London Drugs (appellant) delivered a transformer to the Kuehne & Nagel (respondents) for storage in their warehouse. There was a clause in the contract stating that the "warehouseman's liability was limited to $40" unless specifically stated otherwise. No further statements had been made. London Drugs chose not to obtain additional insurance from Kuehne & Nagel and arranged for its own all-risk coverage. In transfer, two employees of Kuehne & Nagel (Bassart and Vanwinkel) negligently dropped the machine causing $33,000 of damage. The employees were found liable in trial, but their appeal was allowed at the Court of Appeal. London Drugs then appealed to the Supreme Court.
- Did the employees owe London Drugs a duty of care?
- Were the employees covered under the limitation of liability clause?
Iacobucci, writing for the majority, finds that the employees did owe a duty of care, and that they were negligent. Therefore the only issue is whether they are excluded from liability under the limitation clause. The main obstacle to this finding is the doctrine of privity of contract; Iacobucci states that the only reason to reject the employee's claim is a strict adherence to this doctrine. He holds that when the parties signed the contract they knew of the clause, and knew that employees of the company would be handling the material. He also says that this change to the doctrine of privity is only incremental, and not large enough to require legislative support. In this case he says that to allow the employees to benefit from the limitation coincides with the agreement of the parties when they signed the contract. Further, there are policy reasons to allow the exclusion – particularly that employees do not expect to be found liable when there are clauses that specifically state that they are excluded.
He sets out a two-step test that must be satisfied in order for employees to be excluded from liability:
- the limitation of liability clause must, either expressly or impliedly, extend its benefit to the employee(s) seeking to rely on it; and
- the employees must have been acting in the course of their employment and must have been performing the very services provided for in the contract between their employer and the other party when the loss occurred.
If both of these provisions are met, then the employees are excluded from liability. They are met in this case, and therefore the employees can benefit from the limitation clause.
The test for employees being party to a contract made by their employer:
- the limitation of clause must (expressly or impliedly) extend the benefit to the employee(s); and
- the employees must have been acting in the course of their employment performing the services provided for in the contract when the loss occurred.