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Case law: Court clarifies how to interpret contract clauses excluding or limiting liability for breach

Parties to an agreement should ensure there are no ambiguities in clauses excluding, limiting or reducing liability for breach, and consider how the rules of interpretation of contract terms will apply if there is a dispute

Legal Alert

This update was published in Legal Alert - July 2016

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A company entered into an agreement to buy the share capital of another company. The seller warranted that the company's accounts were accurate in the agreement, but the agreement also said that claims under the warranties had to be made within certain time limits.

The clause containing the time limit said: "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 is practicable, the amount claimed in respect it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter." The buyer later claimed those warranties had been breached because the target company's management accounts did not give a fair view of its finances.

The seller argued that the buyer was out of time under the agreement. Whether the seller was right depended on the interpretation of the words "becoming aware of the matter".

The Court of Appeal said that there was a general principle that an agreement should not be interpreted in a way that excluded or reduced remedies which would otherwise apply, unless the agreement clearly said so. The way to approach any ambiguities in clauses excluding or reducing a party's liability for breach (such as by imposing a time limit on claims for breach) was therefore to adopt the narrowest possible interpretation of the relevant clause.

The narrowest interpretation of the words "becoming aware of the matter" was: when the buyer became aware of the claim, in the sense that it became aware that there was a proper basis for the claim. This could be contrasted with, for example, an interpretation that it meant becoming aware of the facts giving rise to the claim, or simply becoming aware there might be a claim.

Applying this interpretation, the Court of Appeal ruled in favour of the buyer. It said that the seller's interpretation took away the buyer's remedy for breach of the warranty on expiry of the time limit for no sensible purpose. Much clearer words would have been needed to argue that interpretation successfully.

However, it warned that the 'narrowest construction' approach is not a presumption that should always be applied to exclusion clauses. The test of construction of an agreement, including exclusion clauses, remained the objective test of what a reasonable person in possession of all background information reasonably available to both the parties at the time the contract was entered into would think it meant. It was only if, after applying that test, ambiguities remained in relation to an exclusion clause, that the 'narrowest construction' test would apply.

Operative date

  • Now

Recommendations

  • Parties to an agreement should ensure there are no ambiguities in any clauses excluding, limiting or reducing liability for breach, and consider how the rules of interpretation of agreements generally, and such clauses in particular, will apply if there is a dispute

Case ref: Nobahar-Cookson & Ors v The Hut Group Ltd [2016] EWCA Civ 128

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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