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Exclusion Clauses – It’s all about Context

The Background

The English Court of Appeal recently considered the terms of an exclusion clause. The administrators of Alphasteel Limited (Alpha), had sold the business and assets to a 3 rd party and it was acknowledged that there may be a title dispute with regard to one of the assets (a hot strip mill) with a company called Lictor. The sale was structured by way of a hive down of the business and assets to a Newco named Mir Steel and a share transfer of the shares in Mir Steel to the final purchaser (Libala) for £1 .Clause 9.5 of the hive down agreement provided that: "the purchaser 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”. The agreement also contained the usual exclusions of liability in favour of the administrators.

Following completion of the sale Lictor sued Newco and the Purchaser for alleged conversion, seeking delivery up of the equipment and damages. It also raised other claims against both for inducing a breach of contract and conspiracy on the basis that the alleged inducement of breach of contract amounted to a conspiracy by unlawful means. In turn, Mir Steel sought permission to join Alpha and the administrators as Part 20 defendants in respect of the claims for damages for breach of warranty under the hive down agreement; repayment of sums to have been paid by mistake of fact and/or law; and contribution to Lictor’s claims against Mir Steel for inducing a breach of contract and for conspiracy. The judge at first instance held that the Part 20 claim had no prospect of success and so refused to join Alpha and the administrators as co-defendants. Mir Steel appealed Mir Steel relied upon the Canada Steamship Lines Ltd v The King case stating that clear words should be used in an exclusion of liability clause to include claims based upon intentional wrongdoing, such as under the torts of inducing a breach of contract and conspiracy.

The Decision

The Court dismissed the appeal. In the Court’s view Canada Steamship principles were not to be applied mechanistically and should be regarded merely as guidelines. In interpreting contractual provisions, the Court's function was always to interpret the particular contract in light of the context in which it was made. In this case, the Court's role was to approach the interpretation of the clause in light of the overall commercial purpose of the hive down agreement. The question for the Court was whether it was "inherently improbable" that the wording of the clause was directed at releasing the respondents from liability to contribute to a claim in conversion and also from liability to contribute to any other claim that Lictor may bring against Mir Steel in respect of the hot strip mill. It was stressed that all parties were aware of the title issue surrounding the hot strip mill. The clear purpose of the clause was to insulate Alpha and the administrators from liability and shift to Mir Steel the entire risk and burden of any claim that Lictor might in future bring against Alpha and the administrators in respect of the hot strip mill. Indeed, the language extended to all claims that Lictor had brought. Accordingly, the words "any claim" in the clause of the hive down agreement should be read widely so as to include any claim for inducement of breach of contract or conspiracy

Advice

The Court emphasised that a distinguishing factor of this case was that all parties knew about the title issue. This was not a scenario where, as may more typically be the case, the administrators simply were unaware of the title dispute until after the sale. This case serves as an important reminder that any exclusion of liability clause for the benefit of administrators should be widely drafted to ensure that all claims are excluded. In this case the exclusion clause did not expressly exclude liability of either Alpha or its administrators and so it was necessary to rely upon interpretation. The general contra preferentem rules on exclusion clauses and understands that they must be clearly shown to be incorporated into the contract using clear, unambiguous language will continue too apply. However, this case confirms that by far the most important factor in construing an ambiguity in a contract is its commercial purpose. Strong drafting would have avoided many of the issues in this case particularly if the exclusion of liability clause expressly covered the delictual issues. When instructing a solicitor on a hive down or asset transfer agreement, as a general rule provide as much background as possible so that limitations and scope of exclusions clauses can be fully considered.

BBM Solicitors specialise in advising IP's in both contentious and non-contentious matters (including transactional work). Contact: Eric Baijal () or Alasdair Baijal ().This briefing note is current as at 2nd May 2013 and is our understanding of the position described at that date. Legal advice ought to be taken before relying on its terms (particularly to ensure the law has not changed).

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