An exemption clause in an agreement that excludes a party’s liability for loss caused by the deliberate wrongdoing of its employees is enforceable, the Constitutional Court confirmed in a decision handed down last month.
The court’s judgment ended a legal dispute that arose after a consignment of laptops was stolen from a South African Airways (SAA) warehouse a decade ago. It also provides clarity on the validity, application, and enforceability of exclusion clauses.
The court’s decision was not unanimous. The majority view of six judges prevailed and is binding, but five judges reached a different conclusion.
The applicant, Fujitsu Services Core (Pty) Ltd, imports, sells and distributes laptops and accessories. The respondent, Schenker South Africa (Pty) Ltd, conducts the business of a warehouse operator, freight forwarder, logistics manager, distributor, and forwarding agent.
In 2012, Fujitsu imported a consignment of laptops and accessories from its affiliate company in Germany to the value of $516 887. It engaged the services of Schenker, which entailed Schenker’s receiving the goods from the carrier and delivering them by road to Fujitsu after attending to the customs clearance and other logistical issues.
The agreement between Fujitsu and Schenker incorporated the Standard Trading Terms of the South African Association of Freight Forwarders.
Clause 17 of these terms provides that Schenker would not accept nor deal with high-value goods without special arrangements being made in writing. If Fujitsu delivered such high-value goods and Schenker dealt with them without a special arrangement being made in writing, Schenker would incur no liability for the loss of such goods.
No prior special arrangements were made regarding the laptops and accessories.
Once the goods arrived in storage at the SAA cargo warehouse and were ready to be delivered to Fujitsu, Schenker issued its drawing clerk, Wilfred Lerama, with the documentation authorising him to collect and deliver the cargo. On 23 June 2012, Lerama arrived at the warehouse to collect the laptops, ostensibly on behalf of Schenker and Fujitsu. The goods were loaded onto his truck, which was not marked with the Schenker branding, and he drove off, never to be seen again.
Like all Schenker’s drawing clerks, Lerama had been issued with an identity card that allowed him almost unfettered access to the airport cargo terminal and its warehouses and storage facilities. The warehouse personnel knew that Lerama was one of Schenker’s drawers and on the day in question did not suspect that he was there for any unlawful business.
Arguments before the High Court
Fujitsu took Schenker to the High Court in 2019, arguing the logistics company was vicariously liable for the conduct of its employee. Fujitsu said clause 17 did not apply to intentional conduct, such as theft. It submitted that clause 17 would apply where the conduct giving rise to the loss was conduct in execution of the contract.
Schenker argued it was not liable for Fujitsu’s loss because the laptops fell within the list of goods in clause 17 or were high-value goods to which clause 17 applied. Schenker contended that because Fujitsu failed to make special arrangements in advance with Schenker about such goods before requiring Schenker to deal with them or to handle them, Schenker was excused from liability.
The High Court rejected Schenker’s contention and upheld Fujitsu’s argument. It, accordingly, ordered Schenker to pay damages to Fujitsu.
Schenker appealed to the Supreme Court of Appeal (SCA), which heard the same arguments between the parties. The SCA upheld Schenker’s appeal with costs and set aside the order of the High Court.
Fujitsu applied to the Constitutional Court for leave to appeal against the judgment and order of the SCA, which Schenker opposed.
Is the clause contrary to public policy?
The parties advanced the same arguments before the Constitutional Court as they had done in the High Court and the SCA except that Fujitsu raised a new point for the first time: namely, that if clause 17 means that Schenker is exempted from liability for loss suffered by Fujitsu because of the theft of its goods by its employee, this would be contrary to public policy and should, for that reason, not be enforced.
The majority ruling was penned by Chief Justice Raymond Zondo.
Chief Justice Zondo held that although Schenker was contractually responsible for the loss caused by the theft by its employee, it did not itself commit the theft and enforcing clause 17 would not be condoning the theft.
He held that a claim under clause 17 would arise only if Fujitsu had made prior special arrangements in writing with Schenker as contemplated in the agreement. If no prior special arrangements were made in writing with Schenker, no claim would arise under clause 17. The agreement between Fujitsu and Schenker must be upheld unless there are valid reasons it should not be the case.
Chief Justice Zondo said exemption from liability is required for conduct that is in breach of the contract or the law and not for conduct that is in line with the contract and the law.
The majority ruling said previous cases have rejected the proposition that it is contrary to public policy to have a clause in a contract that exempts one of the parties from liability for loss arising from the intentional conduct of its employees, such as theft. What is prohibited is that a party benefits from, for instance, fraudulent misrepresentations inducing a contract. This does not arise in the case of a theft, which is not for the benefit of the employer but for the benefit of the employee.
The majority ruling dismissed the argument that clause 17 of the agreement is contrary public policy and reasoned there is nothing unfair or unreasonable about the terms of the clause. On the contrary, the terms of clause 17 of the agreement are fair to both parties.
The majority reiterated the principle that contracts that have been voluntarily and freely concluded should, as a rule, be enforced unless there is something contrary to public policy about them. There is nothing contrary to public policy with two contracting parties agreeing on exempting one party to the agreement from liability.
Minority opinion
The minority opinion, which was written by Justice Rammaka Mathopo, held that clause 17 of the agreement does not exonerate Schenker from liability.
Justice Mathopo said contractual clauses that limit liability must be interpreted narrowly, particularly if the harm in question arises outside of the contract (theft by the employee), unless the parties expressly agree otherwise.
He found that theft did not fall within the ambit of clause 17. If a party wishes to be absolved from liability for theft, this should be clearly spelt out. It did not make sense that the clause did not exclude liability for gross negligence but excluded liability for theft. If a party cannot escape liability for fraud or dishonesty by inserting an exemption clause to cover such conduct, that should also apply to theft by parity of reasoning.
Justice Mathopo held that a clause that “allows employees to steal goods” in the circumstances of this case was against public policy because it offends the values of human dignity, the achievement of equality, the advancement of human rights, and, most importantly, the rule of law. Enforcing the clause in this case would deprive Fujitsu of its basic contractual rights and offend the principles of good faith and fairness.
Commentary on the implications
Law firms have commented on the implications of the Constitutional Court’s decision.
Webber Wentzel said the strong opinions expressed in the judgment should serve as a warning to parties to pay special attention to their contractual arrangements.
Eversheds Sutherland said the majority judgment is in line with the interpretive tools in the context of a contractual setting.
It said the judgment is significant for three reasons:
- The court has re-emphasised that exclusion clauses are valid and enforceable in a constitutional dispensation.
- To trigger the application of an exclusion or limitation of liability clause, it is a condition precedent that the aggrieved party must have complied with the contractual provisions or established breach of the contract to impute liability on the other contracting party.
- If the exclusion or exemption clause is clear and unambiguous, the court would not hesitate to enforce same.
Norton Rose Fulbright said although the judgment creates a general rule, it should be noted that the Consumer Protection Act did not apply to the agreement, and different considerations would apply if it did.
Furthermore, regulations pertaining to certain industries – for example, the private security industry – prohibit exemption clauses that have such an effect. In addition, the courts will not uphold such an exemption clause if the theft is imputed to the defendant itself and is not merely the act of an errant employee.
The decision provides welcome legal clarity to situations where contrary legislation does not apply.
