THE THE KEY POINTS

––Practitioners have questioned whether there is still a place for the contra proferentem rule Feature CONTRA in the construction of modern complex banking and finance . ––In order to justify their resort to a contra proferentem construction, have had to read an ambiguity into a clause by the process of strained construction.

––Commercial contracts often contain language which on a true construction constitutes a PROFERENTEM deliberate allocation of risks and liabilities such that the language is not ambiguous.

Authors Stephanie Barrett and Claudia Wilmot-Smith

The contra proferentem rule in financial LITIGATION RULE IN FINANCIAL litigation

“Contra proferentem” is shorthand for the Latin maxim verba cartarum fortius commercial implications of each rival accipiuntur contra proferentem (literally “the words of documents are to be taken construction being tested. Contractual strongly against the one who puts forward”). This principle has a long history, dating construction is a unitary exercise, with the from Roman times.1 various elements being balanced. Under English , the “contra proferentem” principle is used to describe two The interaction between these ordinary related rules of contractual construction2 that: (i) in case of doubt, a contractual principles of contractual interpretation provision is construed against the party which drafted it or put it forward for inclusion and the contra proferentem principle is an in the ;3 and (ii) ambiguities in exclusion or limitation clauses are resolved important issue, but unfortunately the cases against the party seeking to rely on the clause to diminish or exclude its liability. This and commentators do not speak with one article focuses on the position regarding exclusion, limitation or clauses, voice in this regard.8 Given that the starting which are common in complex financial contracts. point is meant to be the words used by the parties, and that the context of the contract and commercial implications of each rival Historically, and especially in the context or to refer to separate principles of law. For construction are already factored in when nof consumer contracts, the courts example, the contra proferentem principle is determining the true construction of a clause, approached exclusion clauses with hostility. sometimes conflated with the rule that clear it might be thought that the rule about They adopted strained constructions to find words are required before a party is taken to construing a clause “contra proferentem” are ambiguity, which would then allow them have abandoned one or more remedies which rarely, if at all, going to be determinative. to construe exclusions or limitations contra would otherwise be available for a breach All linguistically plausible and commercially proferentem, so as to preclude a party from of contract.4 sensible constructions of the words used excluding or limiting their liability beyond a It should also be noted that there are should have already been considered at the level which the deemed “fair”. The classic some specific rules of construction (similar first stage. statement in Canada Steamship Lines Ltd to contra proferentem) governing certain types Thecontra proferentem principle only v The King [1952] AC 192 that: ‘If there is no of clause common in financial transactions. applies where the wording in question is still express reference to negligence, the court must For example, there is a line of cases suggesting ambiguous, even after this approach has consider whether the words used are wide that an express exclusion of liability for been followed. It is not appropriate to use enough, in their ordinary meaning, to “consequential loss” does not exclude liability the principle itself to create or magnify an negligence on the part of the servants of the for any loss which arises directly and naturally ambiguity. The first task is always to construe proferens’ was often relied upon to argue that in the ordinary course of events from the the clause applying the principles set out in if a clause did not on its face refer to negligence breach.5 This cuts down the scope of the Arnold and Wood, even if this task is it was, at the least, ambiguous whether such exclusion significantly from what the natural not straightforward. liability was excluded; that such a clause should meaning of the words might have suggested. be construed contra proferentem; and that the COMMERCIAL CASES PRIOR TO result was that liability for negligence was not Contractual construction TABERNA excluded. This approach was rejected in cases The Supreme Court in recent years has Use of the contra proferentem rule to police following the Unfair Contract Terms Act decided a number of cases concerning the the scope of an makes most 1977 (UCTA), which gave the courts powers proper approach to contractual construction. sense in cases where one set of terms has been to deal with certain types of unreasonable Most recently, in Arnold v Britton6 and Wood imposed wholesale by party A on a much exclusion clauses. v Capita7 the court has emphasised that the weaker party B, and those terms include starting point is always the natural meaning wide-ranging exclusions of A’s liability. In a INTERACTION WITH OTHER of the words used by the parties. That commercial case, however, contracts are often PRINCIPLES language is to be construed in the context negotiated between two sophisticated parties, Unfortunately the words contra proferentem of the contract as a whole against the rather than being presented and accepted are sometimes used in a loose fashion and/ admissible factual matrix, and with the on a “take it or leave it” basis. Moreover,

Butterworths Journal of International Banking and Financial Law December 2017 707 Feature

commercial contracts often contain language disclose an answer to the question with applicable. In Jackson LJ’s view: ‘exemption which on a true construction constitutes a sufficient clarity’.13 This formulation accords clauses are part of the contractual apparatus deliberate allocation of risks and liabilities, with Lord Neuberger MR’s previous for distributing risk. There is no need to

RULE IN FINANCIAL IN RULE LITIGATION including the use of exclusion clauses or statement that, ‘“rules” of interpretation such approach such clauses with horror or with a mutual . In many cases parties as contra proferentem are rarely decisive as to mindset determined to cut them down.’18 may have adjusted their remuneration or the meaning of any provisions of a commercial insurance arrangements on the basis of that contract. The words used, commercial sense, TABERNA EUROPE V ROSKILDE agreed allocation. The approach of strained and the documentary and factual context are, The application of thecontra proferentem constructions in order to resort to application and should be, normally enough to determine rule in the context of complex international 14 PROFERENTEM of the “ ” rule where the the meaning of a contractual provision.’ The financial transactions was recently considered contra proferentem language is not itself ambiguous threatens the other two judges sitting with Briggs LJ agreed by the Court of Appeal in Taberna Europe freedom to contract in this manner. with the result, but stated that they placed CDO Plc v Selskabet of 1 September 2008 It is therefore unsurprising that there greater emphasis on the “commerciality” of A/S (formerly Roskilde Bank A/S) (In CONTRA have been many judicial statements over the the various constructions put forward. This Bankruptcy) [2017] QB 663. The claimant years casting real doubt on the role of the suggests that they were less convinced of the (Taberna) had entered into a secondary THE contra proferentum rule in commercial cases. utility of the contra proferentem principle. market purchase from Deutsche Bank of It has more than once been described as being The application of this principle of certain subordinate loan notes originally a rule of “last resort”9 and has been said to construction to complex commercial issued by Roskilde. It claimed that it had be ‘of uncertain application and little utility contracts was revisited in two subsequent done so in reliance on certain representations in the context of commercially negotiated Court of Appeal cases, which both confirmed contained in an investor presentation agreements’.10 that the court will not use the principle to cut document, which was published on Such pronouncements have not, however, down even broad exclusions of liability if the Roskilde’s website. These representations prevented application of the principle in some wording is clear. were said to have been false, and Taberna commercial cases. One recent example of In Transocean Drilling UK Ltd claimed damages under s 2(1) of the the principle being applied in a commercial v Providence Resources Plc,15 the Court Act 1967. context (specifically a share purchase of Appeal held that the meaning of the Both the judge at first instance (Eder J) agreement) is Nobahar-Cookson & Anor v Hut clause in question (an exclusion of defined and the Court of Appeal (the lead judgment Group Ltd.11 Briggs LJ held that the principle consequential losses in a drilling rig hire being given by Moore-Bick LJ) recognised remains of utility in the context of exclusion agreement) was clear, and that there was that by publishing the investor presentation clauses, even in commercial cases. However, therefore no room for the application of on its website, Roskilde was actively inviting His Lordship also confirmed that: contra proferentem. The judge had incorrectly potential investors (of which Taberna was started with the contra proferentem principle, one) to make use of the information contained ‘This approach to exclusion clauses is rather than construing the clause in context therein for the purpose of deciding whether to not now regarded as a presumption, still first, and had in effect altered the parties’ invest in its subordinated securities generally. less as a special rule justifying the giving bargain. Moore-Bick LJ was keen to stress As a result, the representations it contained of a strained meaning to a provision that commercial parties are entitled to agree were made by Roskilde to Taberna when merely because it is an exclusion clause. to give up contractual rights. His Lordship considering whether to invest in its Commercial parties are entitled to allocate also thought that contra proferentem had debt generally, including the subordinated between them the risks of something going no role to play in typical “knock for knock” loan notes. wrong in their contractual relationship type arrangements negotiated between There were numerous strands to in any way they choose. Nor is it simply parties of equal bargaining power, whereby Roskilde’s defence. Relevantly here, it relied to be mechanistically applied wherever sophisticated schemes of mutual indemnities on a number of disclaimers published on an ambiguity is identified in an exclusion are provided in respect of loss arising from the back page of the investor presentation. clause. The court must still use all its tools certain causes, even if the party seeking an These included the disclaimer that no‘ of linguistic, contextual, purposive and indemnity is at fault. Such clauses favoured liability whatsoever is accepted as to any common-sense analysis to discern what both parties equally and therefore should not errors, omissions or misstatements the clause really means…’12 be construed narrowly.16 contained herein, …’ and that ‘neither the Similarly, in Persimmon Homes Ltd v Ove bank or any officers or employees accepts An ambiguity in the meaning of a clause Arup17 the Court of Appeal, referring to any liability whatsoever arising directly or ‘may have to be resolved by a preference for Transocean, held that the meaning of the indirectly from the use of this presentation the narrower construction, if linguistic, exclusion clause in issue was clear and that for any purpose…’ (emphases supplied) contextual and purposive analysis do not therefore the contra proferentem rule was not Roskilde argued that the effect of these

708 December 2017 Butterworths Journal of International Banking and Financial Law THE THE

Feature PROFERENTEM CONTRA

disclaimers was to exclude any liability that it The task of contractual construction however, a practitioner considering whether might otherwise have had under s 2 (1) of the (of which the application of the contra they have any prospects of successfully relying RULE IN FINANCIAL LITIGATION RULE IN FINANCIAL 1967 Act. proferentem rule plays a part) is to determine on the rule to preclude their contractual Eder J was prepared to assume that these what these terms are. To say that the court’s counterparty from excluding or limiting disclaimers were exclusion clauses on which task is to ‘interpret fairly the words they their liability may find that the first instance Roskilde could rely, and which satisfied the have used’ is to beg the question as to what is decision is worth considering. requirements of reasonableness. However, “fair”. Moore-Bick LJ’s points are perhaps not Eder J ruled that disclaimers of ‘any he also held that they were to be construed best understood as general guidance on the liability whatsoever arising directly or contra proferentem, and were insufficiently correct approach to contractual construction. indirectly from the use of this provision for clear to exclude liability for damages for Rather, they highlight that the courts should any purpose’, and the statement that the bank misrepresentation under s 2 (1) of the not use the contra proferentem rule as a means accepted ‘no liability whatsoever’ were ‘to be Misrepresentation Act 1967. of re-drawing the parties’ bargain to reflect construed contra proferentem and, as such, the Roskilde successfully appealed this point. the terms on which the court thinks that they words used are insufficiently clear to exclude Moore-Bick LJ noted that while judges have “should” do business, on the basis that the liability for damages for misrepresentation historically invoked the contra proferentem result conforms to some perceived standard under s 2(1) of the 1967 Act’ (at [120]). Yet rule as a useful means of controlling of “fairness”. it is hard to see how the words could have unreasonable exclusion clauses, This judgment, together with Moore-Bick been any clearer. Indeed, they are almost LJ’s earlier judgment in the Transocean case, textbook examples of ‘words which clearly ‘[t]he modern view, however, is to has prompted some practitioners in the field indicate an intention to exclude all liability recognise that commercial parties (which to question whether there is still a place for without exception’, including negligence.20 these were) are entitled to make their own this “rule” in the construction of modern That Eder J was nonetheless willing to reach bargains and that the task of the court complex banking and finance contracts. the conclusion he did suggests that there may is to interpret fairly the words they have These are precisely the sorts of contracts still be first instance judges (or arbitrators) used. Thecontra proferentem rule may that Moore-Bick LJ was considering when who will be able to persuade themselves of still be useful to resolve cases of general he spoke of exclusion clauses as a means by an ambiguity that does not really exist if they ambiguity, but ought not to be taken as which parties allocate risk, an exercise that are of the view that the “merits” require it. the starting point: see, for example, The they should be free to do without the fear of Such decisions may not survive the Court of Hut Group Ltd v Nobahar-Cookson [2016] judicial intervention. Appeal. However, as Briggs LJ’s judgment EWCA Civ 128 and Transocean Drilling This does not represent a change in the in The Hut Group shows, in cases where the UK Ltd v Providence Resources plc [2016] law. Thecontra proferentem “rule” has not been ambiguity is genuine, and the judge is able to 2 All ER (Comm) 606. In my view [the discarded from the contractual construction see the commercial logic behind both parties’ disclaimers] are couched in language that rule book. Rather, the case is illustrative of a rival constructions, the contra proferentem makes it quite clear that Roskilde accepts further deprecation of the practice whereby principle is still a useful aid to construction. n no responsibility for the information the courts ‘read an ambiguity into [a clause] contained in the investor presentation. by the process of strained construction which 1 See Oxonica Energy Ltd v Neuftec Ltd [2008] There is no ambiguity of the kind that can was deprecated by Lord Diplock [1980] EWHC 2127 (Pat) (Prescott QC). properly be resolved by invoking the contra AC 827, 851C in Securicor 1 and by Lord 2 See Chitty on Contracts (32nd edn 2015) at proferentem rule.’ (at [23]) Wilberforce in Securicor 2 [1983] 1 W.L.R. para 15-012. 964, 966G’.19 in order to justify their resort 3 Determining the identity of the “proferens” or Nor was Taberna assisted by the to a contra proferentem construction. Judges “proferentes” (ie “the one who puts forward”) suggestion in Canada Steamship that a clause who wished to police the parties’ ability to can give rise to difficulty. Some cases identify will not be interpreted in a way that excludes exclude their liability had to strain to find the party who prepared the contract or negligence liability unless it specifically such ambiguity precisely because the “rule” a particular clause, others the party who purports to do so, or there is no other basis of has always been one of last resort. benefits from the clause. As noted inThe liability on which it could operate. Moore- Moore-Bick LJ gave short shrift to the Interpretation of Contracts (Lewison ed.) at Bick LJ noted the recognition in subsequent notion that the relevant disclaimers of liability p 391, this ambiguity has led to differing cases (in particular those decided since should be construed contra proferentem formulations of the contra proferentem the introduction of UCTA, although he because he did not think that they were principle. made no reference to that Act) ‘that parties ambiguous. If contracts are clearly drafted, 4 Gilbert-Ash (Northern) Ltd v Modern to commercial contracts are entitled to limitations and exclusions of liability should Engineering (Bristol) Ltd [1974] AC 689 (HL). determine for themselves the terms on which escape judicial intervention in the guise of The Nobahar-Cookson case cited below is an they will do business’ (at [26]). contra proferentem construction. Conversely, example of a court appearing to make this

Butterworths Journal of International Banking and Financial Law December 2017 709 Biog box Feature Stephanie Barrett and Claudia Wilmot-Smith are barristers practising from Quadrant Chambers. Email: [email protected] and [email protected]

error cf per Moore-Bick LJ in Transocean (also 133 LQR 6, Professor Peel suggests that contra 19 per Lord Diplock in George Mitchell cited below) at [19]–[21]. proferentem may have a role in the construction (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 5 ie that the exclusion is only of loss recoverable of an exclusion clause even if the clause is not 2 AC 803 at 814.

RULE IN FINANCIAL IN RULE LITIGATION under the second limb of Hadley v. Baxendale ambiguous. That does not, it is suggested, reflect 20 Chitty cites words such as ‘no liability whatever’, (1854) 9 Ex. 341; 156 ER 145. See Croudace the current state of English law. ‘under no circumstances’, ‘all liability’, all loss Construction Ltd v Cawood’s Concrete Products 9 See eg per Mance LJ in Sinochem International ‘howsoever arising’ from ‘any cause whatsoever’ Ltd [1978] 2 Lloyd’s Rep. 55 (CA) and following Oil (London) Co Ltd v Mobil Sales & Supply as examples of ‘words which clearly indicate cases. Such an approach is open to the criticism Corp [2000] 1 Lloyd’s Rep. 339 (CA) at [27]. an intention to exclude all liability without that it uses the terms “consequential loss” to 10 per Gloster J in CDV Software Entertainment exception’, including negligence. The basis upon mean something fundamentally different from AG v Gamecock Media Europe Ltd [2009] which the words in Taberna can be distinguished its generally understood meaning in the law of EWHC 2965 at [56]. from these textbook examples is not clear. damages: see eg McGregor on Damages at 3-014. 11 [2016] 1 CLC 573. However, recent decisions suggest that some of 12 at [19]. Further Reading: CONTRA PROFERENTEM these cases would not be decided in the same 13 at [21]. ––Consequential loss exclusions in way today (see per Moore-Bick LJ at [15] in 14 K/S Victoria Street v House of Fraser [2012] Ch financial misselling claims (2017) THE Transocean, cited below). 497 at [68]. 5 JIBFL 277. 6 [2015] AC 1619. 15 [2016] 2 Lloyd’s Rep. 51 (CA). ––Are we exceedingly reliant on common 7 [2017] 2 WLR 1095. 16 See [20]. sense? (2015) 11 JIBFL 704B. 8 For instance, at para 7-015 of Treitel, The Law 17 [2017] EWCA Civ 373. ––LexisPSL: Banking & Finance Practice of Contract (14th edn) and at p 11 of [2017] 18 At [56]. note: Rules of contract interpretation.

710 December 2017 Butterworths Journal of International Banking and Financial Law