Interpretation Of Exclusion Clauses

2nd August 2016 by

Jerome O’Sullivan, Senior Associate,  discusses the latest case law in regards to the Courts interpretation of exclusion clauses.

The Contra Preferentem Rule

Historically, the Courts applied this rule when there was any doubt about the meaning of a particular clause in a contract.  The rule had the effect that the words in the clause would be construed against the party who had drafted them.  It has been particularly applied to exclusion and limitation clauses, with the effect that these clauses were construed narrowly against the party that was seeking to rely on them.

The approach has fallen out of favour to some extent.  The Courts now prefer to construe these clauses according to general principles of interpretation.  However, they seek clear wording to put beyond doubt that the parties intended to limit, or have removed, the legal rights and remedies that they would otherwise enjoy.

Nobahar-Cookson and others v The Hut Group Limited [2016] EWCA Civ 128

Mr Nobahar-Cookson entered into a share purchase agreement with The Hut Group for the sale of his business.  The agreement contained a clause exempting the sellers from liability for any claim “unless the buyer serves notice of the claim on the sellers…as soon as reasonably practicable and, in any event, within 20 business days of becoming aware of the matter”.

The Hut Group served notice of a warranty claim but the sellers argued it was time barred as they were aware of various relevant facts outside the 20 day time limit.  However, they had not realised they had a proper basis for a claim until they had sought the advice of forensic accountants.

The sellers lost at first instance and appealed.  The Court was asked to choose between three possible meanings of the phrase “aware of the matter” as follows:

  1. Awareness of the facts that gave rise to a claim.
  2. Awareness that there might be a claim under the warranties.
  3. Awareness that there was a proper basis for a claim.

The Court held that while the contra preferentem principle still has a part to play, it is not a special rule of construction that can be used to give a strained meaning to an exclusion clause, particularly in a commercial setting where the Courts have repeatedly emphasised that contracting parties should generally be free to allocate risk as they see fit.

The Court must first use its tools of linguistic, contextual, purposive and common sense analysis to discern what the clause really means.

The Court held that requiring notice of a claim as soon as suspicions arose was hopelessly uncertain and uncommercial in the situation in hand.  20 days’ notice is short but not unrealistic given the purpose was to prevent The Hut Group from concealing claims in order to pursue them later.

The Court therefore held that awareness of there being a realistic claim, rather than awareness of the underlying facts, was a better interpretation.  The Court then went on to apply the narrower construction which favoured interpreting the phrase to mean awareness there was a proper basis for a claim.  On this basis, the Court held that the Hut Group had served notice within the required 20-day time limit.

The author of this article has significant experience in advising clients involved in complex and high value commercial litigation.  For advice and information in relation to the issues set out in this article, please contact Jerome O’Sullivan of Healys LLP on 020 7822 4144 or Jerome.osullivan@healys.com.