Contracts: Contra movement

Two decisions of the Court of Appeal in the last month seem to have put the contra proferentem rule firmly back in its exceedingly small box (Transocean Drilling UK vs Providence Resources Plc on 13 April 2016 and Nobahar-Cookson and Ors vs The Hut Group Ltd on 22 March 2016). Neither concerned a construction contract but both looked at general principles of contract interpretation.

The appeal decision in Transocean vs Providence had been eagerly awaited. The original decision was trailed in Building (“Teetering on the breach”, 19 February 2016, page 40). One of the issues was how far a consequential loss exclusion in a rig hire contract extended. Interpretation of an exclusion clause was recently looked at in the Persimmon vs Arup case (“Clarity begins at home”, 4 March 2016, page 42).

To recap, Transocean was a drilling rig owner which claimed hire costs during periods of rig downtime, some of which were due to the condition of the rig on delivery and therefore Transocean’s breach. Providence counterclaimed for costs it had incurred during the resulting period of delay. Transocean claimed Providence was not entitled to these costs as they were covered by a consequential loss exclusion clause.

The court got ‘stuck in’ to the contra proferentem principle, stating that it should only be used where a contract was one sided and there was ambiguity as to meaning

The contract was based on the LOGIC standard form of contract used on and off shore for oil and gas projects, including for construction activities.The exclusion of consequential losses definition in the contract included the following:

“Loss of use (including without limitation loss of use or the cost of use of property, equipment, materials and services including without limitation those provided by contractors or subcontractors of every tier or third parties), loss of business and business interruption….”

Transocean said these words struck out Providence’s claim for costs of personnel, equipment and services contracted from third parties which it was not able to use during the period of delay. The judge at first instance did not agree, finding that if parties had intended to exclude such losses caused by Transocean’s negligence it needed to spell that out clearly and applying rules of contra proferentem it favoured Providence’s position. Transocean appealed.

It is fair to say that the Court of Appeal got “stuck in” to the application of the contra proferentem principle (that a clause should be interpreted against a party seeking to rely on it), stating that it should only be used where the contract was one sided and there was ambiguity as to meaning. It also noted that the contra proferentem rule should not be confused with the principle that exclusion clauses should be interpreted strictly by giving them their narrowest meaning.

What was more important was to allow parties to contract freely and if they had chosen, as they had in this contract, to accept responsibility for losses that might otherwise be recoverable from the wrong doing party they were free to do so.

Parties, the vice president of the Court of Appeal said, could make an ‘unreasonable agreement’. It was not up to the court to rewrite it

The court also countered Providence’s argument that this interpretation meant Transocean was unlikely to have any obligations in the event of its breach, which could not have been what was intended. The court considered Transocean retained some liabilities but parties, the vice president of the Court of Appeal said, could make an “unreasonable agreement”. It was not up to the court to rewrite it.

In Nobahar-Cookson vs The Hut Group (which was decided just one month earlier) the Court of Appeal was very critical again of the application of the contra proferentem principle in an interpretation of an exclusion clause in a share purchase agreement.

So where does this all take us?

• Commercial parties are free to allocate commercial risks in a contract as they see fit. They can exclude liability for losses that in the normal scheme of things would fall their way
• The court is not there to rewrite an “unreasonable contract” or give parties a contract they have not chosen
• Where there is ambiguity as to what a clause means, the modern approach is to take a “purposive” interpretation – does the interpretation work in the whole scheme of things?
• On exclusion clauses, although parties will not generally be taken to have given up rights they may have had under contract, whether they have or not, depends on the language they have used
• Some judges are still happy to apply the principle that an exclusion clause which is ambiguous and has more than one interpretation should have the narrower interpretation
• Above all, contra proferentem as an aid to construction will only apply as a last resort when (1) the clause is ambiguous and (2) parties are not of equal bargaining power. With negotiated contracts the latter will be difficult to prove.

Lindy Patterson QC is a partner and solicitor advocate in the construction team of CMS Cameron McKenna