The grey area between ‘legally prescribed’ and ‘industry standard’ liability provisions
09 Mar 2020
“Nothing in this Agreement will exclude or limit a Party’s liability to the other for damages occasioned by the gross negligence or willful misconduct of such Party” is a liability provision which seeks to ensure that a contracting party’s liability in respect of those heads of loss is unlimited. In other words, a contracting party will be responsible for having to pay a claim of any amount which the claimant is legally entitled to under common law.
In South Africa, legal representatives caution against limiting a client’s liability for these heads of loss on the basis that it would be contrary to public policy and against the constitutional values to exclude liability for acts which are considered unforgiveable in the eyes of the law. A question arises whether the law explicitly prescribes that liability in respect of gross negligence and willful misconduct be unlimited, or if this has transpired as an ‘industry standard’ liability provision.
In S v Dhlamini gross negligence was defined as “a particular attitude or state of mind characterized by an entire failure to give consideration to the consequences of one’s actions, in other words, an attitude for reckless disregard of such consequences”.
In Rustenburg Platinum Mines Ltd v South African Airways and Pan American World Airways Inc (which was later upheld and adopted in the case of KLM Royal Dutch Airlines v Hamman) the court found that willful misconduct extended further than gross negligence and involved a negligent act or omission of a person who, despite acknowledging and appreciating it as being wrongful, proceeds carelessly with no due regard to the consequences of such act or omission.
Contracts vs Common Law
Generally, a contract is concluded in order to provide plain and unambiguous deviations from the legal rights and obligations prescribed under common law. Should a party to a contract wish to be absolved, wholly or partially, from liability (where liability would otherwise exist under common law), that party would need to ensure that a clause is included in the contract which substantially and effectively records this intention. The South African legal system actually encourages a contracting party to contract freely, without invasive legal intervention, in terms of the freedom of contract legal principle, so much so that the courts will only intervene to the extent that a clause contains terms that clearly disregard public policy and pose possible constitutional implications.
It goes without saying that a clause which limits a contracting party’s right to claim all damages it has suffered as a result of another party’s gross negligence or willful misconduct would trigger warning signs and the court would be more inclined to intervene in light of public policy considerations and the values enshrined in the Constitution.
The courts have, however, shied away from providing an absolute legal principle in respect of the legality of limiting liability for these heads of loss. This may be due to the fact that the courts will consider the clause in light of the industry in which it is enforced and determine whether, in terms of that industry, such limitation would be contrary to public policy and any constitutional values.
Nevertheless, the following South African case law provides guidance on the current legal position regarding the legality of these clauses:
- A contracting party cannot contract out of liability for willful misconduct and any clause seeking to exclude liability for willful misconduct is deemed to be against public policy and therefore void. The court will therefore intervene where a party seeks to enforce this clause, and have it struck down for being unconstitutional.
- In Government of the Republic of South Africa v Fibre Spinners and Weavers (Pty) Ltd the court, being reluctant to restrict the plain meaning of the words in the disputed clause, found no reasons on public policy to hold that the clause, insofar as it referred to limiting a contracting party’s liability for damages caused by gross negligence, was unenforceable. This principle was later upheld by the Supreme Court of Appeal in the case of First National Bank of South Africa Ltd v Rosenblum and Rosenblum, which to date is the most recent case dealing with this issue.
Therefore, a clause that limits liability for gross negligence will not generally attract court intervention, unless the clause is contrary to public policy given the industry in which it is being enforced.
In summary, it is contrary to South African law to include a clause in a contract that limits liability in respect of damages caused as a result of willful misconduct. It is completely acceptable to do so for gross negligence and it seems that the courts will only intervene in very exceptional circumstances.
- The significance of force majeure provisions on contractual arrangements
- Demand Guarantees in the Construction Industry
- Piercing the corporate veil and your remedies
(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.)