Contracting out of liability

Is it possible to contract out of liability? More specifically, is it possible to contract out of liability for negligence and, if so, even for gross negligence?

A common example of this is erecting a sign at the entrance to a place of work, which reads that the company is not responsible for loss or damage to property, or injury to persons who enter the premises.

More specifically, these signs are usually erected at the car park with respect to damage to cars parked in the company parking lot. These signs beg the question: can a company legally contract out of liability? It is common practice to attempt to do so. This practice has resulted in a large number of court cases around the world.

The reason why we want to look at this issue is the recent, rather strange, decision of Naidoo versus Birchwood Hotel 2012 6 SA 170 GS. Before looking at that case, however, let us first look at earlier cases.

In Galloon versus Modern Burglar Alarms 1973 3 SA 647 C, the alarm company installed and maintained a radio burglar-alarm system for a jeweller in terms of a lease agreement. There was a term in the agreement that the alarm company would “not be liable for any damage whatsoever caused by the non-operation of the alarm for any reason”.

A technician went out to work on the alarm system and, in order to do so, rendered the system inoperable by inserting a bridge. After finishing working on the system, the technician failed to remove the bridge and reactivate the system.

A burglary took place, the alarm did not go off and the bridge was found. The company sued the alarm company, alleging its negligence caused it harm. The alarm company countered that it could not be liable, because of the term in its contact exonerating it from liability. The company contended that the phrase “for any reason”, meant that it was exonerated from liability for any reason.

Galloon argued that that phrase did not include negligence. The court accepted that it was possible to contract out of liability for negligence. It then became a question of interpretation. The court concluded that, in order to contract out of liability for negligence, the contract term had to make that point clear, and since it did not, the contractual exclusion did not assist the alarm company to avoid liability.

In Government of the Republic of South Africa versus Fibre Spinners & Weavers 1977 2 SA 324, Spinners manufactured grain bags. The government contracted with Spinners to manufacture a large quantity of bags to be used in the farming community. The government indicated it was unable to take delivery of the bags and asked Spinners to store them. Spinners was prepared to do this on condition it was not responsible for the safekeeping of the bags.  

Its letter of acceptance included a statement that it was “absolved from all responsibility for loss of, or damage, howsoever arising, in respect of …”. After a while, it became necessary to move the bags (a whole warehouse full of them), whereupon it was discovered that a vast quantity of bags had been stolen.

The stack had been hollowed out in the middle. From the outside it looked as though all the bags were there, but only the outside layer was intact. The core had been removed and stolen. To make matters worse, one of the people responsible for the theft turned out to be employed by Spinners.

The government claimed from Spinners, which denied liability relying on the exclusion. The government sued Spinners, but lost. The case was taken on appeal, but the court declined to overturn the judgement. In this case it was clear that the two parties had applied their minds to the problem and decided to contract out of liability, and thus the court would not interfere with what the parties had, in fact, agreed to. The court accepted that it is possible to contract out of liability.

The next case, Micor Shipping versus Tregar Golf and Sports 1977 2 SA 709 W, is important since the court specifically addressed the question of whether it is possible to contract out of liability. In this case, the court concluded that it is even possible to contract out of wilful default.

So, it was clear that it was possible to contract out of negligence – even gross negligence, but to do this the contract term had to be clear. In the end, despite making the law clear, the company had not contracted out of liability.

The case of Union National South British Insurance Co versus South African Railways & Harbours (SAR & H) 1979 1 SA 1 A involved a worker who had been injured. A sign had been erected at the entrance of the site, which read: “Warning – Entrance at own risk: beware of cranes and shunting movements.” The injured workman tried to sue the SAR & H, which then used the sign as a defence.

It should be noted that the sign was not an attempt to contract out of liability, but is an example of the voluntary assumption of risk. If someone is content to accept a risk, then that person cannot be unhappy if the loss event takes place. So, for example, if someone is a boxer, that person cannot claim he was assaulted if he is punched in the boxing ring. He voluntarily accepted the risk of being punched! The court ruled, as expected, that the notice could not be applicable to persons such as workmen, who had a duty to work at the premises.

More recently, there was Afrox Healthcare versus Strydom 2002 6 SA 21 SCA where, once again, the court directly addressed the question of contracting out of liability for negligence. It was put to the court that a contract term, which allows a party to contract out of liability for negligence, was contrary to public policy and should not be upheld.

The court did not uphold that contention as a general principle. It may be that, under certain circumstances, a court would conclude contracting out of liability was against public policy, but not as a general principle. In fact, the opposite is correct. It is in the public interest that contracts freely and seriously entered into should be upheld.

That now brings us to Naidoo versus Birchwood Hotel 2012 6 SA 170 GSJ. As indicated, the question of contracting out of liability has been carefully considered by the courts for many years.

The plaintiff, Naidoo, signed into a hotel that had an exclusion clause which included: “the hotel
shall not be responsible for any injury … on the premises … caused or arising from the negligence (gross or otherwise) or wrongful acts of any person in the employment of the hotel”.

The following morning, Naidoo was injured when a heavy steel gate fell on top of him. He sued the hotel, which raised the exemption clause as a defence.

The court found the hotel was, indeed, negligent. When it came to contracting out of liability, the court held that “to deny him judicial redress for injuries he suffered, which came about as a result of the negligent conduct of the hotel, offended against notions of justice and fairness. Public policy, with the notions of fairness, justice and reasonableness, would preclude the enforcement of a contractual term if its enforcement would be unjust or unfair”.

It is, indeed, unusual to see a court disregard a contract, because it feels the contact term is unfair, unreasonable and unjust. These feelings have not in the past formed the basis of the law of contract.

Legally Speaking is a regular column by Professor Robert W Vivian and Albert Mushai, both in the school of Economics and Business Sciences, University of the Witwatersrand. Robert W Vivian is a leading authority on insurance and risk management. He has written a number of books on South Africa’s business history. Albert Mushai holds a master’s degree from the City University, London, and was the head of the insurance department at the National University of Science and Technology in Zimbabwe before joining Wits University as a lecturer in insurance.