Liability is a condition precedent to trigger invocation of an exclusion clause

liability
24 Jul 2023

Recently, the Constitutional Court in Fujitsu Services Core (Pty) Limited v Schenker South Africa (Pty) Limited [2023] ZACC 20, was called upon to determine the tension between exclusion clauses and public policy in the context of theft committed by an employee of goods belonging to a client. In a split decision, the court pertinently held that exclusion clauses in contracts are valid and enforceable and are triggered only when the aggrieved party has established breach of contract or the law on the part of the other contracting party.

The applicant, Fujitsu Services Core (Pty) Ltd, imports, sells and distributes laptops and accessories. The respondent, Schenker South Africa (Pty) Ltd conducts the business of a warehouse operator, freight forwarder, logistics manager, distributor and forwarding agent. The parties concluded an agreement called the National Distribution Agreement. Clause 17 of that agreement contained an exclusion of liability clause, in respect of goods that are sent to the Schenker without prior special arrangements having been made.

Fujitsu sent to Schenker goods contemplated in clause 17 of the agreement without making any prior special arrangements in writing with Schenker as required by the agreement. An employee of Schenker, stole those goods and disappeared forever. The court accepted as common cause that the employee was sent by Schenker to the airport to collect Fujitsu’s goods that he stole after he had collected them.

Fujitsu contended that Schenker is liable for its loss. Schenker disputed liability and contended that, since the goods in question fell within the goods described in clause 17 of the agreement, Fujitsu was obliged to have made prior written special arrangements with Schenker before it could send those goods to Schenker and, as Fujitsu failed to make such special written arrangements, Schenker was not liable for Fujitsu’s loss. The High Court found for Fujitsu, and whereas the Supreme Court of Appeal found for Schenker.

The salient issue before the Constitutional Court was whether a contractual provision which seeks to exempt a contracting party from liability for loss caused by the deliberate wrongdoing of an employee is contrary to public policy.

The majority held that a claim under clause 17 of the agreement would arise only if Fujitsu had made prior special arrangements in writing with Schenker as contemplated in the agreement. If no prior special arrangements were made in writing with Schenker, no claim would arise under clause 17 of the agreement. The majority continued to say that that was the deal between Fujitsu and Schenker as reflected in clause 17 of the agreement. That deal between the parties must be upheld unless there are valid reasons why it should not be the case. The majority also remarked that exemption from liability is required for conduct that is in breach of the contract or the law and not for conduct that is in line with the contract and the law.

The majority dismissed the argument that clause 17 of the agreement is contrary public policy and reasoned that there is nothing unfair or unreasonable about the terms of the clause 17. On the contrary, the terms of clause 17 of the agreement are fair to both parties. The majority reiterated the principle that contracts that have been voluntarily and freely concluded should, as a general rule, be enforced unless there is something contrary to public policy about them. Finally, the majority held that there is nothing contrary to public policy with two contracting parties agreeing on exemption of the one party to the agreement from liability.

The minority made a spirited argument that contractual clauses that limit liability must be interpreted narrowly, particularly if the harm in question arises outside of the contract (theft by the employee), unless the parties expressly agree otherwise. Significantly, the minority held that, clause 17 of the agreement does not exonerate Schenker from liability. The minority held that an act of theft can never be said to be in furtherance of a legally valid and enforceable contract and therefore, any contract which envisioned, tolerated or provided for the furtherance of theft would be contrary to the doctrine of legality and public policy.

The judgment of the majority is sound and is in line with the interpretive tools in the context of a contractual setting. The judgment is significant for three reasons. One, the court has reemphasised that exclusion clauses are valid and enforceable in a constitutional dispensation. Two, to trigger the application of an exclusion or limitation of liability clause, it is a condition precedent that the aggrieved party must have complied with the contractual provisions or established breach of the contract to impute liability on the other contracting party. Three, if the exclusion or exemption clause is clear and unambiguous, the court would not hesitate to enforce same.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Ayanda Nondwana

Ayanda Nondwana is a Partner and the Head of the Insurance Team. He holds a BA and LLB degree from the University of Witwatersrand. He later obtained a Certificate of... Read more about Ayanda Nondwana

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