Court of Appeal confirms modern approach to contractual construction

In a recent decision, the Court of Appeal has found that a clause allocating responsibility for third party claims applied to claims based on intentional wrongdoing, despite the absence of clear words to that effect: Mir Steel UK Ltd v Morris [2012] EWCA Civ 1397.

This case should not however be taken to signal a more relaxed approach to the interpretation of clauses excluding or limiting liability, or allocating liability between the parties.  The decision re-emphasises that the court's function is always to interpret the particular contract in the context in which it was made. Here the facts were unusual in that both parties knew of the potential claims prior to entering into the contract, and therefore the court saw nothing improbable in the conclusion that the parties had intended to include those claims in their agreed allocation of responsibility.  In many cases, the commercial context might suggest that the parties did not intend the clause to cover intentional wrongdoing. 

It remains important, to put the matter beyond any doubt, to define as clearly as possible the scope of any such clause in a contract. Gary Milner-Moore and Joanne Keillor comment on the decision. 

	Gary Milner-Moore Partner +44 20 7466 2454
	Joanne Keillor Senior associate +44 20 7466 2376

Facts and first instance decision

Mir Steel bought the assets of a company in administration (Alphasteel), including a hot strip mill, used for the production of hot rolled steel products.  The mill had been assembled for Alphasteel by Lictor Anstalt ("Lictor"), pursuant to a letter agreement which provided that the equipment was to remain the property of Lictor.  When purchasing the assets (via an intermediary company, the detail of which was not relevant to the ultimate analysis) Mir Steel understood that Lictor had asserted a claim to the ownership of the mill equipment and clause 9.5 of the purchase agreement provided that Mir Steel "agrees that it shall be responsible for settling any claim made against it by [Lictor] in respect of the hot strip mill situated at the property".

Lictor subsequently commenced claims against Mir Steel for conversion, inducing breach of the letter agreement and unlawful means conspiracy.  Mir Steel sought to join Alphasteel (and the administrators) as Part 20 Defendants, seeking a contribution to Lictor's claims for inducing a breach of contract and for conspiracy (it did not pursue its alternative claim against Alphasteel for breach of warranty on appeal).  Mir Steel's application was dismissed at first instance, with the judge finding that Lictor's claims were clearly claims "in respect of the hot strip mill" to which clause 9.5 applied on its "obvious meaning".

Court of Appeal

On appeal, Mir Steel sought to establish that clause 9.5 should be narrowly construed as extending only to the claim for conversion, and not the claims for inducing breach of contract and conspiracy.  It argued that unless the clause expressly spelt out that it was intended to apply to torts which have at their heart intentional wrongdoing, it could not properly be construed as having that wider effect.   

Mir Steel relied upon the principles set out in R v Canada Steamship Lines Ltd [1952] AC 192, namely the requirement for express words to exclude claims for negligence.  It submitted that if clear words are required to exclude claims for negligent wrongdoing, so also must they be required to exclude claims for intentional wrongdoing.   

The Court of Appeal rejected Mir Steel's arguments and upheld the decision of the trial judge.  Lord Justice Rimer, who gave the leading judgment, applied the modern approach to contractual construction, as stated by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society (No.1) [1998] 1 WLR 896.  This approach requires the court to ascertain the meaning the contract would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the particular commercial context in which the contract was entered into. 

The Court of Appeal followed the reasoning of the House of Lords in HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, which found that the Canada Steamship principles should not be applied mechanistically and ought to be regarded as no more than guidelines. They do not provide an automatic solution (what the House of Lords termed a "litmus test") to any particular case. The court's function is always to interpret the particular contract in the context in which it was made, and the guidelines simply reflect (in the words of Buckley LJ and Lord Fraser in earlier authorities) the "inherent improbability" that a contracting party should intend to absolve its counterpart from the consequences of the latter's own negligence. 

The task for the court was therefore to interpret clause 9.5 in light of the overall commercial purpose of the transaction, and determine whether it was "inherently improbable" that clause 9.5 was intended to apply to claims based on intentional wrongdoing. Rimer LJ referred to what he described as a "crucial feature" of the present case, namely that Mir Steel, Alphasteel and the administrators all knew that Lictor had asserted a claim to ownership of the hot strip mill and they knew the factual basis upon which Lictor could or might assert its title.  It therefore was – or should have been – apparent to them that Lictor might seek to advance a claim not only for conversion but also for inducing a breach of contract.  Rimer LJ described Mir Steel's assertion that clause 9.5 could not have been intended to be directed at their right to claim in relation to torts of intentional wrongdoing as "particularly hollow", in view of the fact that if the sale to Mir Steel did involve any wrongdoing, the parties (including Mir Steel) were all engaged in it together, and Mir Steel could or should have realized that.  The deal, however, was plainly that any such claim was exclusively for the account of Mir Steel.

Rimer LJ found that it would have been obvious to all parties that the administrators' objective was to achieve an early sale and prompt consequential distribution of proceeds to creditors.  The prospect of a claim would have effectively kept those assets locked up and they were therefore seeking by clause 9.5 to insulate Alphasteel and themselves from any liability to Mir Steel if a claim was brought against it.  It could not realistically have been the parties' intention that Mir Steel could in effect be entitled to claw back part of the price it had agreed to pay in the full knowledge of the possible flaw in the title to the mill and the consequent risk of those claims. 

It is notable that clause 17.4 of the contract, expressly cited by Rimer LJ albeit at an earlier point in his judgment, recorded that Mir Steel had agreed that the exclusions contained in the agreement were "fair and reasonable", and that it was in the light of skilled professional advice concerning the terms of the Agreement that it had agreed to buy the assets on an "as is" basis for a consideration "calculated to take into account (inter alia) the risk to [Mir Steel] represented by the fact that the parties believe that the said exclusions would be recognized as fully effective by the Courts".  

Comment

The courts have historically taken a restrictive approach to the construction of clauses which exclude or limit the liability of one contacting party for loss or damage suffered by the other (or which allocate between the parties where any such loss or damage is to lie).  In addition to construing such clauses strictly against the party seeking to rely on the clause, other rules, principles and presumptions - such as the Canada Steamship guidelines - were developed. 

It was also at one time supposed that a party would be precluded from relying on an exclusion clause where he had been guilty of a fundamental breach of contract or the breach of a fundamental term.  This was firmly rejected by the House of Lords in Photo Production Ltd v Securicor [1980] AC 827, although there has been some debate at first instance in recent years following the decision in Internet Broadcasting  Corporation Ltd (t/a) NETTV) and another v MAR LLC [2009] EWHC 844 which appeared to resurrect aspects of the fundamental breach approach.  It was found in NETTV that there is a strong rebuttable presumption that an exclusion clause should not apply to a deliberate, repudiatory breach of contract.  This was criticised (albeit obiter) by Flaux J in AstraZeneca UK Limited v Albermarle International Corporation and another [2001] EWHC 1574 as "wrong on the modern authorities" (see our post on the decision).  The need for the conflict in the authority to be resolved was recognized by Lewison J in Shared Network Services Limited V Nextiraone UK Ltd [2012] EWCA Civ 1171.  However, despite the fact that the Court of Appeal in Mir Steel was also considering (albeit indirectly) the principles applicable to the interpretation of an exclusion clause in the context of intentional wrongdoing, NETTV and related decisions were not cited by the Court (although it is not clear whether they were referred to in argument).  The conflict therefore still remains to be resolved.   

The Mir Steel decision is of interest in its consideration of the role of guidelines or thresholds in the process of interpretation.  In West Bromwich, Lord Hoffmann stated that "almost all the old intellectual baggage of 'legal' interpretation of contacts has been discarded".  However, as the very fact that this appeal proceeded may show, Lord Hoffmann's sentiment may not yet be as firmly entrenched as he might have envisaged.  That this is so is further demonstrated by other decisions in recent years, in which the Canada Steamship principles have been applied, albeit recognising that they are no more than guidelines (both at first instance, in Onego Shipping & Chartering BV v JSC Arcadia Shipping (M/V Socol 3) [2010] EWHC 777 (Comm) and in the Court of Appeal, in Colour Quest Ltd v Total Downstream UK Plc [2010] EWCA Civ 180) by the courts in declining to construe indemnity clauses as applying to negligence  where it had not been expressly referred to.    

Under the Canada Steamship guidelines, the courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do. However, as this decision confirms, the Canada Steamship guidelines are not to be applied mechanistically. The interpretation of any terms excluding or limiting liability, or allocating it between the parties, will ultimately depend on the context of the whole instrument against the admissible background.