Facts[]
Musgrove, an employee of Securicor, started a fire at Photo Production's factory to warm himself while at work and accidentally burnt it down, costing £615,000. Securicor argued that an exclusion clause in its contract meant they were not liable, as it said "under no circumstances be responsible for any injurious act or default by any employee . . . unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of [Securicor]." Photo Productions argued that the clause could apply under the doctrine of fundamental breach; that the breach of the contract went to the root of the contract and invalidated the whole agreement, and extinguished the exclusion clause.
Denning, at the Court of Appeal, held that the doctrine of fundamental breach did apply as in Karsales (Harrow) Ltd. v Wallis and Securicor was liable, which they appealed.
Rule of law[]
- Does an exemption clause excuse a fundamental breach?.
Decision[]
Appeal allowed.
Reasons[]
Lord Wilberforce, writing for the Court, overturned Denning and found that the exclusion clause could not be relied upon. Wilberforce explicitly rejected Denning's application of the doctrine of fundamental breach and opted for a "rule of construction" approach. Exemption clauses are to be interpreted the same as any other term regardless of whether a breach has occurred; the allocation of risk should lie with the respondent - they are in the best position to insure the factory. The scope of the exclusion is determined by examining the construction of the contract. The appellants had met their duty of care by not hiring negligently. On the facts, Wilberforce found that the exclusion clause precluded all liability even when harm was caused intentionally. He went out of his way to disapprove the doctrine of fundamental breach of contract.
Lord Diplock held that the cause's effectiveness was a question of construction of the contract and that it did cover the damage (very clear construction). He noted "the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses" though the need should have gone since the passage of the Unfair Contract Terms Act of 1977. Under freedom of contract, parties can determine their obligations to one another as long as they are explicit in those obligations.
Ratio[]
- Fundamental breach is a rule of construction not rule of law.
- Freedom of contract trumps any other considerations.