Arbuthnott v Fagan – Case Summary

Arbuthnott v Fagan

Court of Appeal

Citations: [1995] CLC 1396.


This case concerned the proper construction of a company’s standard agency agreements for agents dealing with insurance policies. In particular, the contract contained a ‘pay now, sue later clause’. This clause prevented one party from suing the other in relation to ‘any matter…in the preparation or audit of the accounts’ and the making of any cash requirements until they had paid all cash requirements the other claimed.

A dispute arose as to whether the clause stopped a party from suing for negligence (as opposed to just claims for the agent’s expenses and outgoings) until they had paid the agent’s cash requirements.

  1. Should the clause be construed to cover negligence claims?

The Court of Appeal held that the clause did not cover negligence claims. The clause’s purpose was to stop parties from challenging the validity of a cash demand arising out of agency and accounting functions before it had been paid. This allowed the agents to promptly pay third-party policy-holders.

The clause was not, however, designed to preclude claims for breach of contract or negligence. The parties would have used clearer language if the parties had intended the clause to have a broader effect.

This Case is Authority For…

The courts will not construe contract clauses in a vacuum. They will interpret each clause in light of the relevant factual background and the clause’s objective intended purpose. At the same time, the literal wording of the clause is usually the key to its meaning: parties can be assumed to say what they mean.

As Bingham MR put it: ‘construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis.’