[1980] 1 All ER 556
House of Lords
The facts are set out in the judgement of Lord Wilberforce.
Lord Wilberforce
'My Lords, this appeal arises from the destruction by fire of a factory owned by the respondents ('Photo Productions') involving loss and damage agreed to amount to £615,000. The question is whether the appellants ('Securicor') are liable to the respondents for this sum.
Securicor are a company which provides security services. In 1968 they entered into a contract with Photo Productions by which for a charge of £8 15s 0d (old currency) per week it agreed to 'provide their Night Patrol Service whereby four visits per night shall be made seven nights per week and two visits shall be made during the afternoon of Saturday and four visits shall be made during the day of Sunday'. The contract incorporated printed standard conditions which, in some circumstances, might exclude or limit Securicor's liability. The questions in this appeal are (i) whether these conditions can be invoked at all in the events which happened and (ii) if so, whether either the exclusion provision, or a provision limiting liability, can be applied on the facts...
What happened was that on a Sunday night the duty employee of Securicor was one Musgrove. It was not suggested that he was unsuitable for the job or that Securicor were negligent in employing him. He visited the factory at the correct time, but when inside he deliberately started a fire by throwing a match onto some cartons. The fire got out of control and a large part of the premises was burnt down. Though what he did was deliberate, it was not established that he intended to destroy the factory. The judge's finding was in these words:
'Whether Musgrove intended to light only a small fire (which was the very least he meant to do) or whether he intended to cause much more serious damage, and, in either case, what was the reason for his act, are mysteries I am unable to solve.'
This, and it is important to bear it in mind when considering the judgements in the Court of Appeal, falls short of a finding that Musgrove deliberately burnt or intended to burn Photo Productions' factory.
The condition on which Securicor relies reads, relevantly, as follows:
'Under no circumstances shall the Company [Securicor] be responsible for any injurious act or default by any employee of the Company unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of the Company as his employer; nor, in any event, shall the Company be held responsible for; (a) Any loss suffered by the customer through burglary, theft, fire or any other cause, except insofar as such loss is solely attributable to the negligence of the Company's employees acting within the course of their employment...'
There are further provisions limiting to stated amounts the liability of Securicor on which it relies in the alternative if held not to be totally exempt.
It is first necessary to decide on the correct approach to a case such as this where it is sought to invoke an exception or limitation clause in the contract. The approach of Lord Denning MR in the Court of Appeal was to consider first whether the breach was 'fundamental'. If so, he said, the court itself deprives the party of the benefit of an exemption of limitation clause. Shaw and Waller LJJ substantially followed him in this argument.
Lord Denning MR in this was following the earlier decision of the Court of Appeal, and in particular his own judgement in Harbutt's Plasticine Ltd v Wayne Tank and Pump Co Ltd. In that case Lord Denning MR distinguished two cases: (a) the case where as the result of a breach of contract the innocent party has, and exercises, the right to bring the contract to an end; and (b) the case where the breach automatically brings the contract to an end, without the innocent party having to make an election whether to terminate the contract or to continue it. In the first case Lord Denning MR, purportedly applying this House's decision in Suisse Atlantique Societe d' Armement Maritime SA v NV Rotterdamsche Kolen Centrale, but in effect two citations from two of their Lordships' speeches, extracted a rule of law that the 'termination' of the contract brings it, and with it the exclusion clause, to an end. The Suisse Atlantique case in his view --
'affirms the long line of cases in this court that when one party has been guilty of a fundamental breach of the contract... and the other side accepts it, so that the contract comes to an end... then the guilty party cannot rely on an exception or limitation clause to escape from his liability for the breach.' See (Harbutt's case). He then applied the same principle to the second case.
My Lords, whatever the intrinsic merit of this doctrine, as to which I shall have something to say later, it is clear to me that so far from following this House's decision in the Suisse Atlantique case it is directly opposed to it and that the whole purpose and tenor of the Suisse Atlantique case was to repudiate it. The lengthy, and perhaps I may say sometimes indigestible speeches of their Lordships, are correctly summarised in the headnote --
'(3) That the question whether an exceptions clause was applicable where there was a fundamental breach of contract was one of the true construction of the contract.'
That there was any rule of law by which exception clauses are eliminated, or deprived of effect, regardless of their terms, was clearly not the view of Viscount Dilhorne, Lord Hodson or myself. The passages invoked for the contrary view of a rule of law consist only of short extracts from two of the speeches, on any view a minority. But the case for the doctrine does not even go so far as that. Lord Reid, in my respectful opinion, and I recognise that I may not be the best judge of this matter, in his speech read as a whole, cannot be claimed as a supporter of a rule of law. Indeed he expressly disagreed with Lord Denning MR's observations in two previous case (Karsales (Harrow) Ltd v Wallis and UGS Finance Ltd v National Mortgage Bank of Greece) in which he had put forward the 'rule of law' doctrine. In order to show how close the disapproved doctrine is to that sought to be revived in Harbutt's case I shall quote one passage from the Karsales case:
'Notwithstanding earlier cases which might suggest the contrary, it is now settled that exempting clauses of this kind, no matter how widely they are expressed, only avail the party when he is carrying out his contract in its essential respects. He is not allowed to use them as a cover for misconduct or indifference or to enable him to turn a blind eye to his obligations. They do not avail him when he is guilty of a breach which goes to the root of the contract.'
Lord Reid comments as to this that he could not deduce from the authorities cited in the Karsales case that the proposition stated in the judgements could be regarded as in any way 'settled law'. His conclusion is stated thus: 'In my view no such rule of law ought to be adopted', adding that there is room for legislative reform.
My Lords, in the light of this, the passage from the Suisse Atlantique case cited by Lord Denning MR has to be considered. For convenience I restate it:
'If fundamental breach is established, the next question is what effect, if any, that has on the applicability of other terms of the contract. This question has often arisen with regard to clauses excluding liability, in whole or in part, of the party in breach. I do not think that there is generally much difficulty where the innocent party has elected to treat the breach as a repudiation, bring the contract to an end and sue for damages. Then the whole contract has ceased to exist including the exclusion clause, and I do not see how that clause can then be used to exclude an action for loss which will be suffered by the innocent party after it has ceased to exist, such as loss of the profit which would have accrued if the contract had run its full term.'
It is with the utmost reluctance that, not forgetting the 'beams' that may exist elsewhere, I have to detect here a mote of ambiguity or perhaps even or inconsistency. What is referred to is 'loss which will be suffered by the innocent party after [the contract] has ceased to exist' and I venture to think that all that is being said, rather elliptically, relates only to what is to happen in the future, and it not a proposition as to the immediate consequences caused by the breach; if it were, that would be inconsistent with the full and reasoned discussion which follows.
It is only because of Lord Reid's great authority in the law that I have found it necessary to embark on what in the end may be superfluous analysis. For I am convinced that, with the possible exception of Lord Upjohn whose critical passage, when read in full, is somewhat ambiguous, their Lordships, fairly read, can only be taken to have rejected those suggestions for a rule of law which had appeared in the Court of Appeal and to have firmly stated that the question is one of construction, not merely of course of the exclusion clause alone, but of the whole contract.
Much has been written about the Suisse Atlantique case. Each speech has been subjected to various degrees of analysis and criticism, much of it constructive. Speaking for myself I am conscious of imperfections of terminology, though sometimes in good company. But I do not think that I should be conducing to the clarity of the law by adding to what was already too ample a discussion a further analysis which in turn would have to be interpreted. I have no second thoughts as to the main proposition that the question whether, and to what extent, an exclusion clause is to be applied to a fundamental breach, or a breach of a fundamental term, or indeed to any breach of contract, is a matter of construction of the contract. Many difficult questions arise and will continue to arise in the infinitely varied situations in which contracts come to be breached: by repudiatory breaches, accepted or not, anticipatory breaches, by breaches of conditions or of various terms and whether by negligent, or deliberate, action, or otherwise. But there are ample resources in the normal rules of contract law for dealing with these without the superimposition of a judicially invented rule of law. I am content to leave the matter there with some supplementary observations.
1. The doctrine of 'fundamental breach' in spite of its imperfections and doubtful parentage has served a useful purpose. There were a large number of problems, productive of injustice, in which it was worse than unsatisfactory to leave exception clauses to operate. Lord Reid referred to these in the Suisse Atlantique case, pointing out at the same time that the doctrine of fundamental breach was a dubious specific. But since then Parliament has taken a hand: it has passed the Unfair Contract Terms Act 1977. This Act applies to consumer contracts and those based on standard terms and enables exception clauses to be applied with regard to what is just and reasonable. It is significant that Parliament refrained from legislating over the whole field of contract. After this Act, in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament's intention, for leaving the parties free to apportion the risks as they think fit and for respecting their decisions.
At the stage negotiation as to the consequences of a breach, there is everything to be said for allowing the parties to estimate their respective claims according to the contractual provisions they have themselves made, rather than for facing them with a legal complex so uncertain as the doctrine of fundamental breach must be. What, for example, would have been the position of Photo Productions' factory if instead of being destroyed it had been damaged, slightly or moderately or severely? At what point does the doctrine (with what logical justification I have not understood) decide, ex post facto, that the breach was (factually) fundamental before going on to ask whether legally it is to be regarded as fundamental? How is the date of 'termination' to be fixed? Is it the date of the incident causing the damage, or the date of the innocent party's election, or some other date? All these difficulties arise from the doctrine and are left unsolved by it.
At the judicial stage there is still more to be said for leaving cases to be decided straightforwardly on what the parties have bargained for rather than on analysis, which becomes progressively more refined, of decisions in other cases leading to inevitable appeals. The learned judge was able to decide this case on normal principles of contractual law with minimal citation of authority. I am sure that most commercial judges have wished to be able to do the same (cf The Angelia, Trade and Transport Inc v Iino Kaiun Kaisha Ltd, per Kerr J). In my opinion they can and should.
2. Harbutt's Plasticine Ltd v Wayne Tank and Pump Co Ltd must clearly be overruled. It would be enough to put that on its radical inconsistency with the Suisse Atlantique case. But even if the matter were res integral I would find the decision to be based on unsatisfactory reasoning as to the 'termination' of the contract and the effect of 'termination' on the plaintiffs' claim for damage. I have, indeed, been unable to understand how the doctrine can be reconciled with the well accepted principle of law, stated by the highest modern authority, that when in the context of a breach of contract one speaks of 'termination' what is meant is no more than that the innocent party or, in some cases, both parties are excused from further performance. Damages, in such cases, are then claimed under the contract, so what reason in principle can there be for disregarding what the contract itself says about damages, whether in 'liquidates' them, or limits them, or excludes them? These difficulties arise in part from uncertain or inconsistent terminology. A vast number of expressions are used to describe situations where a breach has been committed by one party of such character as to entitle the other party to refuse further performance: discharge, rescission, termination, the contract is at an end, or dead, or displaced; clauses cannot survive, or simply go. I have come to think that some of these difficulties can be avoided; in particular the use of 'rescission', even if distinguished from rescission ab initio, as an equivalent for discharge, though justifiable in some contexts (see Johnson v Agnew) may lead to confusion in others. To plead for complete uniformity may be to cry for the moon. But what can and ought to be avoided is to make use of these confusions in order to produce a concealed and unreasoned legal innovation: to pass, for example, from saying that a party, victim of a breach of contract, is entitled to refuse further performance, to saying that he may treat the contract as at an end, or as rescinded, and to draw from this the proposition, which is not analytical but one of policy, that all or (arbitrarily) some of the clauses of the contract lose, automatically, their force, regardless of intention.
If this process is discontinued the way is free to use such words as 'discharge' or 'termination' consistently with principles as stated by modern authority which Harbutt's case disregards. I venture with apology to relate the classic passages. In Heyman v Darwins Ltd Lord Porter said:
'To say that the contract is rescinded or has come to an end or has ceased to exist may in individual cases convey the truth with sufficient accuracy, but the fuller expression that the injured party is thereby absolved from future performance of his obligations under the contract is a more exact description of the position. Strictly speaking, to say that, upon acceptance of the renunciation of a contract, the contract is rescinded is incorrect. In such a case the injured party may accept the renunciation as a breach going to the root of the whole of the consideration. By that acceptance he is discharged from further performance and may bring an action for damages, but the contract itself is not rescinded.'
Similarly Lord Macmillan; see also Boston Deep Sea Fishing and Ice Co Ltd v Ansell per Bowen LJ. In Moschi v Lep Air Services Ltd my noble and learned friend Lord Diplock drew a distinction (relevant for that case) between primary obligations under a contract, which on 'rescission' generally come to an end, and secondary obligations which may then arise. Among the latter he included an obligation to pay compensation, ie damages. And he stated in terms that this latter obligation 'is just as much an obligation arising from the contract as are the primary obligations that it replaces'. My noble and learned friend has developed this line of thought in an enlightening manner in his opinion which I have now had the benefit of reading.
These passages I believe to state correctly the modern law of contract in the relevant respects; they demonstrate that the whole foundation of Harbutt's case is unsound. A fortiori, in addition to Harbutt's case there must be overruled Wathes (Western) Ltd v Austine (Menswear) Ltd which sought to apply the doctrine of fundamental breach to a case where, by election of the innocent party, the contract had not been terminated, an impossible acrobatic, yet necessarily engendered by the doctrine. Similarly, Charterhouse Credit Co Ltd v Tolly must be overruled, though the result might have been reached on construction of the contract...
4. It is not necessary to review fully the numerous cases in which the doctrine of fundamental breach has been applied or discussed. Many of these have now been superseded by the Unfair Contract Terms Act 1977. Others, as decisions, may be justified as depending on the construction of the contract (cf Levison v Patent Steam Carpet Cleaning Co Ltd in the light of well-known principles such as that stated in Alderslade v Hendon Laundry Ltd.
In this situation the present case has to be decided. As a preliminary, the nature of the contract has to be understood. Securicor undertook to provide a service of periodical visits for a very modest charge which works out at 26p per visit. It did not agree to provide equipment. It would have no knowledge of the value of Photo Productions' factory; that, and the efficacy of their fire precautions, would be known to Photo Productions. In these circumstances nobody could consider it unreasonable that as between these two equal parties the risk assumed by Securicor should be a modest one, and that Photo Productions should carry the substantial risk of damage or destruction.
The duty of Securicor was, as stated, to provide a service. There must be implied an obligation to use care in selecting their patrolmen, to take care of the keys and, I would think, to operate the service with due and proper regard to the safety and security of the premises. The breach of duty committed by Securicor lay in a failure to discharge this latter obligation. Alternatively it could be put on a vicarious responsibility for the wrongful act of Musgrove, viz, starting a fire on the premises; Securicor would be responsible for this on the principle stated in Morris v C W Martin & Sons Ltd. This being the breach, does condition 1 apply? It is drafted in strong terms, 'Under no circumstances, any injurious act or default by any employee'. These words have to be approached with the aid of the cardinal rules of construction that they must be read contra proferentem and that in order to escape from the consequences of one's own wrongdoing, or that of one's servant, clear words are necessary. I think that these words are clear. Photo Productions in fact relied on them for an argument that since they exempted from negligence they must be taken as not exempting from the consequence of deliberate acts. But this is a perversion of the rule that if a clause can cover something other than negligence it will not be applied to negligence. Whether, in addition to negligence, it covers other, eg deliberate, acts, remains a matter of construction requiring, of course, clear words. I am of opinion that it does and, being free to construe and apply the clause, I must hold that liability is excluded...'