When contract liability exclusion clauses go too far

No doubt in light of the current focus on building safety, many parties with property interests will be reviewing their contractual exposure and asking themselves to what extent they may be accountable to third parties for downstream risks. One way of contractors/subcontractors limiting liability is through the use of exclusion clauses in any contract. This article examines two recent cases involving the interpretation of such clauses, which make interesting reading - particularly for institutions which may be seeking to claim back costs relating to poorly installed materials or unsafe systems. Importantly, the approach taken in these recent cases supports the position that the issue is one of allocation of risk as between the parties and it is a matter for commercial negotiation how contracting parties allocate risks between themselves and ultimately who is responsible to insure against that risk. Price (and the ability to obtain insurance cover) will obviously play a part in determining which party is prepared to accept liability for things going wrong but it is clear that freedom of contract prevails and parties can not necessarily rely on the courts to intervene to save them.

Goodlife -v- Hall Fire Protection

In Goodlife Foods Ltd. -v- Hall Fire Protection Ltd. (2017, TCC) the court looked at the effect of contractors’ exclusion clauses; particularly, where a clause goes too far while seeking to avoid liability.

Goodlife suffered a fire in an industrial frying machine at its factory. It blamed failure of a fire suppression system supplied by Hall. Goodlife claimed a £6 million loss for property damage and business interruption. Hall argued an exclusion clause in its standard terms (part of its contract with Goodlife) had excluded liability for all claims in negligence.

Hall’s clause excluded liability, loss, damage or expense caused to ‘your property, goods, persons or the like, directly or indirectly resulting from our negligence or delay or failure or malfunction of the systems or components provided for whatever reason.’

Goodlife argued that this exclusion was too widely drafted to be allowed, as really it was an attempt to exclude any kind of loss; while reference to excluding damage to persons was an attempt to exclude liability for causing personal injury and death, prohibited by Unfair Contract Terms Act 1977 (UCTA).

UCTA applies to clauses which seek to restrict or exclude business liability. With supply contracts, any standard terms which seek to exclude or restrict liability are likely to be caught:

• Section 2(1) provides ‘a person cannot by reference to any contract term … exclude or restrict his liability for death or personal injury resulting from negligence.’
• Section 2(2) provides ‘in the case of other loss or damage (i.e. other than death or personal injury), a person cannot so exclude or restrict his liability for negligence except in so far as satisfies the requirement of reasonableness.’

Goodlife argued that because Hall’s clause tried to exclude liability for personal injury when it should not, it was ineffective for all other purposes, so that Hall was fully liable for causing property damage.

The judge decided that the words ‘damage caused to your persons’ did seek to exclude liability for causing personal injury or death and so, went too far in excluding liability and breached Section 2(1) of UCTA. Did his finding mean that the exclusion clause was rendered unreasonable in its entirety or were only those words referring to damage to persons unreasonable? The judge determined that where a clause seeks to exclude liability both for death/personal injury and also for other kinds of loss or damage, the offending part of the clause can be excised and the remainder may be upheld where that is reasonable.

Accordingly he held the remaining words of Halls’ clause did reasonably exclude any liability Hall might have had to Goodlife in negligence. In assessing whether the clause was reasonable the judge took into account the following:

• The parties had roughly equal bargaining positions
• There were other options available to Goodlife which could have bought a fire suppression system elsewhere
• Hall had raised the issue of Goodlife insuring against fire risks

In the light of these, the exclusion clause sought to reasonably allocate risk between the parties and was enforceable to exclude Hall’s other potential liability. The parties had intended that Goodlife would be responsible for bearing the risk and insuring against the same.

Whilst undoubtedly a basic error in drafting led to the inclusion of wording that breached UCTA, the court could have struck down the clause in its entirety which would have meant that Hall would have been liable without restriction. This illustrates the risk of trying to go too far and exclude too much and the need for a proper review of contractual obligations to ensure any necessary cover is in place.

Persimmon Homes -v- Ove Arup

In Persimmon Homes Ltd. and Others -v- Ove Arup & Partners Ltd. and Another (2017) EWCA Civ 373, the Court of Appeal looked at the effect of a clause seeking to exclude liability for asbestos and gave some useful guidance reiterating how such clauses are to be interpreted.

Persimmon, property developers, instructed Arup as civil engineers in connection with a construction project in Barry, Wales, which included the provision of advice in relation to possible asbestos contamination at the site. When negotiating the contract, the parties expressly considered what would happen if Arup had been negligent when providing services to Persimmon. This eventuality was covered by professional indemnity insurance, so the clause under this heading stated that:

‘[Arup]’s aggregate liability under this Deed whether in contract, tort, (including negligence), for breach of statutory duty or otherwise (other than for death or personal injury caused by the [Arup]’s negligence) shall be limited to £5,000,000.00 (five million pounds) with the liability for pollution and contamination limited to £5,000,000.00 (five million pounds) in the aggregate. Liability for any claim in relation to asbestos is excluded.’

There may be nothing obviously contentious in that clause (unlike the Goodlife case above, this clause was UCTA compliant, carving out death and personal injury) but there was an express exclusion clause excluding liability in relation to asbestos. Persimmon purchased the site relying upon Arup’s advice.

Subsequently asbestos was discovered on the site and Persimmon alleged that that Arup had been negligent by failing to identify and report the asbestos. Arup sought to rely on the express wording of the exclusion clause – ‘Liability for any claim in relation to asbestos is excluded.’ The Court of Appeal was called upon to determine whether the exclusion clause exempted Arup for asbestos-related losses suffered by Persimmon. Arup’s case was that the exclusion clause alleviated it from all liability, whereas Persimmon asserted that the word ‘for’ had a causative connotation such that it means ‘for’ in the sense of meaning ‘for causing’ the spread of asbestos, and that it did not exclude liability for failing to advise of/identify asbestos. Persimmon also alleged that the clause did not expressly exclude liability for negligence in respect of asbestos.

Persimmon sought to rely on the doctrines of contra proferentem i.e. any ambiguity in the interpretation of an exclusion clause should be resolved against the party seeking to rely upon it - in this case Arup - and the rule in Canada Steamship Lines -v- The King (1952)AC 192 which is long-standing authority for the proposition that the very clearest of words are required to exclude liability for negligence.

The court rejected Persimmon’s assertion that the clause was ambiguous. The court stressed that ‘any application of business common sense’ led to this conclusion along with examining the natural language of the clause. It upheld the ordinary meaning of the exclusion clause and that it would be nonsensical to reach any other finding.

In rejecting the arguments put forward to apply the contra proferentem rule and the rule in Canada Steamship, it was held that the contra proferentem rule will now be of little application in respect of contracts negotiated between parties with equal bargaining position and that the Canada Steamship case was of more relevance now to indemnity clauses than to exclusion clauses, the court stating: ‘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 mind-set determined to cut them down.’

As such, the exclusion clause was valid and excluded liability for all claims for asbestos (whether arising from negligence or not) and Persimmon could not pursue Arup for any claim in relation to the asbestos. The courts have once again recognized commercial parties’ ability to allocate liability and risk between themselves.

Particularly in the aftermath of the recent Grenfell Tower tragedy, many organizations (local authorities, management companies, private landlords and corporate/institutional landlords) with direct or indirect ownership of properties will be examining their property portfolios and looking at refurbishment work carried out by contractors and subcontractors to determine where liability would ultimately lie in the event that a disaster occurred. Some subcontracting chains may involve numerous parties and the importance of back-to-back provisions is clear. In addition, developers, architects, surveyors and designers may also be involved. Insurers will equally be keen to understand the extent of cover provided and the cases referred to here illustrate the need for a careful understanding of contractual clauses allocating risk, and most importantly, that the actual allocation of risk will depend upon the strength in negotiating such clauses by the parties. It is to be expected that a more careful analysis of exclusion clauses will result.

This article originally featured on law360.com