Don’t hold it against me: effective exclusion clauses

Written on 4 May 2016

Contractual clauses that seek to limit or exclude one party’s liability towards another can produce harsh results. Two recent cases clarify that the court will be prepared to give a wide meaning to an exclusion clause when the natural meaning of the clause is clear. But when two or more meanings are equally plausible, a court will prefer the narrowest meaning, construing the exclusion or limitation against the party seeking to rely on it.

Nobahar-Cookson & Zedra Trust Company v The Hut Group: time limits in breach of warranty claims

Nobahar-Cookson & Zedra Trust Company (Jersey) v The Hut Group was a breach of warranty claim arising out of a share purchase agreement. After the transaction had completed, both the buyer (The Hut Group) and the sellers (Mr Nobahar-Cookson and Zedra) brought breach of warranty claims against each other.

When litigation was commenced, there was a dispute as to whether the buyer had brought one of its claims out of time, by reference to a contractual exclusion clause for claims not brought within a prescribed time limit, which was “20 Business Days after becoming aware of the matter.”

The sellers argued that the 20 business days ran from the date that the buyer became aware of the facts giving rise to the claim, in which case the claim was brought out of time. The buyer argued that the period did not begin to run until it was aware that there was a proper basis for the claim, in which case the claim was brought within time.

The first instance judge found in favour of the buyer, that the time period did not start until it was aware that there was a proper basis for the claim. The Sellers appealed.

What did the Court of Appeal decide?

The Court of Appeal also found in favour of the buyer. Briggs LJ, giving the leading judgment, analysed the contract both linguistically, reading the relevant clause in the context of the SPA as a whole, and commercially. On each count, he found force in each party’s arguments. Commercially, for example, he found that imposing a time limit of 20 days from the date of knowledge of the underlying facts was not necessarily too draconian.

Nevertheless, on balance, the judge preferred the buyer’s interpretation. He agreed with the buyer that the real purpose of the clause was to “prevent the buyer from pursuing claims it had previously kept up its sleeve“. This pointed towards the time starting only once the buyer knew it had the proper basis for a claim.

In reaching this decision, the judge considered the role of traditional principles of contractual construction, such as the contra proferentem rule – that in the case of ambiguity, the meaning of a clause will be construed against the party seeking to rely on it. The first instance judge had disregarded this rule, finding that it no longer held significant weight. However, Briggs LJ found that recent decisions had affirmed a similar principle where exclusion clauses are concerned – that, if needed to resolve ambiguity, they should be narrowly construed. The principle had been expressed by Moore Bick LJ in Seadrill Management v OAO Gazprom as:

essentially one of common sense; parties do not normally give up valuable rights without making it clear that they intend to do so.”

In this case, this principle also favoured the buyer, since it was the seller that was seeking to rely on a broader interpretation of the exclusion clause. The judge therefore found that a commercial and linguistic interpretation narrowly favoured the buyer, but that this was “significantly reinforced” by more traditional principles of contractual construction.

Transocean Drilling UK v Providence Resources: exclusion clauses and consequential losses

Transocean Drilling v Providence Resources, which was heard by the Court of Appeal very shortly after Nobahar-Cookson v The Hut Group, concerned a contract for drilling for oil off the Southern Coast of Ireland. As a result of mechanical failings, the rig was unable to operate for over a month.

Providence brought a claim against Transocean, arguing that the failings had arisen due to Transocean’s breaches of contract. Providence was looking to recover various costs incurred as a result of the inactivity, known as “spread costs”, such as the wasted costs of personnel, equipment and services from third parties.

What did the contract say about consequential losses?

The contract between Transocean and Providence contained a “sophisticated scheme for apportioning responsibility for loss and damage of all kinds, backed by insurance.” This included a clause which was drafted as a cross-indemnity, but which the parties agreed was in effect an exclusion clause, excluding each party’s liability for the other’s consequential loss.

The dispute turned on the following words under the definition of consequential loss:

… loss of use (including, without limitation, loss of use or the cost of use of property, equipment, materials and services including without limitation, those provided by contractors or subcontractors of every tier or by third parties), loss of business and business interruption…

Providence argued that the words “loss of use” should be restricted to the natural meaning of those words – the loss of the ability to make use of property belonging to it. Transocean argued that the words in brackets expanded the scope of “loss of use, for example to include costs incurred in procuring goods or services from third parties.

The first instance court found in Providence’s favour, on similar principles to those approved in Nobahar-Cookson, holding that: “a party relying on an exclusion clause must establish that the words show a clear intention to deprive the other party of a remedy to which he would otherwise be entitled.” Transocean appealed this decision.

What did the Court of Appeal decide?

The Court of Appeal (which included Briggs LJ and Moore-Bick LJ) found in Transocean’s favour, that the exclusion clause should be given the wider interpretation. At first glance, this might seem at odds with the decision in Nobahar-Cookson. However, the crucial difference was that, unlike in Nobahar-Cookson, in this case the court held that the meaning of the words was clear.

Moore-Bick LJ, giving the leading judgment, noted that the 2015 case of Arnold v Britton (see our previous article here) had re-emphasised that particular importance must be given to the language chosen by the parties to express their agreement. Where the meaning of the words was clear, he held, the contra profeentum, or similar, principles, should not be applied.

In this case, the meaning of the words was clear. The purpose of the words in brackets was to provide specific examples to flesh out what was meant by “loss of use”. Looking at the clause as a whole, its purpose was to exclude consequential losses of any kind, of which expenditure on goods or services from third parties was an obvious example. Particularly as part of a sophisticated scheme for apportioning risk between parties of equal bargaining strength, the court held that the words of the contract should be given their natural meaning.

Osborne Clarke Comment

Transocean v Providence continues the recent trend of cases that have emphasised contractual certainty – giving effect to the words that the parties have used, where they are clear – over commercial common sense. If the natural meaning of a clause is clear, the courts will give effect to it.

Nobahar-Cookson v Zedra, however, clarifies that, where exclusion clauses are concerned, in cases of real ambiguity, contra proferentum-type principles still have a place.

One point that is less certain from the two cases is the relevance of the parties’ relative bargaining strengths. In Transocean, the judge held that contra proferentum did not have a role to play in relation to a clause that favoured each party equally, especially where they had equal bargaining strength. In Nobahar-Cookson, however, the judge saw no reason to dissapply the principle just because both parties were giving warranties and subject to similar exclusion clauses. He did not discuss the parties’ relative bargaining strengths.

Practice points

  • If the wording is unambiguous, a court will give effect to it, so clarity of drafting is of utmost importance. 
  • For warranty provisions in SPAs, be clear as to when any limitation periods start to run: is it from the date of knowledge of the facts, or of knowledge that there is a proper basis for bringing a claim? 
  • For exclusions of consequential loss, what precisely are the parties prepared to accept, and what are they trying to exclude? 
  • It is important for both parties to ensure the clarity of drafting, but where an exclusion clause favours one party, and particularly where that party has greater bargaining power, the onus will be on them to ensure that the meaning of the clause is unambiguous.