The Primacy of Language in the Construction of (Commercial) Contracts

In the just published Sea Venture 28 from Steamship P&I Club, Simon Rainey QC and John Russell QC of Quadrant Chambers discussed two recent cases which Steamship said were examples of a number of recent high-profile decisions which have considered the interpretation of commercial contracts.

In Gard Shipping v Clearlake Shipping [2017] EWHC 1091 (Comm) Sir Jeremy Cooke 12 May 2017, and Persimmon Homes v Ove Arup [2017] EWCA Civ 373 Court of Appeal (Jackson, Beatson, Moylan LJJ) 25 May 2017, the issue of the correct approach to the construction of contracts was addressed.

The Gard Shipping case was the first application in a first instance decision of the recent Supreme Court decision in Wood v Capita Services, which rejected the suggestion that there was any tension between the Supreme Court’s earlier decisions in Rainy Sky v Kookmin Bank and Arnold v Britton.

The case also considered the application of the Supreme Court decision on the implication of terms in Marks & Spencer v BNP Paribas.

Rainey and Russell said that the decision in Persimmon was striking, not so much for what it decided, as to the doubt it cast on the continuing relevance in commercial contracts of the principle of contra proferentem (a rule in contract law which states that any clause considered to be ambiguous should be interpreted against the interests of the party that requested that the clause be included) and the rule in relation to exemption clauses flowing from the Canada Steamship case.

Gard Shipping v Clearlake Shipping

The Supreme Court decision Rainy Sky in 2011 had opened the floodgates: no case on construction could be argued without it being asserted by each side that its interpretation made more commercial sense.

Rainey and Russell noted that this development “was not embraced with enthusiasm” by most first instance judges. How could advocates or judges discern what, objectively, made commercial sense in myriad different circumstances? And even if they could, construing a contract in accordance with objective commercial sense risked rewriting the bargain actually struck by the parties.

Such doubts seemed to be reflected in the subsequent Supreme Court judgment in Arnold v Britton in June 2015. This was widely seen as being a “rowing back” from the free-for-all of Rainy Sky. Although there was no criticism of Rainy Sky per se, the Supreme Court emphasized the importance of the language of the provision which was to be construed. Commercial common sense was not to be invoked to undervalue the importance of the language.

Then, in March of 2017, came the Supreme Court decision in Wood v Capita Services (the ‘for want of a comma’ case)

Lord Hope rejected the submission that Arnold was a rowing back from or recalibration of Rainy Sky. What the court had to do, in any case, was, in the unitary exercise of construction, balance the indications given by the language and the commercial implications of competing constructions.

The balancing exercise was key to the approach. As to how that balance was to be struck, Lord Hodge identified three factors (which must be viewed as non-exhaustive):

(1)  the quality of the drafting – the poorer the drafting the more the balance may tip away from a strict semantic reading;

(2)  the court should bear in mind that one party may simply have made a bad bargain;

(3)  the court should bear in mind that the drafting may be a negotiated compromise, with the parties unable to agree more precise terms.

(3)Gard showed the first application of Wood in a first instance decision.

In that case a voyage charterparty based on BPVOY4 contained standard laytime/demurrage provisions. It also contained specifically agreed terms that Charterers had the liberty to order the vessel to stop and wait for orders. If they exercised that liberty, waiting time was to count as laytime and demurrage was to be payable at enhanced and escalating rates. Charterers did not give a “stop and wait” order. Instead, after the vessel tendered a Notice of Readiness (“NOR”) at the discharge port, Charterers simply gave no discharge orders at all for over two months.

The owners argued that it was clear that the commercial purpose of the clause was to make the charterers pay at the enhanced rates, where they used the vessel as floating storage. They had used the vessel as floating storage at the discharge port. It could make no commercial sense if the charterers could avoid the enhanced rate by the tactic of giving no orders, after NOR, rather than giving a “stop and wait” order. Commercially the two amounted to the same thing, and should attract the same consequences.

Sir Jeremy Cooke had no hesitation in rejecting this argument. The wording of the specially agreed terms required a “stop and wait” order to trigger the enhanced rates. There was no such order. Therefore, the enhanced rates were not triggered. The ordinary demurrage rate applied.

Sir Jeremy also firmly rejected the Owners’ alternative argument based on an implied term on the grounds of lack of commercial necessity.

This case, said Rainey and Russell, provided an early indication that in charterparties, which were indeed often a negotiated compromise, in carrying out Lord Hodge’s balancing exercise judges would give more weight to the words the parties had actually used, rather than arguments based on supposed commercial common sense.

Notwithstanding Lord Hodge’s assertion that Arnold did not recalibrate Rainy Sky, the post-Arnold focus on the actual words of the contract was likely to be maintained, said Rainey and Russell.

Persimmon Homes v Ove Arup

The correction of approach to the relevance and utility of the so-called “commercial” approach to construction of commercial contracts subsequent to Arnold v Britton and the current emphasis on the primacy of the language used by the parties as usually the best and surest guide to what they intended to achieve found an echo in the rather different field of exemption clauses.

The traditional approach that an exclusion or exemption clause was to be construed contra proferentem (once one had decided who the proferens was) in the event of any ambiguity had ruled the field for many years, although there had been many statements to the effect that it is not to be deployed where the words were themselves sufficiently clear. But, said the lawyers, the trend had increasingly been to give effect to exclusion clauses in commercial contracts without resort to maxims of hostile construction where the wording was subjected to some special linguistic threshold or a more demanding need for clarity.

The position was reviewed clearly and emphatically in the context of the mutual indemnities and exclusions in Transocean Drilling v Providence Resources (The Arctic III) [2016] EWCA Civ 372, where the Court of Appeal ruled that the principle had no role to play in the case of a mutual clause “especially where the parties are of equal bargaining power”, and stressed the parallels with Arnold v Britton.

The Court distinguished the sort of mutual exclusion clause before it from what it described as “a typical exclusion clause, by which a commercially stronger party seeks to exclude or limit liability for its own breaches of contract.” The decision raised a number of questions in particular as to equality of bargaining power and the consistency of the Court’s approach in the light of a case decided by the Court of Appeal just shortly before (NobaharCookson v The Hut Group Ltd [2016] EWCA Civ 128) in which the contra proferentem approach appeared to receive restatement and approval. However the Court was clear that it was not intending to cast any doubt on the allied principle of construction that clear words were required to exclude liability for negligence and the ‘Rule’ in Canada Steamship (1).

Rainey and Russell said that the recent decision in Persimmon Homes v Ove Arup appeared to continue the trend towards minimizing the scope for a contra proferentem approach generally, and not just in the context of mutual exclusion or exemption clauses. That case raised issues of construction under a contract for consultancy and surveying services rendered by Ove Arup to Persimmon and other parties relating to a redevelopment project for the Barry Docks. Asbestos was found in more than expected quantities, for which it was alleged that Ove Arup was responsible by negligently failing to detect and manage that risk. A number of issues arose as to the application of exclusion and limitation clauses. In particular a clause which read “Liability for any claim in relation to asbestos is excluded”.

The Court of Appeal re-endorsed in terms the approach in K/S Victoria Street, that the language used should be and usually is enough to resolve the meaning, without resort to “rules” of construction and the approach taken in The Arctic III.

However, more importantly, said Rainey and Russell, it went a step further and doubted the relevance and applicability of the Canada Steamship principles (by which a clause must either expressly refer to negligence or some synonym of it or, if it does not, must indicate that it covers negligence with general words being read as covering non-negligent liability if possible to do so and unless such liability is fanciful).

The Court stressed that it was necessary to distinguish between a simple exclusion of liability and an indemnity clause requiring a party to hold the other harmless from the consequences of that party’s negligence and that, at least in the former case, the Court’s “impression” was that Canada Steamship guidelines “in so far as they survive” were “now more relevant to indemnity clauses than to exemption clauses” and that in commercial contracts between sophisticated parties, such as a large construction contract, it should all turn on the language. The Court made it clear that the wording in question was clear enough to cover liability for negligence and that Canada Steamship was simply not of assistance.

As belt and braces the Court then applied Canada Steamship and held that any liability other than liability for negligence was indeed fanciful. Rainey & Russell said that the case represented a further cutting back of the application of technical canons of construction to exclusion clauses in the commercial context in favour of simply giving ordinary language its effect.

The lawyers noted that it also stated, perhaps more clearly than before, that the same approach applied generally and that Canada Steamship was not exempt from the process.

Although the Court stressed that the issues before it were not such as to merit a general review of Canada Steamship, its words were likely to be cited generally as building on an Arnold v Britton approach, even to exclusion clauses:

“Exemption clauses are part of the contractual apparatus for distributing risk. There is no need to approach such clauses with horror or with a mindset determined to cut them down.”

Originally on Quadrant Chambers website and on the Steamship Mutual website June 2017.

(1) This was a 1952 decision in which rules for interpretation of exclusion clauses were set out, these being:

(i) words seeking to exclude liability for negligence must be express and clear;

(ii) any ambiguity in wording must be resolved against the party seeking to rely on the exclusion; and

(iii) where negligence is the only basis of liability, even general wording can exclude liability for negligence. However, such general wording will not exclude negligence if there is another basis of liability provided that such other basis is not “fanciful or remote”. If another basis does exist, a widely drawn clause will not exclude liability for negligence.