Contracting out of liability for gross negligence

December 1st, 2012
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By Ian Chadwick

Exemption clauses limiting the liability of a carrier and depositee are frequent. They are virtually the norm in the industry. The effect of such exemption clauses has been limited by the Consumer Protection Act 68 of 2008 (CPA), which came into effect on 1 April 2011 and which restricts the power of a supplier of goods or services to impose conditions or terms that exempt the supplier from common law obligations. However, given the exclusion of juristic person consumers whose asset value or annual turnover at the time of the transaction exceeds R 2 million from the operation of the CPA, the common law is still relevant when considering the rights and obligations of contracting parties where the supplier of goods or services attempts to enforce provisions exempting or limiting liability.

The CPA

Section 48(1) of the CPA provides that a supplier must not –

‘(a) offer to supply, supply, or enter into an agreement to supply, goods or services –

(ii) on terms that are unfair, unreasonable, or unjust;

(b) … ; or

(c) require a consumer, or other person to whom goods or services are supplied at the direction of the consumer –

(i) to waive any rights;

(ii) … ; or

(iii) waive any liability of the supplier, on terms that are unfair, unreasonable or unjust or impose any such terms as a condition of entering into a transaction.’

Precisely what constitute ‘unfair, unreasonable or unjust’ terms is still to be determined by the courts. There is, however, some indication in the CPA that excluding liability for negligence, as opposed to gross negligence, may be permissible. Section 51 of the Act prohibits an exemption of a supplier of goods or services from liability for any loss directly or indirectly attributable to gross negligence of the supplier or any person acting for or controlled by the supplier. By implication, a clause exempting liability for ordinary negligence is not prohibited.

The common law

Contracts concluded between carriers and owners of goods (or persons acting as agents for such owners, such as clearing and forwarding agents) seem, almost as a matter of rule, to include provisions exempting in whole, or at least restricting, the carrier’s liability for loss, theft or damage to the goods carried. Many, if not most, of the consumers of such services would be large juristic entities falling outside the limits of the CPA.

The question of whether, at common law, clauses exempting liability for gross negligence on the part of carriers or depositees are permissible does not appear to have received much attention from South African courts in the last 60 years.

There are many cases dealing with exemption clauses but, as far as I am aware, there is only one reported case during that period dealing with the question of whether it is against public policy to exempt liability for gross negligence, namely Government of the Republic of South Africa (Department of Industries) v Fibre Spinners & Weavers (Pty) Ltd 1977 (2) SA 324 (D) (on appeal 1978 (2) SA 794 (A)). In this case the depositor’s grain bags were stored for reward in the depositee’s store. Grain bags were stolen from the store by thieves, one of which was the depositee’s chief security officer. A contract between the parties, embodied in a letter from the depositor, ‘absolved [the depositee] from all responsibility for loss of or damage howsoever arising in respect of’ the grain bags in consideration of the depositee insuring in an all risks policy such grain bags. The court a quo upheld the depositee’s defence. The court considered, inter alia, the question of whether a party could contract out of liability for gross negligence but found it unnecessary to decide the point as, on the facts, the court found that the allegations in the pleadings did not go beyond an allegation of ordinary negligence.

The court a quo, per Didcott J, referred to Rosenthal v Marks 1944 TPD 172 at 180, in which it held that ‘gross negligence … connotes recklessness, an entire failure to give consideration to the consequences of his actions, a total disregard of duty’ and to CSAR v Adlington & Co 1906 TS 964 at 973, where the court gave as an example of gross negligence ‘a person who takes charge of property (who) leaves it so exposed that thieves may carry it off’. The court a quo in the Fibre Spinners case concluded from these dicta that gross negligence ‘smacks of wanton irresponsibility’ (at 335H). The case was taken on appeal and in the Appeal Court (where the appeal was unsuccessful) the court considered, inter alia, a submission by the depositor that the exemption clause ought to be construed as not applying to responsibility for loss or damage caused by the depositee’s gross negligence. The Appeal Court dismissed this submission with the following statement at 807D:

‘In my opinion, there is no justification for so restricting the plain meaning of the words of the exemption clause, nor is there any reason founded on public policy why it should be held that, in so far as the clause refers to loss or damage caused by defendant’s gross negligence, it is not enforceable.’

In dismissing the depositor’s submission that it was against public policy to uphold an exemption of liability for gross negligence, the court did not refer to the cases of Adlington & Co and Naylor v Munnik (3 Searle, 187). In these cases the courts found that a carrier could not exempt itself from malfeasance or gross negligence (although it could for ordinary negligence). In the Adlington & Co case, the court referred to the difference between gross negligence, ordinary negligence and slight negligence. The court also referred to the fact that there was authority (the Naylor case) that owner’s risk does not include freedom from liability arising from gross negligence or from malfeasance. The court stated at 974: ‘He is not exempted if he displays gross negligence or malfeasance, or if he employs such servants as are likely to be guilty of gross negligence or wilful misconduct.’

There has never been any doubt since the case of Wells v South African Alumenite Co 1927 AD 69 that a party cannot contract out of liability for fraudulent conduct. This principle is founded on grounds of public policy. In the Adlington & Co case the court appears to have equated ‘malfeasance’ to ‘wilful misconduct’.

In the case of Essa v Divaris 1947 (1) SA 753 (A) the court considered whether it was permissible for a carrier to contract out of liability for gross negligence or malfeasance but found it unnecessary to decide the point on the basis that, even if it were assumed that proof of gross negligence would have entitled the plaintiff to succeed, the plaintiff had failed to discharge the onus of proving such gross negligence.

Conclusion

I submit that if one has regard to the fact that the consequences of gross negligence for the victim are often as damaging, if not more damaging, than the consequences of fraud or wilful misconduct, and given the close analogy between recklessness and wilful misconduct (see the criminal law relating to mens rea), the decision in the Adlington & Co case is to be preferred to the decision of the Appellate Division in the Fibre Spinners case. Consequently, I submit that, even in cases not subject to the CPA, neither a depositee nor a carrier should be permitted to contract out of liability for gross negligence or wilful misconduct, including such gross negligence or wilful misconduct on the part of the servants of such parties.

Ian Chadwick BA LLB PG Dip (Tax) (UKZN) is an attorney at Shepstone & Wylie in Umhlanga.

This article was first published in De Rebus in 2012 (Dec) DR 34.