In certain cases, in which an ‘agreement’ has been reached by an unfair process, then the court may intervene. There is no duty existing in common law to satisfy a “reasonable” expectation and the inclusion of contractual terms, such as exemption clauses, could change the nature of the apparent agreement and lead to an abuse of bargaining power between the parties. Subsequently, there exists, at common law, the possibility of an unwitting contracting party entering into a binding agreement, different from that envisioned and which, to the mind of any “reasonable man”[1], would be absolutely or comparatively objectionable.

Although the Common Law is unable to modify the effect of an exemption clause or disregard it, except in limited circumstances, the courts have demonstrated the propensity to view exemption clauses with disfavour.[2] A critical incident in the evolution of contract law and the perceptions of interpretation of exemption clauses, evolved from the Canadian Steamship case. The issue was whether the exclusion clause could be construed to exclude liability on the facts of the case. However, before the implications of this case for exclusion clauses can be considered, it would be prudent to consider the various types of exemption clauses, their impact on liability and the implications for the parties involved.

Indemnity, Exclusion and Limitation Clauses

There are three types of exemption (sometimes used synonymously as exclusion) clauses, exclusion, limitation & indemnity which have different degrees of ‘liability’. Each of these clauses has a particular function to manage the risks associated with commercial agreements.[3] They are not mutually exclusive, and it is paradigmatic for all three to be employed in commercial agreements. The first of these is an exclusion clause[4] which, in the case of a breached contract may be either full or partial but will safeguard that party from any accountability regarding an explicit incident. An exclusion clause is not subject to an indemnifying party’s ability to carry the financial responsibility and they endeavour to completely remove liability of a party, for specific events or conduct. Some exclusion clauses are broadly drafted and venture to avoid liability for any eventuality, or they may be narrower in scope and only remove liability for specific circumstances.

The second type of exemption clause is a limitation clause[5], often referred to as a limited liability clause. Limitation clauses are differentiated from exclusion clauses in their scope of limiting liability, rather than completely removing a party’s potential liability. A limitation clause may curb the amount of monetary gain, the period of time a party may be liable or an amalgamation of both. These types of clauses allow a party to apportion consequences rather than assign them indiscriminately to parties unable to bear them. However, enforceability of liability limitations[6] raises questions of contractual interpretation[7], unconscionability[8] and public policy.[9]^,[10] 

The final category of exemption clause is that of the indemnity clause, which is an undertaking by one party to reimburse the other party or pay them directly for certain costs and expenses and is often regarded as the most complex of the three clauses.[11]^,[12] An indemnity clause provides a contractual transfer of financial risk between contracting parties, which may occur as a result of a specified event.[13] Therefore, the benefitting party may evade the financial costs of certain events, even though they are liable; however, for a party to utilise an indemnity clause, it is entirely contingent on the other party’s ability to bear the financial burden.

Contra Proferentum

Contra proferentem is short hand for the Latin maxim verba cartarum fortius accipiuntur contra proferentem (literally meaning “the words of documents are to be taken strongly against the one who puts forward”). This principle has a long history, established in the Roman era.

The contra proferentem rule broadly states that if there is uncertainty of the meaning of a contract, then the wording will be construed against the party who will benefit from said contract, or for the purpose of this article, an exclusion clause. For the reason that the party who imposes terms on another party, must make the terms unequivocal and should suffer the repercussions if the party fails to do so.[14]  The rationale for this rule, is that if a party drafts a contract or clause, said party should be expected to be cautious to limit the extent of their liability, to that which the party endeavours to assume.[15] However, the rule does not apply where the scope and term of the exclusion clause was negotiated between the parties.[16] Furthermore, if there is only one reasonable interpretation of the wording in an exclusion clause, the contra proferentem rule would not be engaged. It is one of the most commonly applied defences, when a claim is made under a guarantee.[17]

Utilising the contra proferentem rule to regulate the scope of an exclusion clause, is most reasonable in cases where one band of terms has been enforced by one party, to an impuissant party and said terms include a broad scope of the first party’s liability.[18] However, in commercial agreements, contracts are often negotiated between two sophisticated parties, rather than being presented and accepted on a deal or no deal basis. Furthermore, commercial agreements often include wording which on a true construction, embodies an intentional allocation of risk and liabilities, inclusive of the use of exclusion clauses.[19]

In many instances, the parties may have adapted their remuneration or insurance agreement, in the view of that agreed apportionment. The approach of constrained constructions to employ the application of the contra proferentem rule where the wording is not multivocal, jeopardises the freedom of contract, in this fashion. Accordingly, it is not unexpected that there have been numerous judicial dictums, directing apprehensiveness on the role of the contra proferentem rule in commercial agreements. On more than one occasion, the rule has been described as a “last resort”[20] and “of uncertain application and little utility in the context of commercially negotiated agreements.”[21] However, these instances have not precluded the courts applying the principle in some commercial disputes, as illustrated in Nobahar-Cookson & Anor v Hut Group Ltd,[22] where the Court of Appeal considered the accurate interpretation of an exclusion clause, which placed a contractual time limit on the purchaser bringing a breach of warranty claim against the seller.[23]

It is imperative to clarify any ambiguity and the uncertainty cannot be resolved by linguistic, contextual or purposive analysis, as exclusion clauses should be interpreted in the narrowest conceivable manner.[24] This excogitation affirms Lord Neuberger’s previous statement that “rules of interpretation, such as contra proferentem are rarely decisive as to the meaning of a commercial contract.”[25] Lord Neuberger continued to state that the wording, commercial sense and factual context should be sufficient to establish the intention of a contractual provision.[26]

This article has demonstrated that in the past judicial reservation could be evidenced with regard to permitting exemption clauses, to be construed enabling them to effectually negate a contracting party’s liability for negligence.

Conventionally, when construing exemption clauses, the courts have demonstrated the propensity to apply particular methodologies which are of a narrow construction. These have been derived mainly from two main sources; the ‘contra proferentem rule’ and the purported ‘Canada Steamship guidelines’. The former, affords that any abstruseness in an exclusion clause should be resolved against the party who sought to rely on it. The latter, fundamentally specifies that clear wording is a prerequisite to disregard accountability for negligence, and that the court will not deduce a clause to cover negligence, if there is some other head of damage, that it might realistically have been intended to cover (e.g. strict liability in relation to a statutory duty). 

Of late, the courts have been inclined to have reservations as to the current relevance of these principles, at least where the clause is clear and unambiguous. Recent cases in the UK and beyond have challenged the validity and reliability of the contra proferentem rule and the Canadian Steamship guidelines.^[1],[2] A recent decision by the UK Court of Appeal^[3], maintains that trend, accentuating that the terminology exercised, the pertinent perspective, and commercial judgment should normally be adequate in establishing the connotation of a contractual term. This decision indicates that the propensity to espouse exclusion clauses must be construed narrowly, may be regarded as outdated by the court system. 

[1] Supra, note 43, Rainey Sky SA v Kookmin Bank [2011] UKSC 50, Arnold v Britton [2015] UKSC 36

[2] Supra, note 46, Wood v Capita Insurances Limited [2017 UKSC 24

[3] Supra, note 3

[4] McGuire v Western Morning News, [1903] 2 KB 100 at page 109.

[5] See Wickman Machine Tool Sales Ltd. v L. Schuler A.G[1973] 2 All E.R. 39 at 5, Storer v Manchester City Council [1974] 1 WLR 1403[1974] 3 All E. R. 824 at 828

[6] Marissa Dimarco ‘What's in a word? Indemnity, exclusion and limitation clauses in the commercial context’ (2012) Mondaq

[7] Suhaag Jewellers Ltd. v. Alarm Factory Inc., 2015 Carswell Ont. 8530 (Ont. S.C.J.),

[8] Edgeworth Construction Ltd. v. N.D. Lea & Associates Ltd., 1993 Can LII 67 (SCC)

[9] Supra, note 2

[10] Sattva v. Capital Corp. v. Creston Moly Corp., [2014] 2 S. C. R. at para. 49.

[11] McNeill v. Vandenberg, [2010] BCCA 583 at para. 14.

[12] Roy v. Kretschmer, [2014] BCCA 429

[13] Precision Drilling Canada Limited Partnership v. Yangarra Resources Ltd., 2017 ABCA 378

[14] Weyerhaeuser Company Limited v. Ontario (Attorney General), 2017 ONCA 1007

[15] Dimarco, Supra, note 12

[16] Simone Selkirk ‘Indemnity clauses in commercial contracts: How to achieve desired contractual risk allocation’ (2011) Resources update, Lexology

[17] Paul Herbert, ‘Contra Proferentem: When To Exclude An Exclusion Cause’ (2017) Mondaq, Goodman Derrik LLP

[18] Servus Credit Union Ltd v Waylan Mechanical Ltd, [2009] AJ No 1458, 2009 ABQB 754,

[19] Callidus Capital Corp v McFarlane, [2016] OJ No 2795, 2016 ONSC 3451 paras 21-23

[20] Salgado v Toth, [2009] BCJ No 2230, 2009 BCSC 1515, 72 CCLT (3d) 130, 2009 Carswell BC 3020, 182 ACWS (3d) 211

[21] Mohammed Tanweer ‘Contra Proferentum: Does it Still Exist’ (2017) Kerry Underwood Word Press

[22] Barrett, Supra, note 33

[23] Mance LJ in Sinochem International Oil (London) Co Ltd v Mobil Sales & Supply Corp [2000] 1 Lloyd’s Rep. 339 (CA) at 27.

[24] Gloster J in CDV Software Entertainment AG v Gamecock Media Europe Ltd [2009] EWHC 2965 at 56.

[25] [2016] EWCA Civ 128

[26] Georgina Squire ‘The Hut Group Ltd v Nobahar-Cookson and another [2016] EWCA Civ 128’, (2016), Lexology, Rosling King LLP

[27] Ibid at 21

[28] K/S Victoria Street v House of Fraser (Stores Management) Ltd [2011] EWCA Civ 904 at 68

[29] Ibid