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Clause for Concern: Recent Updates to Exclusion Clauses and Indemnities

Contracting parties must always be considerate of circumstances that could lead to losses, even more so when these parties are of equal bargaining power. The recent decisions of the courts in relation to exclusion clauses and indemnities, affirms the position that drafting these types of clauses in a true literal sense is crucially important.

Exclusion Clauses:

The recent case of Persimmon Homes v Ove Arup & Partners involved Persimmon Homes (PH) purchasing a site relying on the advice of Ove Arup & Partners (OAP) acting as civil engineers and checking for asbestos.

In their agreement, it was stated that "liability for any claim in relation to asbestos is excluded." PH purchased the site relying on OAP's advice, but soon after asbestos was discovered on the site. OAP's case was that the statement excluding liability should be relied upon in the express meaning; PH claimed however the word "for" was causative (i.e. meaning "for causing") and would not exclude liability.

The court rejected PH's argument that the clause was ambiguous in any way. They applied "common business sense" and concluded that natural language could lead to no other finding. The court also advised that the rule of contra proferentem - when the words in the contract are construed against the person who put them forward - would be of little use with regard to parties with equal bargaining position negotiating a contract.

Risks are to still be allocated between negotiating parties themselves and the courts refuse to interpret express language beyond the most straightforward meaning.

Indemnities:

Wood v Capita Insurance Services involved Wood selling his company - an insurance broker specialising in classic cars - to Capita. Whilst the sale agreement considered what would happen if the company was fined by the Financial Services Ombudsman (FSA), and the usual warranties relating to regulatory compliance, the time limit for warranty claims had lapsed, so Capita pursued a remedy under the indemnity clause.

After being sold it was discovered that the company had historically misled customers, which the company then self-reported to the FSA. The FSA ordered that the customers be compensated, which would result in a total cost of £1.35 million to the company. Capita's claim (to recover those monies from Wood) was rejected, as the loss had arisen from self-reporting - no customers had complained, and the exact wording of the indemnity clause only covered losses "arising out of claims and complaints". The courts held that the literal interpretation of the clause thereby resulted in it not being triggered and Wood was not liable to compensate Capita.

The decision upheld previous decisions - in that contractual interpretation requires balancing the language used with the same "business common sense" outlined above. Wood had given warranties on regulatory compliance, so had Capita discovered the mis-selling of insurances within the specified time period, they would have had another viable route to claim for compensation. Therefore, the contract was upheld to be reflective of the "commercial intention" agreed by both the parties.

In conclusion:

The courts have made clear their intent on only enforcing what can be seen as common sense in the natural and literal meaning of terms used. A party claiming for losses will not be helped when they have unfortunately made a "bad bargain" and agreed to potentially disadvantaging terms in the contract.

If you require assistance with the negotiation and preparation of your commercial contracts, terms and conditions, or would like assistance on any other commercial law matter; contact John Pickervance, Associate Solicitor within the Commercial department by email John Pickervance or phone 0333 207 1134. Alternatively, send any question through to Forbes Solicitors via our online Contact Form.

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