Photo Production Ltd v Securicor Transport Ltd

An exclusion or limitation clause is not automatically deprived of effect by a fundamental or repudiatory breach. Its application to any breach depends on the proper construction of the whole contract.

Acceptance of a repudiatory breach discharges future primary performance. It does not extinguish the contract or the secondary obligation to pay damages. Contractual provisions governing liability may therefore continue to apply.

Exclusion clauses are construed strictly, and clear words are required to cover a party’s wrongdoing or that of its servant. Where commercial parties of equal bargaining power allocate risk in clear terms, the court must respect that allocation. A clause covering any injurious act or default by an employee can exclude liability for a deliberate act which the employer could not foresee and avoid by due diligence.

Securicor agreed to provide a night patrol service at Photo Production’s factory. Its employee deliberately started a fire during a patrol, causing agreed losses of £615,000. The employee’s motive and intended extent of the damage were not established. Securicor had not been negligent in employing or supervising him.

The contract contained a standard condition excluding responsibility for an employee’s injurious act or default unless it could have been foreseen and avoided through due diligence by Securicor as employer. MacKenna J held that the condition protected Securicor. The Court of Appeal, reported at [1978] 1 W.L.R. 863, reversed that decision by applying the doctrine of fundamental breach.

The central questions were whether a fundamental breach prevented reliance on the condition as a rule of law and, if not, whether the condition excluded liability for the employee’s act.

1. Disposition. The House of Lords unanimously allowed Securicor’s appeal. The Court of Appeal’s order was reversed and MacKenna J’s order restored.

2. Fundamental breach and construction. Per Lord Wilberforce, in the leading speech, the applicability of an exclusion clause to a fundamental breach is governed by the proper construction of the whole contract. There is no rule of law which automatically removes the clause. Lords Keith of Kinkel and Scarman agreed with Lord Wilberforce’s speech. Lord Diplock and Lord Salmon agreed with the central conclusion and also allowed the appeal. The House reaffirmed Suisse Atlantique v Rotterdamsche Kolen Centrale [1967] 1 A.C. 361.

3. Effect of termination. Per Lord Wilberforce, acceptance of a repudiatory breach ordinarily excuses future performance. It does not cause the contract to cease to exist for all purposes. The right to damages remains contractual, and provisions which exclude, limit or liquidate damages may therefore continue to govern that right. Lord Diplock explained the same conclusion through the distinction between primary obligations and the secondary obligations arising on breach.

4. Construction and application of the condition. Per Lord Wilberforce, an exclusion clause must be read contra proferentem, and clear words are necessary to exclude liability for a party’s wrongdoing or that of its servant. The condition used clear language covering any injurious act or default by an employee. It extended beyond negligence to deliberate acts. As the fire could not have been foreseen and avoided through due diligence by Securicor as employer, liability was excluded. Lord Diplock treated the condition as modifying Securicor’s otherwise absolute primary obligation by limiting it to the exercise of due diligence. Lord Salmon likewise considered the wording incapable of another meaning.

5. Commercial allocation of risk and authorities. The contract pre-dated the Unfair Contract Terms Act 1977 and was governed by the common law. The parties were experienced commercial enterprises capable of allocating and insuring the relevant risk. Clear wording could not be rejected merely because a court regarded the allocation as unreasonable. Harbutt’s “Plasticine” Ltd v Wayne Tank & Pump Co Ltd [1970] 1 Q.B. 447, Wathes (Western) Ltd v Austins (Menswear) Ltd [1976] 1 Lloyd’s Rep. 14 and Charterhouse v Tolly [1963] 2 Q.B. 683 were overruled.

6. The alternative contractual limitation of damages did not require determination. Photo Production was ordered to pay Securicor’s costs in the Court of Appeal and House of Lords, and the cause was remitted to the Queen’s Bench Division.

• House of Lords: Unanimously allowed Securicor’s appeal, reversed the Court of Appeal’s order and restored MacKenna J’s order.
• Court of Appeal: In [1978] 1 W.L.R. 863, held that the doctrine of fundamental breach prevented Securicor from invoking the exclusion clause. Waller LJ would also have decided that the clause was inapplicable on its proper construction.
• High Court, Queen’s Bench Division: MacKenna J held that the contractual condition applied and protected Securicor from liability.