Kerry Underwood

CONTRA PROFERENTEM: DOES IT STILL EXIST?

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By Mohammed Tanweer, Underwoods Solicitors

The contra proferentem rule is generally considered to have originated from the decision of the privy council in

Canada Steamship Lines Limited v The King [1952] AC 192

and that rule requires any ambiguity in an exemption clause or indemnity clause in a contract to be resolved against the party who put the clause forward and relies upon it.

At paragraph 208 Lord Morton said:

“(1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called “the proferens”) from the consequence of the negligence of his own servants, effect must be given to that provision. Any doubts which existed whether this was the law in the Province of Quebec were removed by the decision of the Supreme Court of Canada in The Glengoil Steamship Company v Pilkington.

(2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens in accordance with Article 1019 of the Civil Code of Lower Canada: “In cases of doubt, the contract is interpreted against him who has stipulated and in favour of him who has contracted the obligation.”

(3) If the words used are wide enough for the above purpose, the court must then consider whether “the head of damage may be based on some ground other than that of negligence”, to quote again Lord Greene in the Alderslade case. The “other ground” must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; but subject to this qualification, which is no doubt to be implied from Lord Greene’s words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facis wide enough to cover negligence on the part of its servants.”

In Persimmon Homes Limited & Others v Ove Arup and Partners Limited & Another [2017] EWCA Civ 373

where Lord Justice Jackson considered the modern application of the doctrine.

Lord Justice Jackson said that the principle set out in the Canada Steamship case is of more relevance to indemnity clauses, rather than exemption clauses when incorporated into a commercial agreement.

He said that the contra proferentem rule now had a very limited role in commercial contracts negotiated between parties of equal bargaining strength:

“In recent years, and especially since the enactment of UCTA [The Unfair Contracts Terms Act] the courts have softened their approach to both indemnity clauses and exemption clauses: see Lictor Anstalt v MIR Steel UK [2012] EWCA Civ 139; [2013] 2 ALL ER (Comm) 54 at [31][2][34]. Although the present judgment is not the place for a general review of the law of contract, my impression is that, at any rate in commercial contracts, the Canada Steamship guidelines (insofar as they survive) are now more relevant to indemnity clauses than to exemption clauses.”

Consequently the Court of Appeal drew a distinction between the application of the contra proferentem doctrine in exemption clauses and indemnity clauses, and it is clear that the doctrine still has potential application to indemnity clauses.

The Court of Appeal stated that, as a general principle, exemption clauses were used for allocating risk in commercial contracts.

However the Court of Appeal did not extend that reasoning to indemnity clauses.

In any event, much will turn on the wording of the clauses and also the negotiating strength of the parties.

The Persimmon case concerned the meaning of the words “liability for any claim in relation to asbestos is excluded”.

The Claimants submitted that these words did not exclude liability for negligence in failing to identify and report on asbestos found at the site, and they relied on the contra proferentem rule.

The Court of Appeal held that all liability relating to asbestos, including that arising from negligence, was excluded.

The court relied on the clarity of the language.

There is a debate and tension between the court giving a contract a commercial common sense interpretation – the Commercial Meaning Test – and focusing on the language used – the Language Primacy Test.

The commercial common sense interpretation took precedence in the case of

Rainy Sky SA v Kookmin Bank [2011] UKSC 50

whereas the Language Primacy Test took precedence in

Arnold v Britton [2015] UKSC 36.

In Wood v Capita Insurance Services Limited [2017] UKSC 24

the Supreme Court denied any such tension and said that interpretation was a unitary exercise and the weight to be given to the various considerations depended on the circumstances.

Courts give the language use the meaning which would be given by a reasonable person in the position of the parties and furnished with their common knowledge of the background to the transaction.

Others argue that little has changed. In the 1889 case of

Cornish v The Accident Insurance Company Limited [1889] 23 QBD 453

the Court of Appeal said:

“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 itself made it clear that the stated principles were only employed where there was doubt as to whether the words used were wide enough to cover negligence, and thus the issue may simply be resolved via contractual interpretation in the future.

Clearly careful consideration needs to be given when drafting contractual clauses relating to indemnity and/or exemption.

It also appears that where the parties have unequal bargaining power, the contra proferentem rule may still apply.

Where the court cannot achieve protection for the weaker party through various statutory provisions, such as the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015, it could still apply the principles.

Section 69(1) of the Consumer Rights Act 2015 is a statutory restatement of the contra proferentem rule in favour of the weaker party:

“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.”

That will not always be against the preparer of the contract, but in fact in a consumer contract it will virtually always be the stronger party, that is the non-consumer, who has prepared the contract.

As we have seen the doctrine is likely to continue to have relevance in relation to the indemnity clauses.

Indemnity clauses are ones which provide for one party to give an indemnity to another for losses occurring on the happening of certain events.

One of the issues that can arise is as to whether a person guilty of negligence can benefit from the indemnity given by the other party to the contract.

Following the Canada Steamship case, the courts have generally required that either there must be a reference to negligence 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 a role, but if the language used is clear then the role of the rule may be limited, or indeed non-existent.

The modern approach is that courts are less likely to resort to rules for construction generally to resolve issues of interpretation, but are more likely to focus on the language and the contact.

The Court of Appeal said in

K/S Victoria Street v House of Fraser [2011] EWCA Civ 904

that “such rules are rarely, if ever, of any assistance when it comes to construing commercial contracts”.

This modern approach also raises doubts as to whether other traditional principles of construction will continue to be relevant.

The doctrine of expressio unius est exclusio alterius asserts that the express mentioned of a particular thing shows an intention to exclude another similar thing.

The principle of ejusdem generis 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 Ltd v Providence Resources Plc [2016] EWCA Civ 372

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 overturned that decision and had regard to the language and context and disregarded both the ejusdem generis and contra proferentem principles.

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Written by kerryunderwood

October 24, 2017 at 9:02 am

Posted in Uncategorized

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