Interpretations of Exclusion Clauses

exclusion clauses

Contracts: Update on Interpretations of Exclusion Clauses between Commercial Parties

Exclusion clauses are contractual provisions restricting or excluding liability for a specific event. The Court of Appeal has recently deliberated on the construction of exclusion clauses and more particularly how the principal of ‘contra proferentem’ should apply. Contra proferentem is the principle were ambiguous clauses in a contract should be interpreted against the interests of the party seeking the clause to be included in the contract.

Background

In the case of Transocean Drilling UK –v- Providence Resources PLC [2016] EWCA Civ 372, Transocean hired a semi-submersible drilling rig to Providence. After initiating the work, it came to Providence attention that the rig was faulty, namely a misalignment of part of a blowout preventer. As a result of the faulty rig, work was suspended for a period of five weeks.  Providence refused to pay the hiring fees of the rig, Transocean brought an action for the hire costs, and consequently Providence sought to set off the hire costs against their losses plus $10,000,000.00 paid for goods and services which were wasted (spread costs). The contract between the parties had various exclusion and indemnity clauses. The main clause in dispute in this case, was the clause excluding ‘consequential losses’. The consequential losses in this matter referred to the spread costs. The High Court Judge, Popplewell J, took the view that contra proferentem should apply to the construction of the exclusion clause at the first instance, therefore, deciding with Providence. Transocean appealed the matter, and the Court overruled the Judge’s decision and applied three distinct principles.

New Principles

  1. Contra proferentem should only be used as a last method and only apply to cases dealing with ambiguous clauses.
  2. Secondly, that this is a separate principle to the principle that there is a presumption that neither party intends to abandon any remedies for its breach in the absence of clear words [Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689]. Therefore, parties if they wish to do so can abandon remedies, but the language used in the construction of the clause must be clear and unambiguous.
  3. Contra proferentem principle has no part to play if the clause affects both parties equally and more importantly were both parties have equal bargaining power. Therefore, the Court will place weight to the individual facts of each case depending on how the clause affects the parties and how much bargaining power the parties have.

The findings of the above case place extra burden on the parties to agree to robust exclusion clauses, as the Court are minded to take the literal meaning of the clause rather than use their own interpretation for commercial purposes. Therefore, it is imperative that the each and every exclusion clause is constructed carefully and precisely to demonstrate each party’s intentions, as it will be difficult to escape from liability if any unfavourable exclusion clause is agreed.

– Gurpreet Dhillon

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