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Contractual interpretation: the role of contra proferentem and other principles

It seems as if there has recently been a glut of upper court decisions on contractual interpretation. In Persimmon Homes Limited v Ove Arup & Partners Limited the principle of contra proferentem and the guidelines in Canada Steamship Lines Ltd v The King came under scrutiny.

The decision

Persimmon concerned the meaning of the words “liability for any claim in relation to asbestos is excluded”. The claimants alleged that these did not exclude liability for negligence in failing to identify and report on asbestos found at the site, relying on the contra proferentem rule. This says that any ambiguity in an exemption clause is to be resolved against the party who puts the clause forward and relies on it.

The Court of Appeal held that all liability relating to asbestos, including liability arising from negligence, was excluded. The court relied on the clarity of the language and stated that the contra proferentem rule now has a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power. The court also suggested that the guidelines in Canada Steamship, insofar as they survived, were now more relevant to indemnity clauses than to exemption clauses.

So where does this leave the contra proferentem rule and what does it mean for dispute resolution practitioners?

Commercial meaning v language primacy

Some commentators identified tensions in upper court decisions between giving the contract a commercial common sense interpretation (Rainy Sky SA v Kookmin Bank) and focusing on the language used (Arnold v Britton). In Wood v Capita Insurance Services Limited, the Supreme Court denied any such tension: interpretation was a unitary exercise and the weight to be given to the various considerations depended on the circumstances. Courts give the language used the meaning which it would be given by a reasonable person in the parties’ position furnished with their common knowledge of the transaction’s background.

Following Persimmon, it seems courts will focus on the approach identified in Wood when interpreting exemption clauses. Using principles such as contra proferentem to obtain a particular outcome is unlikely to succeed. It appears that exclusion clauses are not in a privileged interpretive bubble.

However, some may argue that little has changed. As long ago as 1889, Lindley LJ stated in Cornish v Accident Insurance Co Limited:

“… in a case of real doubt, the policy ought to be construed most strongly against the insurers; they frame the policy and insert the exceptions. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty.”

Canada Steamship also made clear that the stated principles were only employed where there was doubt as to whether the words used were wide enough to cover negligence. Thus, in both instances English courts would give effect to clear language.

It may be argued that the principles retain some usefulness where the language is not clear. However, the issue may simply be resolved largely via contractual interpretation in such circumstances in the future. Parties drafting such clauses would be well advised to cover the issue of negligence expressly.

Unequal bargaining power

In contracts where the parties have unequal bargaining power (for example, consumer contracts, residential leases, insurance contracts) the contra proferentem rule may still bite. The courts could use interpretive principles in order to avoid contractual oppression by the stronger party if this cannot be avoided by statutory avenues, such as those provided in the Unfair Contract Terms Act 1977 or Consumer Rights Act 2015. The latter contains provisions as to transparency of contractual terms requiring them to be expressed in plain, intelligible and legible language. Further, section 69(1) of the Consumer Rights Act 2015 enacts a rule analogous to the contra proferentem rule:

“If a term in a consumer contract, or a consumer notice, could have different meanings, the meaning that is most favourable to the consumer is to prevail.”

Indemnity clauses

Broadly speaking, indemnity clauses are clauses which provide for one party (B) to provide an indemnity to another (A) for losses on the happening of certain events. The question can arise whether compensation is to be provided where the event occurred due to A’s own negligence. Following Canada Steamship, the courts have traditionally required that either there must be a reference to negligence or some synonym in order for such liability to be included in the indemnity, or the language must be wide enough to cover negligence. Persimmon suggests that where indemnity clauses are involved, the Canada Steamship guidelines may continue to have some role. However, if the language used is clear, the role of this rule will be limited (if indeed there is any role at all).

Other principles of interpretation

Persimmon may raise questions as to the utility of other principles of construction. For example, expressio unius est exclusio alterius asserts that express mention of a particular thing shows an intention to exclude another similar thing. The ejusdem generis principle of construction is that when general words follow a list of specific matters (often causes or events) of a similar kind, the general words may be given a similarly limited meaning. In Transocean Drilling UK v Providence Resources PLC, the first instance judge used the ejusdem generis principle to cut down the meaning of “loss of use” in that contract. However, the Court of Appeal had regard to the language and context, and disregarded the utility of both the ejusdem generis and the contra proferentem principle in reaching the opposite conclusion.

In Persimmon, the Court of Appeal specifically avoided a general review of contract law. However, it is likely that such contractual principles will be subjected to further consideration. The modern approach is that courts appear less likely to resort to rules of construction to resolve issues of interpretation; rather, they instead focus on language and context. As the Court of Appeal said in K/S Victoria Street v House of Fraser, “such rules are rarely if ever of any assistance when it comes to construing commercial contracts”.

Conclusion

Under English contract law, parties can expect the courts to examine the language, the business context and the constructional consequences when interpreting a contract. Where the language is clear, courts will give effect to its ordinary and natural meaning. This provides contractual parties with certainty and allows them to make arrangements as to insurance and so forth. Indeed, in Persimmon, an important factor was that, in major construction projects, parties commonly agree how to allocate risks and insurance between themselves. The Court of Appeal stated that exemption clauses were a way of distributing risk; therefore, there was no need to approach them with horror or a mindset designed to cut them down. It appears that exemption clauses in commercial contracts will therefore be interpreted in the same way as other clauses. Thus, as always, the lesson is one of clear and comprehensive drafting.

St Philips Stone Chambers Ishfaq Ahmed

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