes to the current approach to the interpretation of exemption clauses.

The facts

The dispute arose from a challenging project to regenerate the port in Barry in South Wales. Contamination and pollution were recognised as potential problems at the site. Persimmon and others made up a consortium ('Consortium') that bought the site with plans for commercial and residential development. In 2009 the Consortium engaged Ove Arup ('Arup'), among others, to provide engineering services. Crucially, Arup’s appointment and the collateral warranties it gave included the following exemption clause (emphasis added):

“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) [£5,000,000 in the collateral warranties] 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.”

In July 2012 the groundworks contractor encountered asbestos. The Consortium considered that the quantity of asbestos was substantially more than had been expected. Having taken the view that Arup had been negligent in failing to identify and report upon the asbestos at an earlier stage, the Consortium made a claim against Arup for the losses allegedly sustained by the late discovery of the asbestos. Arup raised multiple issues in its defence including that it could rely on the terms of the above exemption clause to defeat the claim in its entirety.

A trial of preliminary issues was ordered as to the interpretation of the clause. The Technology and Construction Court found that the clause did exclude liability for the Consortium’s entire claim. Aggrieved, the Consortium appealed.

The Court of Appeal decision

The Consortium sought to argue that the exemption clause should be read as (emphasis added);

“…liability for causing pollution and contamination… [and]… Liability for causing any claim in relation to asbestos is excluded.”

So the argument went, the clause would then only exclude liability for any claim against Arup for causing the presence of asbestos, not merely for failing to report on its presence. Such an interpretation was rejected on the basis that it did not accord with the natural meaning of the words used and as contrary to the application of business common sense: why would the parties agree that Arup would not be liable if it caused the spread of asbestos, but would be liable for simply not reporting its presence? The clause excluded any claim relating to asbestos not only claims for causing the spread of asbestos.

Not giving up, the Consortium sought to rely on two principles that historically have been used to limit the effect of exemption clauses: (1) the contra preferentem rule of interpretation which requires any ambiguity in an exemption clause to be resolved against the party who put the clause forward and seeks to rely on it; and (2) the principles for construing exemption and indemnity clauses derived from Canada Steamship Lines Ltd v The King [1952] AC 192, which, in essence, require an exclusion or indemnity in respect of liability for negligence to be unambiguous.

Applying the normal approach to construing commercial contracts, the court held that the meaning of the clause was clear and so neither of these principles had any impact upon it. Significantly, it went on to say that  where there is a commercial contract, negotiated between parties of equal bargaining power, the contra preferentem rule now has a very limited role and the Canada Steamship principles “…(in so far as they survive) are now more relevant to indemnity clauses than to exemption clauses.”

Refusing to adopt the interpretation argued for by the Consortium, LJ Jackson commented;

"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 that they agree."

What this means for you

As the Court of Appeal acknowledged, the construction industry, with support from insurers, is capable of operating more efficient and effective ways of allocating and managing risk than are provided by the common law of negligence. There is nothing morally objectionable to this. Negligence actions are costly and time consuming and can be based on no more than momentary carelessness or turn on finely balanced judgments, or the relative skills of lawyers and expert witnesses. It is a rather old-fashioned notion that it is the role of the courts to employ ingenious analysis to get round contract drafting to ensure liability for negligence remains. Furthermore, even outside of the consumer context, some statutory protection is provided by the Unfair Contract Terms Act 1977.

This is reflected in other recent cases in the context of:

  • Joint names insurance (notably, Gard Marine and Energy Ltd & Anor v China National Chartering Company Ltd & Anor [2017] UKSC 35, in which a provision for joint names insurance was held to prevent a claim between the co-insured, notwithstanding that this was not spelt out explicitly, as had been said to be required in some earlier cases ); and

  • Exemption clauses (i.e Transocean Drilling UK Ltd v Providence Resources Plc [2016] EWCA Civ 372 and Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm), which discourage resort to the contra proferentem rule and go no further than saying that in the face of genuine ambiguity, it may play a role).

These cases show a desire by the courts to harmonise the approach to construing all parts of a contract and a willingness to respect the risk allocation agreed by commercial parties. This is good news for parties and their insurers when seeking to rely upon such an agreement.

However, difficult cases and uncertain times may lie ahead. Gard Marine split the Supreme Court 3:2 and in Transocean Drilling, the Court of Appeal reversed the decision below (in part). A case could be made for saying that, in at least some cases, the inflexibility of contra preferentem and the Canada Steamship principles provided greater certainty than the normal approach to construction of contracts on the basis that they encouraged the courts to identify ambiguity and to resolve it in favour of liability not being limited/excluded.

On the specific issue of limiting liability for pollution or contamination, including asbestos, professional indemnity insurance policies often contain limitations or exclusions on the cover available. Accordingly, the inclusion of exemption clauses in respect of such liability in a professional’s appointment, having regard to the terms of their cover, is an important part of a professional’s risk management strategy.

Finally, the Court of Appeal raised an interesting question about the effect of the financial limits on liability in the collateral warranties in circumstances where warranties had been provided to separate entities making up the Consortium. The point was not developed and may not matter in this case given the complete exclusion in respect of asbestos, but it provides food for thought to those providing warranties to multiple entities each of which may suffer/share in losses.  

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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

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