Interpretation of exclusion clause
IMPACT FUNDING v AIG (SC) [2016]
The Supreme Court (“SC”) looked at the interpretation of an exclusion clause in this case which related to a restriction in the scope of a firm of solicitors’ professional indemnity insurance policy (“Policy”). It provided some useful reminders of the principles applicable to the interpretation of contracts generally.
The SC referred to the following principles:
Factual matrix
The Court should first construe the relevant terms of the document against its factual matrix ie looking at the meaning of the relevant words in their documentary, factual and commercial context (see Rainy Sky v Kookmin Bank (SC) [2011] and Arnold v Britton (SC) [2015]).
Application of contra proferentem rule
The SC confirmed that the principle of contra proferentem, which states that the wording of a clause should be construed against the party seeking to rely upon the clause or the party who has submitted the clause, should only be applied for the purpose of resolving an ambiguity in the drafting. As there was no ambiguity in the Policy wording in this case, it said there was no role for that principle to be applied.
Implication of terms
There was no basis for implying additional words into the Policy in order to limit its scope and the SC confirmed its ruling in Marks and Spencer v BNP Paribas (SC) [2015]. In that case, it was decided that a term would be implied into a detailed contract only if, on an objective assessment of the terms of the contract, the term to be implied was necessary to give the contract what is called 'business efficacy' (ie would the contract make business sense without it?) or was so obvious that it went without saying. In any event, the SC reiterated that the express terms of the contract must be interpreted before considering any question of implying terms.
Narrow construction of exclusion clauses
The SC acknowledged that there may be circumstances in which exclusion clauses should be construed narrowly. That approach applies to exemption clauses which exclude or limit a legal liability which has arisen by operation of law, such as liability for negligence or liability in contract. But it said that this general doctrine should not apply to an ‘exclusion clause’ which operates more to restrict the scope of the contract itself ie is simply ‘defining the scope of the obligation’. As one of the judges said, “words of exception may be simply a way of delineating the scope of the primary obligation”. The fact that a contractual provision is expressed as an exclusion does not necessarily mean that it should be approached with “a pre-disposition to construe it narrowly”. Like any other provision in a contract, an exclusion must be read in the context of the contract as a whole and taking into account its purpose.
As a matter of general principle, the SC confirmed that if one party who would otherwise be liable, wishes to exclude or limit its liability to the other party, it must do so in clear words. The contract should be given the meaning it would, “convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed ”.
Freedom of contract
The SC also referred to a previous case which was authority that as a general rule business people capable of looking after their own affairs should be free to apportion risks between themselves as they choose.
Points to note:
- The points made by the SC in this decision do not create any new law but they confirm its rulings in several previous judgments.
- It is important to note that that the provision in this case was effectively one limiting the scope of the Policy. In that sense it is akin to any provision which seeks to limit the scope of a party’s obligations under a commercial contract. In other words it was a clause which attempted to preclude a contractual obligation or liability arising in the first place. It was not a clause excluding liability for a breach of contract. Parties traditionally have greater freedom and flexibility with exclusions of the former type whereas those excluding liability are subject to more rigorous scrutiny. It is always better to suitably craft contractual obligations so as to prevent there from being a breach in the first instance rather than trying to limit or exclude liability once a breach has been established.