Fri 15 Apr 2016

Court of Appeal: Narrow Interpretation of Exclusion Clauses

On 22 March 2016 the English Court of Appeal published its decision in Nobahar-Cookson & Others v The Hut Group Limited [2016] EWCA Civ 128. The case concerned a short point of contractual construction relating to a time limit for the making of warranty claims under a Share Purchase Agreement. Both the buyers and sellers gave each other warranties and both made warranty claims against each other resulting in a judgement of around £4.3million in favour of the buyer and a judgement of around £10.8million in favour of the sellers. In finding in favour of the buyer in their claim the Judge rejected a submission by the sellers that the claim was barred by a time limit imposed by clause 5.1 of the SPA in the following terms:

"The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter"

The contentious words are highlighted in bold and the parties invited the appeal court to choose between three different meanings of the words "aware of the matter" namely: (a) aware of the facts giving rise to the Claim; (b) aware that there might be a claim under the warranties; and (c) aware of the Claim in the sense of being aware of a proper legal basis for the Claim. The parties agreed that contractual limitation periods for the notification of warranty claims were properly regarded as a form of exclusion clause.

In support of that argument the buyer relied on the contra proferentum principle which is designed to resolve ambiguities against the person for whose benefit the clause operates. It argued that, on the basis of that rule, the exclusion clause should be interpreted narrowly as at (c) above. While the Court of Appeal agreed that the exclusion clause should be interpreted narrowly it did not agree that the basis for this was that principle. Rather, it held that their narrow interpretation was necessary because exclusion clauses cut down or detract from remedies conferred by the general law such as (in this case) an obligation to give effect to a contractual warranty by paying compensation for breach of it. The parties are unlikely to have meant to exclude such remedies without using very clear words to that effect.

Accordingly, relying on Arnold v Britton [2015] AC 1619 the Court of Appeal resolved the matter by looking at the contract linguistically, contextually, purposively and on the basis of commercial common sense. It held that there was no obvious natural and ordinary meaning of the words "aware of the matter" and that neither party's interpretation was so uncommercial as to be fatal. However, looking at the purpose of the clause, namely to prevent the buyer from pursuing claims previously kept up its sleeve, it considered that the best interpretation was one which focussed on the awareness of a Claim rather than simply awareness of the underlying facts. A useful reminder by the Court of Appeal as to the proper approach to contractual exclusion clauses, particularly those relied on in a commercial context.

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