For years, the contra proferentem rule has been used by the courts for the purposes of contractual interpretation. However, following the recent case of Persimmon Homes v Ove Arup (Persimmon Homes), many have questioned whether the rule still exists. This blog takes a look at the contra proferentem rule and explains why we have not seen the last of it.
What is the contra proferentem rule?
“Contra proferentem” (literal translation from Latin is “against the offeror”), also known as “interpretation against the draftsman”, is a doctrine of contractual interpretation that provides: where a contract is ambiguous, the words will be construed against the party who put them forward. The logic behind this rule is that a party who imposes terms on another should make those terms clear and should be the one to suffer the consequences if they do not. Originating from the case of Canada Steamship Lines Ltd v The King in 1952, the relevance of the contra proferentem rule has been extensively debated over the past few years.
It was the comments of Lord Neuberger in K/S Victoria Street v House of Fraser in 2011 which sparked the initial debate on the relevance of contra proferentem. Although the case focused mainly on the effect of the Landlord and Tenant (Covenants) Act 1995, the Court of Appeal also commented on the usefulness of the contractual interpretation rules. Referring to contra proferentem, Lord Neuberger said “such rules are rarely of assistance when it comes to interpreting commercial contracts.” Instead, “the words used, commercial sense, and the documentary and factual contexts are and should be enough to determine the meaning of a contractual provision.” A similar stance was taken in Transocean Drilling UK Ltd v Providence Resources in 2016. In this case, the Court of Appeal reversed the initial judgement of the High Court, stating that the rule of contra proferentem had “no part to play when the meaning of the words is clear.” However, it was the case of Persimmon Homes in 2017 which caused the most stir.
The comments of Jackson LJ in the case of Persimmon Homes cast the most doubt on the contra proferentem rule. In Persimmon Homes, a consortium of property developers brought a damages claim against project consultant, Arup, for failing to identify large quantities of asbestos on a development site that they had purchased. The developers and the project consultant had entered into two agreements, under which the consultant agreed to take out professional indemnity insurance and to limit their overall liability. The agreements also contained an exemption clause which stated “liability for any claim in relation to asbestos is excluded”. Relying on the contra proferentem rule, the claimants alleged that this did not exclude liability for negligence in failing to identify asbestos. However, the court did not bite. Instead, the Court of Appeal ruled that all liability relating to asbestos, including liability arising from negligence, was excluded. The court relied on the clarity of the language and concluded that the contra proferentem rule had a very limited role in relation to commercial contracts negotiated between parties of equal bargaining power.
Not the end
Despite numerous commentators citing the “death of contra proferentem” following Persimmon Homes we do not believe that this is the case. Firstly, in Persimmon Homes, Jackson LJ drew a distinction between indemnity clauses and exclusion clauses observing that where an indemnity clause is involved, the contra proferentem rule and the Canada steamship guidelines will continue to be of assistance.
Secondly, although the courts seem much less willing to listen to a contra proferentem argument when it is possible to interpret a clause’s meaning by, dare we say it, adopting a “common sense” approach or interpreting the clause in the way that the average businessperson would, there will still be times when the courts simply cannot work out what a clause is saying because it is truly ambiguous or it conflicts squarely with another cause elsewhere in the contract. It is in these cases that the contra proferentem rule will remain.
Finally, the case of Persimmon Homes involved two sophisticated commercial parties, who were capable of allocating risks as they saw fit. In cases where parties do not have equal bargaining power, the courts may be more willing to find that the contra proferentem rule applies. Where the courts cannot achieve protection for a weaker party through statutory provisions, the courts could use interpretive principles to avoid contractual oppression by the stronger party. This may be relevant in cases of consumer contracts, residential leases and insurance contracts.
So, despite what you may read, the contractual interpretation rule of contra proferentem is still relevant today and should not be forgotten. As a business, the main thing to take away from this is: make sure your contracts are clear and free of ambiguities! If you have any questions about contra proferentem, or contract law more generally, please contact Neil Williamson.