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COURT OF APPEAL (CIVIL DIVISION) [1982] 2 Lloyd's Rep 42 HEARING-DATES: 17, 18 March, 1 April 1982 1 April 1982 CATCHWORDS: Contract -- Exclusion clause -- Damage to vessel -- Derrick being restowed on vessel fell causing damage -- Whether defendants' standard terms and conditions incorporated into contract -- Whether defendants could rely on exclusion clause. HEADNOTE: In September, 1975, a derrick on which certain work had been done was being restowed on the plaintiffs' (Lamport and Holt's) vessel Raphael when the tumbler of the mast topping block carried away or fractured with the result that the derrick fell across the closed hatch cover 2 causing damage. Lamport and Holt claimed £ 24,545.73 as damages from the first defendants (M. & I.) and from the second defendants (R. & S.). It was conceded that it was R. & S. which had both contracted to perform and had actually performed the work of restowing the derrick. R. & S. denied liability contending that since their standard conditions were incorporated in the contract they were entitled to rely on condition 2 which provided inter alia: Except as stated herein we shall not be liable for any damage... suffered by you... and which may arise from or be in any way connected with any act or omission of any person or corporation employed by us or by any sub-contractors or engaged in any capacity herewith... A preliminary issue was ordered to be tried, the issues being inter alia whether the relevant standard conditions were incorporated into the contract and if so then (assuming for the purpose of the preliminary issue that the accident was caused by the negligence of the employees of the defendants) whether the conditions were apt to exclude the defendants' conditions. Held, by Q.B. (Com. Ct.) (ROBERT GOFF, J.), that (1) on the facts there was no doubt that the conditions were incorporated; R. & S.'s conditions were exactly the same as the standard conditions used for some years previously by their parent company M. & I. with which Lamport and Holt had contracted for many years and there was no doubt that Lamport and Holt had ample notice that R. & S. contracted on the terms of those conditions so that the second sub-issue would be decided in favour of R. & S.; (2) although the conditions were headed "Conditions of Sale", on a fair construction of these conditions, they should reasonably have been understood by Lamport and Holt as being applicable so far as relevant, to all contracts entered into by them (Lamport and Holt) with R. & S. whether the contract was one of sale of goods or of services or of both; the heading was not conclusive and it was not be proper to ignore conditions which would only be applicable to transactions other than contracts for sale of goods, so that there was no reason to construe condition 2 as applicable only to contracts of sale of goods; (3) on the ordinary meaning of condition 2, the words which excluded liability for an damage which might arise fromor be in any way connected with an act or omission of any person employed by R. & S. were wide enough to cover negligence on the part of their servants; (4) the submission by the plaintiffs, Lamport and Holt, that the head of damage to which the condition applied could be based on some ground other than negligence would be rejected in that on the facts it was difficult to see what liability wider than negligence could arise to which condition 2 could apply; condition 2 on its true construction was applicable to exclude liability in cases of negligence and this sub-issue would also be decided in favour of R. & S. On appeal by Lamport and Holt (the plaintiffs): Held, by C.A. (STEPHENSON, DONALDSON and MAY, L.JJ.), that (1) although there was no express reference to negligence in cl. 2, nor were there words which could be regarded as synonmous therewith, the words "any act or omission" were wide enough to comprehend negligence (see p. 45, col. 2; p. 48, cols. 1 and 2; p. 50, col. 2; p. 52, col. 1); (2) there were no other acts or omissions from which cl. 2 could exempt the second defendants except acts or omissions too fanciful to have been in the contemplation of the parties when they made the contract incorporating cl. 2; if cl. 2 applied to negligence at all, it certainly applied to negligence in the performance of the contract; the learned Judge was right in his conclusions and the appeal would be dismissed (see p. 46, cols. 1 and 2; p. 47, col. 1; p. 50, cols. 1 and 2; p. 52, col. 1). Canada Steamship Lines Ltd. v. R., [1952] 1 Lloyd's Rep. 1, considered and applied. CASES-REF-TO: Alderslade v. Hendon Laundry Ltd., (C.A.) [1945] 1 K.B. 189; Canada Steamship Lines Ltd. v. R., (P.C.) [1952] 1 Lloyd's Rep. 1; [1952] A.C. 192; Donoghue v. Stevenson, (H.L.) [1932] A.C. 562; Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd., (C.A.) [1973] 1 Lloyd's Rep. 10; [1973] Q.B. 400; Gilroy v. Price, [1893] A.C. 56; Hollier v. Rambler Motors (A.M.C) Ltd., [1972] 2 Q.B. 71; Price & Co. v. Union Lighterage Co., [1904] 1 K.B. 412; Rutter v. Palmer, [1922] 2 K.B. 87; Smith v. South Wales Switchgear Co. Ltd., [1978] 1 W.L.R. 165; White v. john Warwick & Co., [1953] 1 W.L.R. 1285. INTRODUCTION: This was an appeal by the plaintiffs, Lamport & Holt Lines Ltd. from the decision of Mr. Justice Robert Goff ([1981] 2 Lloyd's Rep. 659) given in favour of the second defendants, Coubro & Scrutton (Riggers and Shipwrights) Ltd. and holding inter alia that the second defendants were entitled to rely on the exclusion clause in their standard terms and conditions against the plaintiffs' claim for damage done to their vessel Raphael while the defendants were restowing a derrick on the vessel. The action against the first defendant, Coubro & Scrutton (M. & I.) Ltd. was dismissed. The further facts are stated in the judgment of Lord Justice Donaldson. COUNSEL: Mr. Michael Beloff, Q.C. and Mr. Charles Hollander for the plaintiffs; Mr. Richard Aikens for the defendants. JUDGMENT-READ: Judgment was reserved. Thursday, Apr. 1, 1982 PANEL: Before Lord Justice STEPHENSON, Lord Justice DONALDSON and Lord Justice MAY JUDGMENTBY-1: Lord Justice STEPHENSON JUDGMENT-1: Lord Justice STEPHENSON: I ask Lord Justice Donaldson to read the first judgment. JUDGMENTBY-2: Lord Justice DONALDSON JUDGMENT-2: Lord Justice DONALDSON: This is an appeal by Lamport & Holt Lines, the well known shipowners, against a judgment of Mr. Justice Robert Goff given on May 22, 1981, whereby he dismissed their claim against the second defendants, Coubro & Scrutton (Riggers and Shipwrights) Ltd. He had also dismissed the claim against the first defendants, but that decision is accepted (see [1981] 2 Lloyd's Rep. 659). The point is a very short one, turning upon the true construction of the second defendants' conditions of business. The facts are even shorter. In September, 1979, the plaintiffs employed the second defendants to do work which, inter alia, involved stowing a derrick on board their m.v. Raphael in order to make her ready for sea. While this was being done, the derrick fell on to a hatch cover doing very considerable damage. For the purposes of the appeal, it is to be assumed that this incident resulted from the negligence of employees of the second defendants. The second defendants rely upon their business conditions, and in particular upon cl. 2, those business conditions being in the following terms: -- 1. GENERAL No prior representation made by us or variation of these terms shall be recognised by us unless it is agreed and confirmed by us in writing. The terms or conditions that may be written or printed on your enquiry/order shall not apply to us so far as such terms and conditions are at variance with the terms and conditions stated herein. 2. LIABILITY Except as stated herein (a) we shall not be liable for any damage loss injury costs or expenses suffered by you or your servants or agents and which may arise from or be in any way connected with any act or omission of any person or corporation employed by us or by any sub-contractors or engaged in any capacity in connection herewith and (b) you shall indemnify us against all loss damages claims and expenses whatsoever incurred by us in relation to or arising out of the performance of our obligations. 3. GUARANTEE If within a period of 3 months of our supplying or fitting new material, such material needs replacement or repair, either by reason of such material being faulty or on account or our workmanship, we will effect such replacement or repair at our option but our liability shall be limited to such replacement or repair and we will not be liable for any further expense. Such material must be returned at your expense to our works. We hereby expressly eclude any other liability for any form of accident, consequential loss or damage whatsoever and howsoever arising. Except as expressly set out herein, every condition warranty or representation whatsoever, whether statutory or otherwise, is excluded. 4. DELIVERY (a) We will make every effort to deliver by any date quoted but any such date is approximate only and no liability can be accepted by us for failure to meet such date. Delays and possibly price increases will occur if we do not receive promptly all drawings and information to carry out the work. (b) Prices quoted by us do not include parking or delivery charges unless specifically mentioned. (c) Goods delivered by our transport will be at your risk immediately unloading commences. Those not delivered by our transport will be at your risk from the time of delivery to the carrier. 5. REPAIRS All goods sent to us for repairs or proceeding are at all times at your risk. 6. GOODS ON APPROVAL Such goods will be considered to be sold unless returned carriage paid to our works within two weeks of delivery to you. 7. SPECIFICATION In order that way may where possible conform to the relevant British Standard or accepted engineering practice all our designs and specifications are subject to change without notice as are all technical information, catalogues and drawings published or supplied by us. 8. FORCE MAJEURE We shall under no circumstances be under any liability for delays or other failures or omission caused by or resulting from strikes lockouts or without prejudice to the generality of the foregoing any cause beyond our control. We shall be relieved of liability under the contract if and to the extent to which the fulfilment of any obligation is prevented or rendered impracticable as a direct or indirect consequence of war (including hostilities whether was has been declared or not) or of conforming to any statute or to any rules regulations orders or requisitions made by any Government Department or local or other competent authority and in such a case you shall pay for the work done or expenses incurred by us and the contract shall be at an end. 9. CLAIMS OR COUNTERCLAIMS A claim or counterclaim shall not be made the reason for you deferring or withholding payment of monies payable to us. 10. PRICE VARIATION The charges and prices stated in our quotation are subject to variation without notice in accordance with any change thereafter in the market prices of materials to be supplied or in wage levels. 11.PAYMENT TERMS Net monthly account. 12. LAW Any contract arising herefrom shall be subject to English law. The learned Judge held that cl. 2 of these conditions provided the second defendants with effective protection. Mr. Beloff, for the plaintiffs, submits that the learned Judge was in error because the first part of the clause is not sufficiently widely drawn to cover liability for negligence and the second part, containing the indemnity, must be confined to third party claims. Mr. Aikens, for the second defendants, does not rely upon the indemnity provisions and accordingly I need say no more about them as such, although they are part of the clause and have to be taken into account when construing the first part. The starting point of the argument for both parties to the appeal is the opinion of the Judicial Committee of the Privy Council in Canada Steamship Lines Ltd. v R., [1952] 1 Lloyd's Rep. 1; [1952] A.C. 192, which was delivered by Lord Morton of Henryton. At pp. 8 and 208 Lord Morton said: Their Lordships think that the duty of a court in approaching the consideration of such clauses may be summarised as follows: -- (1) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called "the proferens") from the consequence of the negligence of his own servants, effect must be given to that provision. (Any doubts which existed whether this was the law in the Province of Quebec were removed by the decision of the Supreme Court of Canada in The Glengoil Steamship Company v. Pilkington). (2) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens.If a doubt arises at this point, it must be resolved against the proferens (in accordance with article 1019 of the Civil Code of Lower Canada: "In cases of doubt, the contract is interpreted against him who has stipulated and in favour of him who has contracted the obligation"). (3) If the words used are wide enough for the above purpose, the court must then consider whether "the head of damage may be based on some ground other than that of negligence", to quote again Lord Greene in the Alderslade case. The "other ground" must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; but subject to this qualification, which is not doubt to be implied from Lord Greene's words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants. Although the Judicial Committee was concerned with the law of Canada, Lord Morton's remarks are equally applicable to the law of England, and have indeed been applied by this Court in Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd., [1973] 1 Lloyd's Rep. 10; [1973] Q.B. 400, and by the House of Lords in Smith v. South Wales Switchgear Co. Ltd., [1978] 1 W.L.R. 165. On the other hand, it would be a fatal error to regard them as if they were the words of a codifying and, still worse an amending, statute. They provide a very lucid and useful summary of well settled law, but have to be construed in the light of that law. Thus Canada Steamship was cited to this Court in Hollier v. Rambler Motors (A.M.C.) Ltd., [1972] 2 Q.B. 71, but it is mentioned in none of the judgments. Instead reliance was placed upon the older cases of Price & Co. v. Union Lighterage Co., [1904] 1 K.B. 412; Rutter v. Palmer, [1922] 2 K.B. 87 and Alderslade v. Hendon Laundry Ltd., [1945] 1 K.B. 189. Lord Justice Salmon, giving the leading judgment, expressly said at p. 80 that Lord Greene's judgment in Alderslade was not to be taken "au pied de la lettre" or construed as a statute, that it was unreserved and was clearly intended to do no more than restate the effect of the authorities as they then stood. But when it came to Smith v. South Wales Switchgear (sup.) Lord Salmon agreed with the speeches of Lord Fraser of Tullybelton and Lord Keith of Kinkel who based themselves on Canada Steamship without suggesting that there was any inconsistency between that case and Hollier's case. It is the third of Lord Morton's propositions which is liable to mislead, unless full force is given to his caveat that the "other ground" must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it. The duty of the Court is to divine from the words used what, in the circumstances in which they were used, the parties must have intended by their bargain. When parties make an agreement governing their future relationship, human nature being on balance more inclined to optimism than pessimism, the parties are more likely to be thinking in terms of non-negligent rather than negligent performance of the contract. The law reflects this fact of life by assuming that if there are two potential grounds of liability, both of them real and foreseeable, but one involves negligence, prima facie any words of exemption will be directed at the non-negligent ground of liability. Thus in Rutter v. Palmer, (sup.) Lord Justice Bankes contrasts the position of the common carrier and the railway carrier with that of the ordinary bailee. The former operate subject to liabilities independently of negligence; the latter do not. Similar words may therefore protect the bailee from liability for negligence, although they will not protect the carriers. A similar approach has been adopted by the law in relation to the implied warranty of initial seaworthiness. Here the parties are more likely to contemplate negligence than breach of the initial warranty, and accordingly an exception which in terms covers negligence does not protect the shipowner where the negligence has led to breach of the warranty: Gilroy v. Price, [1893] A.C. 56. Similarly in Canada Steamship, Lord Morton, in applying his third test, considered three well defined "other grounds", which were quite distinct from negligence. In so doing he applied an officious bystander test at pp. 9 and 210: ... their Lordships are not prepared to assume that the obligations imposed on lessors by the Civil Code were not in the minds of the parties [ and: ]... It is difficult to imagine the Crown saying to the company when the lease was being negotiated: "Notwithstanding that the Crown agrees to maintain the shed, at its own expense, throughout the term of the lease, and notwithstanding that such an agreement implies an obligation to use due care in its performance, if the Crown's servants set about the work of repair in such a negligent manner that the shed and all the goods therein are destroyed, you are to have no claim for damages against the Crown", and if the Crown had made such a suggestion, it seems unlikely that the company would have accepted it. In the present case there is no express reference to negligence in cl. 2, nor are there words which can be regarded as synonymous therewith. On the other hand, the words "any act or omission" are certainly wide enough to comprehend negligence. Lord Atkins' classic definition in Donoghue v. Stevenson, [1932] A.C. 562 at p. 580, uses those very words: ... You must take reasonable care to avoid acts and omissions which you can reasonably foresee would be likely to injure your neighbour. The fact that the word "whatsoever" appears in the second part of cl. 2 and not in the first part, does not, as Mr. Beloff submitted, artificially narrow the scope of the first part. Indeed, were the word to be included in the first part so that the clause read "any damage, loss, injury, costs or expenses whatsoever suffered by you", its meaning would be quite unaffected. The problem, and the only real problem, is whether there is some substantial alternative ground of liability, to which the parties must have been intending to refer with a view to its exclusion. In answering this question, due regard must be paid to other exclusions, and, in the case of the guarantee clause, assumptions of liability. Before Mr. Justice Robert Goff Mr. Beloff made three suggestions for other grounds of liability: (i) late delivery, (ii) misperformance by, for example, stowing the derrick in the wrong place and (iii) contractual liability for an act which is also a tort. The learned Judge dismissed the first as "fanciful", the second as defeating the very purpose of the contract and the third as being inappropriate to a contract of this nature. Before this Court Mr. Beloff has to some extent changed his ground and the very fact that he has had to do so suggests that it is by no means clear that there is an alternative substantial, i.e., not fanciful, ground of liability. Late delivery has become the delayed provision of services. Misperformance remains, as does a contractual liability parallel with a tortious liability, but he now adds nuisance, conversion and detinue. Delay. Clause 4 makes specific provision for delay in delivery, but the wording is more appropriate to contracts of sale than to contracts for the provision of services. In the Court below it was contended that, for this reason and because the conditions are headed "General Conditions of Sale", none of the clauses had any application to a contract for services. That contention was rejected by the learned Judge and his view is now accepted. In my judgment, if the plaintiffs had been claiming damages for delayed performance, the only question would have been whether cll. 4 or 8 provided the second defendants with protection. If they did not, I do not think that cl. 2 would have done so. Delay is a well known head of damage and if cl. 2 was concerned with it, I should have expected the clause to read "any loss, damage, injury, delay, costs or expenses" or otherwise to have made some express reference to delay. Misperformance. This may or may not involve negligence. Let us assume a contract for painting a derrick which called expressly for the application of one coat of metallic primer, one undercoat and a top coat. The omission of the priming coat would constitute complete nonperformance of part of the contract and the parties, on the wording of cl. 2, cannot have contemplated that the shipowner would be without a remedy. The alternative form of misperformance is a failure to apply the coatings properly. This is contractual neglect or default. There is no obvious reason why, in framing cl. 2, the parties should have been, or be deemed to have been, addressing their minds to contractual neglect rather than tortious neglect or vice versa. Parallel liabilities in contract and tort. This was referred to as the White v. Warwick point, a case reported in [1953] 1 W.L.R. 1293. That case concerned the hire of a bicycle and the contract provided that -- ... nothing in this agreement shall render the owners liable for any personal injuries. The basis of the decision was that the contract, on its true construction, would, in the absence of this clause, have imposed a warranty of fitness for the purpose.The clause was therefore held to negative this warranty, while leaving liability in tort unaffected. But I know of no case in which words of exclusion have been held to operate in relation to a liability for breach of an obligation in contract, but not to affect liability for breach of the self-same obligation in tort. Indeed, the whole concept of a hypothetical discussion between two parties, other than law students, which led to such an agreement is patently absurd. Nuisance, conversion and detinue. Private nuisance can take the form of (i) encroaching upon a neighbour's land; (ii) causing physical damage to a neighbour's land, building, works or vegetation upon it; or (iii) unduly interfering with a neighbour in the comfortable and convenient enjoyment of his land: see Clark & Lindsell (15th ed.) par. 20-03. It is not suggested that either party could have contemplated a direct liability in nuisance. What is suggested is that the plaintiffs might be sued by a third party in nuisance in circumstances in which the second defendants were joint tortfeasors and that cl. 2 was intended to negative their liability to indemnify the plaintiffs. Suffice it to say that I am not surprised that Mr. Beloff has only now thought of this. If the officious bystander had raised the point with the parties when they were negotiating the contract, I think that he would still be trying to explain to them what he had in mind. He might have had less difficulty in explaining the possibility of a liability in conversion or detinue. He could have postulated servants of the second defendants installing one of the plaintiffs' derricks on the vessel of another shipowner and that vessel sailing away, leaving the plaintiffs to sue in conversion or detinue. It seems to me inconceivable that the plaintiffs could have accepted that in such a situation they should be without any remedy against the second defendants. Finally, Mr. Beloff put forward a new submission. Initially I thought that I was being obtuse in not understanding it, but I was relieved to find that my Lords appeared to suffer from a similar disability. Eventually it appeared that it amounted to this. Viewed as conditions applicable to a contract of sale, cl. 3 is of such an all-embracing character that cl. 2 can only relate to a tortious liability incurred quite extraneously to the performance of the contract. The example given was negligently dropping the goods during the process of delivery. I am not sure that this is extraneous to the performance of the contract of sale, but let that pass. Mr. Beloff then submits that in relation to a contract for services, cl. 3 would be inapplicable, but cl. 2 would still be limited in its application to negligence which was extraneous to the contract. The negligent dropping of the derrick was not extraneous to the contract and therefore is outside the scope of cl. 2. Mr. Beloff frankly admitted that this was an argument of last resort. Not only is it an argument of last resort, it is also plainly wrong. If cl. 2 applies to negligence at all, it certainly applies to negligence in the performance of the contract. I would dismiss the appeal. JUDGMENTBY-3: Lord Justice MAY JUDGMENT-3: Lord Justice MAY (read by Lord Justice STEPHENSON): Lord Justice Donaldson has set out the facts of this case and the terms of the respondents' conditions of sale and accordingly I need not repeat them herein. As he has indicated, the question for the learned Judge below and also for us is purely one of construction. The former founded his judgment upon the well-known passage from the opinion of the Privy Council delivered by Lord Morton of Henryton in Canada Steamship Lines Ltd. v. R., [1952] 1 Lloyd's Rep. 1; [1952] A.C. 192, at pp. 8 and 208, which has already been quoted. Counsel for both parties before us also based their submissions upon Lord Morton's three tests. Insofar as the first of these is concerned, Counsel for the appellants drew our attention to two short passages in speeches in the recent decision of Smith v. South Wales Switchgear Co. Ltd., [1978] 1 W.L.R. 165. At p. 168 Viscount Dilhorne said: I agree with my noble and learned friend, Lord Fraser, that it did not expressly indemnify the respondents from the consequences of their or their servants' negligence, and so did not satisfy the first test. To satisfy that there must be a clear and unmistakable reference to such negligence; that is shown by the words "if there is no express reference to negligence" with which the second test begins. Lord Fraser of Tullybelton in his speech, at p. 172, said: The argument was that the words "any liability, loss claim or proceedings whatsoever" amounted to an express reference to such negligence because they covered any liability however caused. The argument was supported by reference to the opinions of Lord Justice Buckley and Lord Justice Orr in Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd., [1973] Q.B. 400, 420 and 421, where great emphasis was placed on the word "whatsoever" occurring in an indemnity clause as showing that the indemnity was intended to apply to all claims and demands however caused including claims for negligence. I agree with the decision in that case and with the statement by Lord Justice Buckley at page 421, that the clause was one "which cannot sensibly be construed as subject to an implied qualification" but I am unable to agree with the learned Lord Justice's conclusion that the clause contained "an agreement in express terms" to indemnify the proferens. I do not see how a clause can "expressly" exempt or indemnify the proferens against his negligence unless it contains the word "negligence" or some synonym for it and I think that is what Lord Morton must have intended, as appears from the opening words of his second test. Counsel then challenged the Judge's finding that the wording of cl. 2 was wide enough, in its ordinary meaning, to cover negligence on the part of the respondents' servants. He contrasted the presence of the word "whatsoever" in the second part of cl. 2 with its absence in the first part, particularly in the light of the discussion of the effect of the use of the word "whatsoever" in this type of condition in the judgment of Lord Justice Buckley in the Gillespie Bros. case, to which Lord Fraser referred in his speech in Smith v. South Wales Switchgear Co. Ltd., which I have already quoted. Counsel also drew our attention to the wording both of cl. 3 and cl. 4 of the respondents' conditions which he submitted, and I agree, are certainly drafted more comprehensively than the first part of cl. 2 with which we are principally concerned. His argument was that where one finds the draftsman using comprehensive wording in conditions which quite clearly do and were intended to cover all liabilities, including those founded in negligence, then if that same draftsman in the same conditions uses elsewhere less comprehensive language, the inference must be that in the latter case he was not intending that the milder wording should have the effect contended for. In reply to these arguments, Counsel for the respondents first suggested to us somewhat tentatively that the width of the first part of cl. 2 was such that, although there was no express reference to the word "negligence" itself, there was sufficient reference to an adequate synonym for it, particularly with the use of the words "any act or omission". I can deal with this point at once. Having regard to the passages from the speeches in the decision in Smith's case I think that the lack of enthusiasm in the respondents' Counsel's submissions on Lord Morton's first test was entirely justified. Although there may be a case involving special circumstances in the future, when a different view may be justified, I think that Lord Morton's first test can only be satisfied if the relevant condition does contain expressly the word "negligent" of "negligence". I am quite clear that cl. 2 in the present case does not satisfy this first test. In so far as the second test if concerned, Counsel for the respondents submitted that the learned Judge below was right in holding that the wording of cl. 2 was wide enough, in its ordinary meaning, to cover negligence on the part of the servants of the proferens. It is unnecessary to refer to all his ancillary arguments on this point. Suffice it to say that he pointed first to the opening words of cl. 2, "Except as stated herein...", submitting that this clearly involved reading the first part of cl. 2 subject to the other general conditions, in particular cll. 3 and 4, under which the respondents did accept liability in the circumstances there set out. At the outset, therefore, in construing cl. 2 one has to bear in mind that it is not seeking to absolve the respondents from the liabilities set out in cll. 3 or 4, or indeed any individual terms which any particular contract entered into by the respondents on the terms of these general conditions might itself also contain. Counsel then pointed to the use of the phrase "act or omission" and submitted that the word "omission" must, again having regard to the opening words of cl. 2, comprise something not within the force majeure cl. 8. Thus, he argued, in its place in cl. 2 the word "omission" was certainly wide enough to cover negligence.Counsel was a little reluctant to accept an argument that the whole of the phrase "any act or omission" was itself wider, and wide enough to cover negligence, because he thought he foresaw that if cl. 2 could be held to cover other heads of liability and thus fail to pass Lord Morton's test three, this would be more likely through the use of the word "act" than "omission". He felt that if he over-stressed the width of the relevant phrase in cl. 2 in order successfully to pass test two, then he might be giving a hostage to fortune when he came to jump the third fence. Although negligence can be defined as a failure to take reasonable care, and thus in one sense an "omission", in many cases the actual negligence giving rise to legal liability comprises a positive act, although the doing of it involves the necessary failure to take care. Thus for my part I would not be satisfied that the word "omission" on its own is sufficient to cover all possible examples of potential negligence. Whatever may be the consequences when one comes to apply test three, I think that one must look to the whole of the phrase "any act or omission of any person". When one does, as with the learned Judge in the Court below, I have no doubt that the wording of cl. 2 does pass Lord Morton's second test: it is certainly wide enough on its ordinary meaning to cover negligence on the part of the respondents, their servants or agents. Before I turn to the third of Lord Morton's tests, I should refer to the point which Lord Justice Donaldson has also mentioned.Underlying Counsel for the respondents' particular submissions on the respective tests there was a more general one. This was to emphasize that although they are described as tests, this is really a misdescription. They are and were only intended to be guidelines, not words in a statute, and at the end of the day the duty of the Court is just to construe the relevant clause. With Lord Justice Donaldson, I agree with this approach. Further, although Lord Morton's use of the words "so fanciful or remote" could lead one to suppose that an exemption clause would only pass test three if one could discard all possible other grounds of potential liability other than those which were unreal and speculative, I do not think that this is a correct interpretation of this passage from his opinion. The words "so fanciful or remote" in the third test are followed by the phrase "that the proferens cannot be supposed to have desired protection against it". Secondly, when on pp. 9 and 210 of the reports the learned Law Lord turned to consider the actual construction of the clauses which were in issue in the Canada Steamship case, he considered and dismissed the likelihood not only of a colloquy between the contracting parties about the meaning of the clauses before the lease in that case had been executed, but also that in such a discussion the proferee would have accepted a clause exempting the Crown's liability for the negligence of its servants. In my opinion, all that one may properly read Lord Morton as saying is that where, under his third test, the Court considers whether the head of damage may be based on some ground other than that of negligence, it should discard any ground to which, on a reasonable assessment of all the circumstances at the time the underlying contract was made, it is unlikely that the parties would have addressed their mind. Such an approach indeed underlines the fact that the exercise upon which the Court is engaged in these cases is one of construction, that it is one of deciding what the parties meant or must be deemed to have meant by the words they used; the guidelines or tests which are referred to in the many authorities are only to be used by the Courts as aids to the successful and correct solution of such exercise. Having regard to Lord Morton's reference in his opinion to the well known judgment of Lord Greene, M.R., in Alderslade v. Hendon Laundry Ltd., [1945] 1 K.B. 189, upon which Courts so frequently rely in cases about exemption clauses, I think it right to refer to one other line of argument which was addressed to us by the respondents. Counsel submitted, and I agree, that the modern law on this topic starts effectively with the judgments of the Court of Appeal in Rutter v. Palmer, [1922] 2 K.B. 87. I need quote only a brief passage from the judgment of Lord Justice Scrutton at p. 92: In construing an exemption clause certain general rules may be applied: First the defendant is not exempted from liability for the negligence of his servants unless adequate words are used; Secondly, the liability of the defendant apart from the exempting words must be ascertained; then the particular clause in question must be considered; and if the only liability of the party pleading the exemption is a liability for negligence, the clause will more readily operate to exempt him. In Lord Greene's judgment in Alderslade's case this test or aid to construction was expressed in this passage on p. 192: The effect of those authorities can I think be stated as follows: where the head of damage in respect of which limitation of liability is sought to be imposed by such a clause is one which rests on negligence and nothing else, the clause must be construed as extending to that head of damage because it would otherwise lack subject-matter. Where, on the other hand, the head of damage may be based on some other ground that that of negligence, the general principle is that the clause must be confined in its application to loss occurring through that other cause, to the exclusion of loss arising through negligence. If read literally this last passage extends the law as expressed by Lord Justice Scrutton in the earlier case. It was on this point that Counsel then referred us to the decision in Hollier v. Rambler Motors (A.M.C.) Ltd., and in particular to a short passage from the judgment of Lord Justice Salmon, at p. 80 where in the course of discussing, and dismissing, an argument based upon a strict application of the words used by Lord Greene in Alderslade's case he said -- I do not think that Lord Greene, Master of the Rolls, was intending to extend the law... If it were so extended, it would make the law entirely artificial by ignoring that rules of construction are merely our guides and not our masters; in the end you are driven back to construing the clause in question to see what it means. The decision and judgments in Hollier's case were subsequently referred to without any disapproval in some of the speeches in Smith v. South Wales Switchgear, upon the hearing of which Lord Justice Salmon (as he had been) was then a member of their Lordships' House. In these circumstances Counsel submitted, and I respectfully agree with Lord Salmon, that Lord Greene was not intending to extend the law in his judgment in Alderslade's case. The word "must" in the relevant passage which I have already quoted should be read as "should usually" or in some such way consistent with the guide to construction stated by Lord Justice Scrutton in Rutter v. Palmer. Thus, if an exemption clause of the kind we are considering excludes liability for negligence expressly, then the Courts will give effect to the exemption. If it does not do so expressly, but its wording is clear and wide enough to do so by implication, then the question becomes whether the contracting parties so intended. If the only head of liability upon which the clause can bite in the circumstances of a given case is negligence, and the parties did or must be deemed to have applied their minds to this eventuality, then clearly it is not difficult for a Court to hold that this was what the parties intended -- that this is its proper construction. Indeed, to hold otherwise would be contrary to commonsense. On the other hand if there is a head liability upon which the clause could bite in addition to negligence then, because it is more unlikely than not that a party will be ready to excuse his other contracting party from the consequences of the latter's negligence, the clause will generally be construed as not covering negligence. If the parties did or must be deemed to have applied their minds to the potential alternative head of liability at the time the contract was made then, in the absence of any express reference to negligence, the Courts can sensibly only conclude that the relevant clause was not intended to cover negligence and will refuse so to construe it. In other words, the Court asks itself what in all the relevant circumstances the parties intended the alleged exemption clause to mean. Thus one turns to the third aspect of this case, namely the application of Lord Morton's third test or guideline. My Lord has listed the various alternative heads of liability which the appellants contend could have been material in the present case, and in consequence why cl. 2 should be construed as limiting liability only in respect of them, rather than any liability which might arise in negligence. Against such contentions Counsel for the respondents deployed very detailed arguments why, for instance, liability in private nuisance just could not have arisen in the circumstances of the instant case. With respect to both sides in this appeal, I think that this is an over-legalistic approach to this problem.When two commercial concerns contract with one another, they do not, neither should they be deemed to, concern themselves with the legal subtleties of the law of private nuisance or the like. They in fact approach the problem, and so also should the Courts, with a much broader brush. They consider, or must be deemed to have in mind, their respective responsibilities one to another more from a factual standpoint than from a legalistic one. In seeking to apply Lord Morton's third test, we should not ask now whether there is or might be a technical alternative head of legal liability which the relevant exemption clause might cover and, if there is, immediately construe the clause as inapplicable to negligence. We should look at the facts and realities of the situation as they did or must be deemed to have presented themselves to the contracting parties at the time the contract was made, and ask what potential liabilities the one to the other did the parties apply their minds, or must they be deemed to have done so. Attempting to do this, I am quite satisfied that the parties in this case would have said to themselves that the contract itself laid down what the respondents had agreed to do thereunder. As I have said, I think that the opening words of cl. 2 would prevent the respondents from thereby resisting a claim for loss due to the fact that they had only applied two coats of paint instead of three. I do not think that the parties did or must be deemed to have applied their minds to the respondents' possible liability in private nuisance or to the other more esoteric liabilities put forward by the appellants in argument and to which my Lord has referred. On the other hand, if one asks whether the parties must at the least be deemed, in the context of cl. 2, to have considered the question of negligence on the part of the respondents' servants or agents, and to have provided where in such event liability therefor should ultimately rest, I think that as a matter of construction, bearing in mind all the guidelines to which I have referred, the only answer to the first question can be in the affirmative, and to the second that such liability was to be accepted by the appellants. For these reasons I would dismiss this appeal. JUDGMENTBY-4: Lord Justice STEPHENSON JUDGMENT-4: Lord Justice STEPHENSON: We have been treated, I thankfully acknowledge, to a strictly limited selection from the all too numerous authorities on the construction of exclusion (and restriction) of liability clauses and indemnity clauses in contracts. The upshot of those authorities is, in my opinion, this. There are certain considerations and principles to be kept in mind in interpreting all such clauses. As with all written contracts the Court starts by trying to discover the intention of the parties from the language they have used in the particular clause, considered not in isolation but in the context of the whole contract. Common sense then tells the interpreter that -- ... it is inherently improbable that one party to the contract should intend to absolve the other party from the consequences of the latter's own negligence... [as Lord Justice Buckley said in Gillespie Bros. & Co. Ltd. v. Roy Bowles Transport Ltd., [1973] 1 Lloyd's Rep. 10; [1973] Q.B. 400 at pp. 19 and 419 of these reports, with the approval of Viscount Dilhorne in Smith v. South Wales Switchgear Co. Ltd., [1978] 1 W.L.R. 165 at p. 168 of the report of that case]. So the party relying on such clauses needs plain words to cover his negligence and its consequences and that can be done either expressly, by using the word "negligence" or "negligent", or by necessary implication. These are the first two heads of the Court's duty summarized by Lord Morton of Henryton in giving the judgment of the Privy Council in the Canada Steamship Lines case, [1952] 1 Lloyd's Rep. 1; [1952] A.C. 192, as interpreted by the House of Lords in Smith v. South Wales Switchgear Co. Ltd., [1978] 1 W.L.R. 165. The Courts are not often confronted with a clause so barefaced as to claim exemption for, or an indemnity against, a party's own negligence in express terms. The reason is no doubt that referred to by Lord Justice Salmon in Hollier v. Rambler Motors (A.M.C.) Ltd., [1972] 2 Q.B. 71, at p. 78 of the report, that merchants and others are "a little shy" of so bluntly warning their customers of a protection for one party so unattractive to the other. But what the parties to a contract contemplate is its performance, the performance of its primary and ancillary obligations, by parties competent to perform them, and one party will not necessarily refuse to accept the risk of the other's want of care and competence in performing those obligations. Accordingly, that risk may be accepted, and the reports supply instances of attempts to construe the language of such clauses as covering negligence by necessary implication. When a party attempts that task, he shoulders the burden of proving that the language is plainly wide enough and that the implication is necessary. Even if the words are wide enough, the implication is not necessary nd will not be made if there is a head of damage based on some ground other than that of the party's own negligence, which is not fanciful or remote but reasonably likely to have been contemplated by him as requiring that he should be protected against it. If there is another such likely head of damage, then on its true construction his clause will be taken to protect him against liability for that damage and not against damage resulting from his own negligence. If there is no such head of damage, the Court is under no duty to seek out, or think up, remote and far-fetched possibilities in order to defeat the intention, which would otherwise be derived from the plain meaning of the clause, to protect the party relying on it from liability for negligence. This is, in my judgment, the true effect of Lord Morton's third head of the Court's duty in the Canada Steamship Lines case. In formulating it, he is considering the supposed intention of the proferens, the party desiring protection, and that is made equally plain or plainer by what he says at pp. 9 and 210 in rejecting the Crown's argument that other claims for damages than claims on the ground of negligence are too fanciful and remote to have been within the contemplation of the parties, and holding that the Crown might well have desired to protect itself from such claims but not from claims for damages resulting from the negligence of its servants. I find no inconsistency in the two passage: it is only a head of damage or claim for damages within the contemplation of the parties when the contract is made which is "fatal to the proferens" who relies on a clause wide enough to cover negligence on the part of his servants. Lord Morton was summarizing "the duty of a Court in approaching the consideration of such clauses", and whether his three formulations of that duty are called "principles" or "tests" or "rules" or "rulings" or "guidelines", they are not provisions in a statute but aids to interpretation, and the Court's duty is always to construe the clause in question to see what it means, what it plainly means to any ordinarily literate and sensible person, even if that results in the clause having no effect; as in Hollier's case, where the defendants' only liability was for negligence, yet the language of the exemption clause was held, even if incorporated in the contract, to be not clear enough to exclude liability for negligence. That the Court's task is to construe an exemption clause (or an indemnity clause) according to ordinary principles with the assistance of those set out in the Canada Steamship case is clear not only from the judgment of the Privy Council in that case but also from the judgments of this Court in Hollier's and Gillespie's cases, especially the judgment of Lord Justice Salmon in Hollier's case at p. 80 of the report, approved by Lord Denning, M.R., in Gillespie's case at pp. 15 and 414 of the reports and by Viscount Dilhorne in Smith's case at p. 108 of the report. There is no artificial rule to compel the Court either to construe a clause as covering negligence because it has no other subject matter or as not covering negligence because it might have a subject matter too improbable and far-fetched to have been contemplated and covered. The first rule comes from taking too literally the language of Lord Greene, M.R., in Alderslade v. Hendon Laundry Ltd., [1945] 1 K.B. 189 instead of Lord Justice Scrutton's formulation in Rutter v. Palmer, [1922] 2 K.B. 87; and the second from disregarding the important qualification which the Privy Council in Canada Steamship Lines v. R. imposed on Lord Greene's formulation in Alderslade's case. In construing these clauses it may be necessary to limit the width of the language taken literally by the context. But I doubt if a minute analysis of the language of other clauses in the same contract is a safe guide to the meaning of the clause in question, and there are even limits to the help to be derived from the construction put by the Courts on other clauses in other contracts. It may be a matter for wonder that previous decisions have not led to the use of language which the Court would be bound to construe as covering liability for negligence, and a matter for thankfulness that the Unfair Contract Terms Act, 1977 has limited the area where there is a need for such construction. But though such construction must be a strict construction against the party putting the clause forward, it must not be a strained construction restricting the plain meaning of the clause simply because it does not contain particular words used elsewhere. The wider the cover (it is difficult not to use words of insurance) that clause gives, the likelier it will embrace liabilities other than negligence. So many a party putting forward such a clause to protect him might find it has got him out of the frying pan of the Privy Council's second principle into the fire of its third. I accordingly approach cl. 2 of the general conditions of sale with these aids to illuminate the path to the right interpretation of it. The clause contains no express exemption of liability for negligence. So I ask first whether it plainly means to any ordinarily literate and sensible person "We shall not be liable for any negligence on our part". My answer, like the Judge's, is Yes, for the reasons given by my Lords. The first sentence of cl. 2 is, in my judgment, wide enough to exempt the second defendants from liability for negligent acts or omissions, whether the sentence is considered in isolation or in the context of the rest of the clause, the other clauses and the contract as a whole. Next, there are no other acts or omissions from which cl. 2 could exempt the second defendants except acts or omissions too fanciful or remote to have been in the contemplation of the parties when they made the contract incorporating cl. 2. That is the conclusion reached by my Lords after exploring in some depth all the other possible heads of damage suggested by Mr. Beloff, and I agree with it. I accordingly agree with the Judge and my Lords on this point also, and would dismiss the appeal. DISPOSITION: Appeal dismissed with costs; leave to appeal to House of Lords refused. SOLICITORS: Alsop Stevens Batesons & Co. Liverpool; Ince & Co. |