Background
Facts
First instance
Appeal
Comment
The recent Court of Appeal decision in MIR Steel UK Limited v Morris(1) provides a useful reminder of the position regarding contractual exclusion clauses.
The principles applying to the interpretation of exclusion clauses were laid down in Canada Steamship Lines Ltd v The King.(2) In summary, they are as follows:
- Words seeking to exclude liability for negligence must be express and clear.
- Any ambiguity in wording must be resolved against the party seeking to rely on the exclusion.
- Where negligence is the only basis of liability, even general wording can exclude liability for negligence. However, such general wording will not exclude negligence if there is another basis of liability provided that such other basis is not "fanciful or remote". If another basis does exist, a widely drawn clause will not exclude liability for negligence.
In short, parties wishing to exclude liability for negligence under a contract must state their intention to do so clearly. If there is any doubt about the scope of an exclusion clause, the court will usually tend to interpret it more narrowly to protect the injured party.
Alphasteel Limited was a steel manufacturer. In around 1991 it contracted with Liechtenstein company Lictor Anstalt for the purchase of parts used to assemble a hot strip mill which produced rolled steel products.
The parts for the mill were supplied by Lictor and the mill was assembled and used by Alphasteel for a number of years. The arrangement between Lictor and Alphasteel relating to the mill was governed by a letter agreement dated April 3 2000. Among other things, the agreement provided that:
- the mill was and would remain the property of Lictor;
- Alphasteel had no property or other rights in the mill, save for the right to use it to roll steel and produce the resulting products; and
- Alphasteel would not "sell or purport to sell, mortgage, hypothecate or charge [Lictor's] interest as owners in the Equipment or create or knowingly suffer to exist any lien over all or any of the Equipment".
Alphasteel went into administration in 2007. The administrators wished to sell Alphasteel's business and assets. Offers for Alphasteel's assets (including the mill) were subsequently received from Libala Limited, with Libala noting its understanding that there was doubt about the ownership of the mill.
Despite their knowledge that the ownership of the mill was disputed (and having received formal notification of Lictor's claim to ownership), the administrators proceeded with the asset sale (including the mill) to Libala. For consideration of approximately £57 million, the assets would be transferred to a special purpose vehicle (later to be named Mir Steel UK Limited). Mir Steel would then be transferred to Libala. Draft heads of terms were agreed between the administrators and Libala, Clause 1.4 of which acknowledged: "a title dispute relating to claim by Lictor Anstalt to ownership of Alphasteel's hot strip mill" and provided that Libala "shall be responsible for settling any claims made against [Libala], the SPV or the Assets following Completion in relation thereto."
The sale was completed in July 2008. The agreement governing the sale stated at Clause 9.5: "The purchaser agrees that it shall be responsible for settling any claim made against it by Lictor Anstalt in respect of the hot strip mill situated at the Property."
Following the sale, Lictor brought a claim against Mir Steel and Libala in which it argued that it was entitled to:
- delivery up of the mill and damages for alleged conversion;
- damages for inducing a breach of the Lictor agreement; and
- damages for unlawful means conspiracy.
As part of its defence of Lictor's claim, Mir Steel applied to join Alphasteel and the administrators as Part 20 defendants. In doing so, Mir Steel sought to advance claims against Alphasteel and the administrators in relation to:
- damages for breach of warranty under the sale agreement;
- repayment of sums said to have been paid by mistake of fact and/or law; and
- contribution under the Civil Liability (Contribution) Act 1978 to Lictor's claims against it for inducing a breach of contract and for conspiracy.
The first instance judge dismissed Mir Steel's application in its entirety. In doing so, he noted that the risk of claims by Lictor was known by the parties at the time of the sale agreement and that they "agreed that the risk of such claims should be borne by Mir Steel and indirectly by Libala".(3) In his view, Clause 9.5 of the sale agreement was not drafted in a restrictive manner; it applied to "any claim" and he saw no reason to not give Clause 9.5 its obvious meaning. As a result, the judge found that Alphasteel and the administrators had excluded liability relating to "any claim" and this included any claim arising out of negligence and/or intentional wrongdoing. Accordingly, they would not be joined as Part 20 defendants.
Mir Steel appealed only in relation to the third limb of its original application (the contribution claim). During the appeal, Mir Steel acknowledged that Clause 9.5 would cover Lictor's claims against it relating to the mill, but submitted that this was not enough. In its submission the exclusion would cover only the first limb of Lictor's claim (its claim in conversion) and not the second and third limbs (for inducing a breach of contract (of the Lictor agreement) and conspiracy (between Alphasteel and the administrators) by unlawful means, both of which would require Lictor to prove intention). Mir Steel submitted that, following the Canada Steamship principles, if clear words are required to exclude liability for negligence they must also be required to exclude liability for intentional wrongdoing. Mir Steel submitted that the wording of clause 9.5 was insufficiently clear. It argued that the judge had given clause 9.5 a wider scope than the parties had intended and it did not exclude claims caused by negligence or intentional wrongdoing.
The Court of Appeal upheld the the first instance judge's decision and dismissed the appeal, despite the fact that the wording of clause 9.5 was arguably not sufficiently clear to exclude liability for negligence (and indeed also intentional wrongdoing). The leading judgment included a useful analysis of the Canada Steamship decision and noted a number of subsequent cases in which the court had expressly stated that the Canada Steamship principles were guidelines only and not absolute rules. Lord Bingham (in another case) is cited; he stated that there "can be no doubting the general authority of these principles" but that:
"Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a certain and predictable result. The Court's task of ascertaining what the particular parties intended, in their particular commercial context, remains."(4)
Accordingly, the Court of Appeal emphasised the value of the Canada Steamship principles as guidance which should not be taken as firm rules or as imposing a mechanistic construction of exclusion clauses.
This case demonstrates that the courts do still pay heed to the Canada Steamship principles, despite the Court of Appeal acknowledging that they "ought to be regarded as no more than guidelines" and that they "do not provide an automatic solution to any particular case".(5) In particular, when interpreting Clause 9.5, the Court of Appeal did consider "how inherently improbable it is in all the circumstances"(6) that the parties intended to release Alphasteel and the administrators not only from liability to contribute to any claim in conversion, but also from liability to contribute to any other claim arising out of negligent and/or intentional wrongdoing (including the claims for inducing a breach of the Lictor agreement and for unlawful means conspiracy). However, on the facts the Court of Appeal held that the parties did so intend.
The facts of this case were somewhat unusual because the contracting parties were fully aware of the potential claim relating to the mill when they entered into the sale agreement, even if they could not be sure of the exact form that any claim might take. Indeed, the sale price was negotiated and agreed against this backdrop. Therefore, in effect clause 9.5 acted more as a transfer of liability rather than an exclusion in the normal sense. This distinction goes some way to explaining why the Court of Appeal so readily held that the wording of Clause 9.5 was sufficiently clear to be construed more widely than might perhaps have been expected considering the Canada Steamship principles.
Overall, the case provides a useful reminder about interpreting exclusion clauses and the ongoing (if perhaps diminishing) role that the Canada Steamship principles play. It also acts as a reminder to take care when drafting exclusion clauses: if parties wish to exclude liability for negligence (or even intentional wrongdoing), they should ensure that they use clear, unambiguous wording. The dispute in this case surrounding Clause 9.5 could probably have been avoided altogether had more care been taken when drafting the clause; in this way at least, keeping in mind the Canada Steamship principles is still as important today as ever.
For further information on this topic please contact Daniel Wyatt at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email ([email protected]).
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Endnotes
