Clause 7.1(d)
15 Bevillesta contends that the air conditioning and elevators claims cannot succeed because they are precluded by clause 7.1(d). Clause 7.1(d) is an exclusion clause. It applies if any of the elevators or the air-conditioning plant 'fails to function for any reason'. Where that condition is satisfied, the clause purports to deprive the Lessee of any right of action or claim for compensation or damages against the Lessor in respect of the failure to function.
16 There is now a substantial body of Australian authority dealing with the correct approach to the construction of an exclusion clause in contract between commercial parties. Both sides referred me to a passage from the joint judgment of Mason, Wilson, Brennan, Deane and Dawson JJ in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, at 510-11, although they sought to use it to reach diametrically opposite conclusions as to the construction of clause 7.1(d). To appreciate the significance of the passage relied upon by the parties, it is necessary to put the Darlington Futures case in the context of previous decisions.
17 The basic problem posed by the construction of an exclusion clause is to reconcile it with the primary contractual undertakings of the parties. Time and again, courts have looked for a way of reading down or limiting the scope of exclusion clauses because, if they are read broadly, one or more of the primary contractual promises will be rendered nugatory or will become no more than pious statements of intention.
18 In England before 1980 a body of case law had developed which seemed to take a special approach to the construction of exclusion clauses, generally to the effect that an exclusion clause will not protect a party to a contract from liability for fundamental breach, or breach of a fundamental term: Suisse Atlantique Societe d'Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361. The House of Lords rejected the doctrine of fundamental breach in Photo Production Ltd v Securicor Ltd [1980] AC 827, in which Lord Diplock observed that the Court was not entitled, at general law, to reject an exclusion clause 'however unreasonable the Court may think it is, if the words are clear and fairly susceptible of one meaning only', and continued (at 851):
'In commercial contracts negotiated between business-men capable of looking after their own interests and deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.'
19 In subsequent cases dealing with commercial contracts, the House of Lords generally followed the 'natural meaning' approach, while observing that the principles applicable to the construction of exclusion clauses do not apply 'in their full rigour' to conditions which merely limit liability: Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964, 970; George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, 813-4. These cases could be taken to imply that it was no longer permissible to read down the literal effect of an exclusion clause by the application of standard principles of construction, such as the principle that the words of a particular clause should be read in the context of the contract as a whole. That approach, if sustained, would give the drafter of an exclusion clause a very large opportunity to obliterate the primary contractual obligations.
20 The approach to the construction of exclusion and limitation clauses adopted by the High Court of Australia never relied on the doctrine of fundamental breach, nor did it require an exclusion clause to be construed in isolation from the rest of the contract. In Sydney City Council v West (1965) 114 CLR 481 the plaintiff parked his car in the defendant's parking station and received a ticket, which contained a provision that the defendant 'does not accept any responsibility for the loss or damage to any vehicle ... however such loss, damage ... may arise or be caused'. The ticket also contained a provision requiring that the ticket be presented for time-stamping and payment before collection of the vehicle. That provision was taken to imply that the defendant promised not to release vehicles without presentation of the ticket. The plaintiff's car was stolen, and the thief handed the parking station attendant a ticket relating to another car, which he had obtained by false representations. The attendant, whose duty it was to ensure that the appropriate ticket was presented before a vehicle left the parking station, accepted the incorrect ticket and allowed the vehicle to leave.
21 The High Court held that the defendant was not excused by the clause from liability for the loss of the plaintiff's vehicle. Barwick CJ and Taylor J reached this conclusion by a process of construction of the exclusion clause in the context of the contract as a whole, including the provision which required presentation of the ticket for collection of the vehicle. Windeyer J took a similar approach. Barwick CJ and Taylor J said (114 CLR, at 488):
'But we would deny the application of such a clause in those circumstances simply upon the interpretation of the clause itself. Such a clause contemplates that loss or damage may occur by reason of negligence on the part of the warehouseman or his servants in carrying out the obligations created by the contract. But in our view it has no application to negligence in relation to acts done with respect to a bailor's goods which are neither authorised nor permitted by the contract ... . Negligence in these circumstances would be right outside the purview of the clause.'
22 In two later cases concerning commercial contracts, the High Court accepted the approach to construction taken in Sydney City Council v West, but decided that the exclusion clause applied in the circumstances: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation, Berhad (1989) 167 CLR 219. A similar approach was taken by the Privy Council, following the dissenting judgment of Barwick CJ, in Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1978) 139 CLR 231; on appeal, (1980) 144 CLR 300.
23 In the Darlington Futures case a clause in a contract between a futures broker and its client purported to limit any liability of the broker for damages 'for or in respect of any claim arising out of or in connection with the relationship established by this agreement' to $100. The question was whether that clause protected the broker from liability in an action by the client to recover losses sustained by the client in dealings undertaken by the broker without the client's authorisation.
24 The Full Court of the Supreme Court of South Australia held that the clause had no application to claims arising out of conduct which was outside the scope of the agreement and the relationship between the parties established by it. On appeal, the High Court (Mason, Wilson, Brennan, Deane and Dawson JJ) disagreed with the Full Court, finding that the Full Court had placed a more restrictive interpretation on the clause than its language would naturally bear (at 511). Their Honours found that a claim in respect of an unauthorised transaction may nonetheless have a connection, indeed a substantial connection, with the relationship of broker and client established by the agreement.
25 Their Honours reviewed the English and Australian authorities, agreeing with the 'normal meaning' approach taken by the House of Lords in Photo Production, but disagreeing with the view that exclusion and limitation clauses require different approaches. They emphasised that in Australian law, it is legitimate, and indeed necessary, to construe the language of the exclusion clause in the context of the entire contract of which it forms part (at 509).
26 This is the context of the passage, relied upon by both parties before me, in which their Honours said (at 510-11):
'These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. Notwithstanding the comments of Lord Fraser in Ailsa Craig, the same principle applies to the construction of limitation clauses. As King CJ noted in his judgment in the Supreme Court, a limitation clause may be so severe in its operation as to make its effect virtually indistinguishable from that of an exclusion clause. And the principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people when no question of the reasonableness or fairness of the clause arises.'
27 Bevillesta submits that no question of the reasonableness or fairness of the clause arises in this case, since this is a formal commercial contract between business people. I agree. The sole question is as to the proper construction of the clause in its context.
28 Establishing the correct Australian approach to the construction of an exclusion clause does not, unfortunately, dictate a clear solution to the construction of a particular contract. The High Court in Darlington Futures rejected the construction adopted by the Full Court, whose approach was similar to the majority's approach in Sydney City Council v West, while approving the principles enunciated by the majority of the High Court in the West case. The difference between the two High Court decisions must lie in the language used, and in particular, the reach of the words 'claims arising ... in connection with' used in the Darlington Futures case. In the absence of such special words, an exclusion clause may still be construed in the manner adopted by the majority in Sydney City Council v West, however sweeping its language.
29 That is illustrated by Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206. In that case thieves stole some whisky from a container terminal in Sydney, aided by the connivance of some employees of the terminal operator. The consignee sued the carrier and its sub-contractor, the terminal operator, for damages resulting from the loss, and the terminal operator cross-claimed for an indemnity from the carrier for any liability to the consignee. The bill of lading under which the goods were carried contained an exemption clause (clause 4) protecting the carrier from liability for the loss of goods after they were unloaded, 'in any circumstances whatsoever' and 'howsoever caused'. It also contained a provision (clause 8 (3)) which stated that the exemption applied whether or not the loss was caused by negligence or actions constituting a fundamental breach of the contract. By virtue of a Himalaya clause, these exemptions were extended to the terminal operator as a sub-contractor of the carrier.
30 All members of the Court of Appeal of New South Wales took the view that clause 4 standing alone would not have exempted the carrier. Sheller JA (with whom Cripps JA agreed) held (at 239) that if clause 4 stood alone, the Court would be obliged (applying Sydney City Council v West) to hold that the exemption did not extend to an unauthorised delivery amounting to conversion of the goods, such as occurred in the case at hand. Handley JA agreed on this point (at 210). This was so, even though clause 4 used the broad language 'in any circumstances whatsoever' and 'howsoever caused'.
31 However, clause 8(3) specifically stated that the exemption was to apply whether or not the loss or damage was caused by an action constituting a fundamental breach of contract. The actions of the employees of the terminal operator who connived with the thieves were in fundamental breach of the contract evidenced by the bill of lading. In Sheller JA's view, the terms of clause 8(3) were plain and consequently an exemption from liability in clause 4 applied (at 240). Handley JA, dissenting on this point, was influenced by Sydney City Council v West to prefer the view that clause 8(3) did not protect the carrier because delivery to the thief was not authorised by the contract, was in breach of an express provision relating to delivery, and was a conversion (at 215). He based his judgment on the ground that an exclusion clause such as the one before him, and also the clause in West's case, does not protect a bailee against deliberate damage or conversion (at 216).
32 In the present case Sovereign contends that Bevillesta failed to use its best endeavours to maintain and service the air-conditioning plant, by non-feasance and by deliberate intervention in turning off the system. It contends that Bevillesta failed to use its best endeavours to maintain and service the elevators, by non-feasance. Sovereign's complaints relate to Bevillesta's performance of its contractual obligations, rather than to some extraneous event which might be treated as unauthorised by the contract, such as conniving in the theft of goods. Therefore, the point of distinction between, say, Sydney City Council v West and the Darlington Futures case is not before the Court in the present case.
33 Nevertheless, the earlier cases are helpful because they show the kind of specific language in an exclusion clause which has been held sufficient to override primary contractual obligations. Here there is nothing equivalent to the stipulation in the Darlington Futures case excluding liability for damages in respect of a claim 'in connection with' the relationship established by the agreement, and there is no equivalent to the specific stipulation of clause 8(3) in the Glebe Island Terminals case. Here, the question is whether the words 'fails to function for any reason', which are literally quite general but which appear proximately to the 'best endeavours' undertaking in clause 7.1(a), should be taken to prevent a claim for damages for non-performance of the 'best endeavours' undertaking. It appears to me that, just as clause 4 would not (had it stood alone) have excluded all liability for damages in the Glebe Island Terminals case, notwithstanding its broad language, so clause 7.1(d) should not be construed to exclude all liability for damages in this case.
34 It seems to me that some specific textual considerations support the conclusion to which the case law has guided me. One is, as I have said, the proximity of the exclusion clause to the 'best endeavours' clause. It seems unlikely that the drafter would have intended that the 'best endeavours' clause, which is after all the first sub-provision on the subject of air-conditioning and elevators, designated an obligation which would then be substantially overridden by a later sub-clause of the same provision. The proximity of the two provisions demands that they be read together and each given a sensible sphere of operation.
35 Secondly, clause 7.1(a) is expressly a 'best endeavours' provision rather than an absolute obligation. The fact that it is limited to best endeavours suggests that clause 7.1(a) is intended to have binding and enforceable effect to that extent.
36 Thirdly, if clause 7.1(b) removes any cause of action for damages for breach of clause 7.1(a), the only way to give clause 7.1(a) any effect at all is to say that it creates an obligation enforceable by injunction. This, indeed, is Bevillesta's submission. Bevillesta submits that it is permissible for the parties to a contract to agree to limit the remedies that may be available in respect of breach of any term of the contract, citing J Carter and D Harland, Contract Law in Australia (3rd ed, 1996), at [748]; Geo Mitchell Ltd v Finney Lock [1983] 2 AC 803, and noting a statutory example in 68A of the Trade Practices Act 1974 (Cth). Bevillesta argues that in the present case the parties have agreed by clause 7.1(d) to exclude the remedies of damages and compensation, effectively leaving Sovereign with only the remedy of injunction.
37 While accepting the principle upon which Bevillesta relies, I find it implausible that the parties in this case would have intended that Sovereign's remedies for breach of clause 7.1(a) should be limited to injunctive orders. Clause 7.1(a) is not the kind of provision that would be readily enforceable by injunction. It is unspecific in its terms, and its enforcement would fall foul of the principle that an injunction will not lie if the making of the order would entail continual superintendence of the contractual obligations by the Court. Breach of a promise to use best endeavours to maintain and service equipment most naturally sounds in damages.
38 Bevillesta submits that it would make commercial sense for the parties to agree to exclude the remedy of damages and leave the Lessee to injunctive relief if problems with the air-conditioning plant and elevators occur. This is because, says Bevillesta, problems with this equipment should be resolved in matter of hours, days, or weeks, rather than months or years, and so urgent equitable relief is more appropriate than proceedings for damages. Bevillesta points out that in proceedings for equitable relief, the Court could appoint an expert to advise as to what steps need to be taken, and in a sufficiently serious case, the Court might even appoint a receiver. In contrast, an action for damages might not come on for several years, there will be issues associated with causation and assessment of damages, and consequent costs to both parties.
39 I reject this submission. The fact that remedial work on the air-conditioning plant or the elevators should be undertaken very quickly after they fail to function does not mean that damages cannot also be an appropriate remedy. Moreover, to obtain an injunction the Lessee would have to overcome the Court's reluctance to become involved in constant superintendence of the performance of contractual obligations, even if the parties had effectively agreed to exclude the remedy of damages.
40 All of these considerations point to the view that clause 7.1(d) does not completely prevent Sovereign from ever making any claim for damages in any circumstances. The question is: what boundaries does clause 7.1(d) set to the making of a claim for compensation for breach of clause 7.1(a)? Sovereign submits that the combined effect of clause 7.1(a) and clause 7.1(d) is that Bevillesta is obliged to use its best endeavours to maintain and service the air-conditioning plant and elevators to ensure they are kept working and reasonably available for use by Sovereign, but if notwithstanding the use of Bevillesta's best endeavours the air-conditioning plant or elevators fail to function for any reason, Sovereign does not by reason of that failure have any right of action or claim for compensation or damages against Bevillesta. This construction requires, in effect, the insertion of the italicised words into clause 7.1(d) - words which might readily have been, but were not, inserted by the drafter. In my view, Sovereign's preferred construction is not authorised by the wording of the clause. The limitations imposed by clause 7.1(d) are to be found in a close analysis of the wording of the clause itself, rather than by the insertion of words not literally there.
41 Clause 7.1(d) does not purport on its face to remove all claims for compensation for breach of clause 7.1(a), but only applies where the air-conditioning plant or elevators 'fail to function' for any reason. The concept of 'failure', when applied to the failure of a natural person to do something, is highly ambiguous. In Ingram v Ingram (1938) 38 SR (NSW) 407, 410 Jordan CJ said:
'[W]here it is provided by statute that certain consequences shall follow if a person fails to do something which is directed to be done, the meaning of the word 'fail' depends on the context in which it is found. In some contexts it may mean simply the omission to do the thing in question, irrespective of any reason which may have existed for his not doing it ... . In other cases it may mean an omission to do the thing by reason of some carelessness or delinquency on his part, but not omission caused by impossibility for which the person in question is not responsible ... . In other cases, it may mean omission to do the thing, but so that omission caused by impossibility arising from some causes is included and from others is excluded ... .'