Termination Criteria

Cases

Photo Production Ltd v Securicor Transport Ltd

[1980] UKHL 2 [1980] AC 827,  [1980] 1 All ER 556

Lord Wilberforce

It is first necessary to decide upon 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 the Master of the Rolls 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 or limitation clause ([1978]

1 W.L.R. 863). The Lords Justices substantially followed him in this argument.

The Master of the Rolls in this was following the earlier decision of the

Court of Appeal, and in particular his own judgment in Harbutt’s “Plasticine”

Ltd. v. Wayne Tank & Pump Co. Ltd. [1970] 1 Q.B. 447. In that case Lord

Denning 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, (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 the Master of the Rolls,

purportedly applying this House’s decision in the Suisse Atlantique case [1967]

1 A.C. 361, 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”

(Harbutt’s case p.467). 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 it is directly opposed to it and that

the whole purpose and tenor of the Suisse Atlantique was to repudiate it.

The lengthy, and perhaps I may say sometimes indigestible speeches of their

Lordships, are correctly summarised in the headnote—holding No. 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 exceptions clauses are

eliminated, or deprived of effect, regardless of their terms, was clearly not the

view of Viscount Dilhorne, Lord Hodson, or of 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 the Master of the Rolls’ observations in two previous cases (Karsales

(Harrow) Ltd. v. Wallis [1956] 1 WLR 936 and U.G.S. Finance Ltd. v. National

Mortgage Bank of Greece [1964] 1 Lloyd’s Rep. 446 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

Karsales:

“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”. (I.c. p.940).

Lord Reid comments as to this that he could not deduce from the authorities

cited in Karsales that the proposition stated in the judgments could be regarded

as in any way “settled law” (p.401).

His conclusion is stated on p.405: “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 cited by the Master of the Rolls

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.” (Suisse At/antique [1967]

1 A.C. at p.398.)

It is with the utmost reluctance that, not forgetting the “beams” that may

exist elsewhere, I have to detect here a note of ambiguity or perhaps even of

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 is 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. 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 observa-

tions.

1. The doctrine of “fundamental breach” in spite of its imperfections and

doubtful parentage has served a useful purpose. There was 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 (p.406), 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 of negotiation as to the consequences of a breach, there is every-

thing 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 the respon-

dents’ 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 re-

garded 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

upon 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. Trade & Transport Inc. v. lino Kaiun Kaisha Ltd. [1973] 1 W.L.R. 210,

232 per Kerr J.). In my opinion they can and should.

2. The case of Harbutt must clearly be overruled. It would be enough to

put that upon its radical inconsistency with the Suisse Atlantique. But even if

the matter were res Integra I would find the decision to be based upon un-

satisfactory 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 prin-

ciple 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 con-

tract, so what reason in principle can there be for disregarding what the con-

tract itself says about damages—whether it “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 a 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 [1979] 1 All E.P. 883) 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 as

“ceased to exist may in individual cases convey the truth with snt

“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,

“on 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.” ([1942]

A.C.356, 399)

and similarly Lord Macmillan at p.373: see also Boston Deep Sea Fishing &

Ice Co. Ltd. v. Ansell 39 Ch.D. 339, 361 per Bowen L.J. In Moschi v. Lep Air

Services Ltd. [1973] A.C. 331, 350, 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 includes an obligation

to pay compensation, i.e., damages. And he states 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 over-

ruled the case of Wathes (Western) Ltd. v. Austins (Menswear) Ltd. [1976]

1 Lloyd’s Rep. 14 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 v. Tolly [1963] 2 Q.B. 683 must be over-ruled, though

the result might have been reached on construction of the contract.

I must add to this, by way of exception to the decision not to “gloss” the

Suisse Atlantique a brief observation on the deviation cases, since some reliance

has been placed upon them, particularly upon the decision of this House in

Hain Steamship Co. Ltd. v. Tate & Lyle Ltd. [1936] 2 All E.R. 597 (so earlier

than the Suisse Atlantique) in the support of the “Harbutt” doctrine. I suggested

in the Suisse Atlantique that these cases can be regarded as proceeding upon

normal principles applicable to the law of contract generally viz., that it is a

matter of the parties’ intentions whether and to what extent clauses in shipping

contracts can be applied after a deviation, i.e., a departure from the con-

tractually agreed voyage or adventure. It may be preferable that they should

be considered as a body of authority sui generis with special rules derived from

historical and commercial reasons. What on either view they cannot do is to lay

down different rules as to contracts generally from those later stated by this

House in Heyman v. Darwins (I.c.). The ingenious use by Donaldson J. in

Kenyon Son & Craven Ltd. v. Baxter Hoare & Co. Ltd. [1971] 1 W.L.R. 519

of the doctrine of deviation in order to reconcile the Suisse Atlantique with

Harbutt’s case, itself based in part on the use of the doctrine of deviation, illu-

strates the contortions which that case has made necessary and would be

unnecessary if it vanished as an authority.

It is not necessary to review fully the numerous cases in which the doctrine

of fundamental breech 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 upon the construction of the contract (cf.

Levison v. Patent Steam Carpet Cleaning Co. Ltd. [1978] Q.B. 69) in the light of

well known principles such as that stated in Alderslade v. Hendon Laundry

Ltd. [1945] K.B. 189.

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

the plaintiffs’ factory: that, and the efficacy of their fire precautions, would be

known to the plaintiffs. 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 the respondents 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 due 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 com-

mitted by Securicor lay in a failure to discharge this latter obligation. Alterna-

tively it could be put upon a vicarious responsibility for the wrongful act of

Musgrove—viz., starting a fire on the premises: Securicor would be responsible

for this upon the principle stated in Morris v. Martin [1966] 1 Q.B. 716, 739.

This being the breach, does condition 1 apply? It is drafted in strong terms,

“In no circumstances”. . . “any injurious act or default by any employee”.

These words have to be approached with the aid of the cardinal rules of con-

struction 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. The respondents in fact

relied upon 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, e.g., 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. On this

part of the case I agree with the judge and adopt his reasons for judgment. I

would allow the appeal.

Lord Diplock

my lords,

My noble and learned friend Lord Wilberforce has summarised the facts

which have given rise to this appeal. The contract which falls to be considered

was a contract for the rendering of services by the defendants (“Securicor”) to

the plaintiffs (“the Factory Owners”). It was a contract of indefinite duration

terminable by one month’s notice on either side. It had been in existence for

some two-and-a-half years when the breach that is the subject matter of these

proceedings occurred. It is not disputed that the act of Securicor’s servant,

Musgrove, in starting a fire in the factory which they had undertaken to protect

was a breach of contract by Securicor; and since it was the cause of an event,

the destruction of the factory, that rendered further performance of the contract

impossible it is not an unnatural use of ordinary language to describe it as a

“fundamental breach”.

It was by attaching that label to it that all three members of the Court of

Appeal found themselves able to dispose of Securicor’s defence based on the

exclusion clause restricting its liability for its servants’ torts in terms which

Lord Wilberforce has already set out, by holding that where there had been a

fundamental breach by a party to a contract, there was a rule of law which

prevented him from relying upon any exclusion clause appearing in the contract,

whatever its wording might be.

The Court of Appeal was, I think, bound so to hold by previous decisions of

its own, of which the first was Harbutt’s Plasticine v. Wayne Tank Co. [1970] 1

Q.B. 44. It purported in that case to find support for the rule of law it there laid

down in the reasoning of this House in Suisse Atlantique v. Rotterdamsche Kolen

Centrale [1967] A.C. 361. I agree with Lord Wilberforce’s analysis of the

speeches in Suisse Atlantique, and with his conclusion that this House rejected

the argument that there was any such rule of law. I also agree that Harbutt’s

Plasticine and the subsequent cases in which the so-called “rule of law” was

applied to defeat exclusion clauses should be overruled, though the actual

decisions in some of the later cases might have been justified on the proper

construction of the particular exclusion clause on which the defendant relied.

My Lords, the contract in the instant case was entered into before the passing

of the Unfair Contract Terms Act 1977. So what we are concerned with is the

common law of contract—of which the subject-matter is the legally enforceable

obligations as between the parties to it of which the contract is the source. The

“rule of law” theory which the Court of Appeal has adopted in the last decade

to defeat exclusion clauses is at first sight attractive in the simplicity of its logic.

A fundamental breach is one which entitles the party not in default to elect to

terminate the contract. Upon his doing so the contract comes to an end. The

exclusion clause is part of the contract, so it comes to an end too; the party

in default can no longer rely on it. This reasoning can be extended without undue

strain to cases where the party entitled to elect to terminate the contract does not

become aware of the breach until some time after it occurred; his election to

terminate the contract could not implausibly be treated as exercisable nunc pro

tunc. But even the superficial logic of the reasoning is shattered when it is

applied, as it was in Wathes (Western) Ltd. v. Austins (Menswear) Ltd. [1976]

1 Lloyd’s Rep. 14, to cases where, despite the “fundamental breach”, the party

not in default elects to maintain the contract in being.

The fallacy in the reasoning and what I venture to think is the disarray into

which the common law about breaches of contract has fallen, is due to the use

in many of the leading judgments on this subject of ambiguous or imprecise

expressions without defining the sense in which they are used. I am conscious

that I have myself sometimes been guilty of this when I look back on judgments

I have given in such cases as Hong Kong Fir Shipping Co. Ltd. v. Kawakasi Kisen

Kaisha Ltd. [1962] 2 QB 26; Ward v. Bignall [1967] 1 Q.B. 534; Moschi v. Lep

Air Services [1973] A.C. 331; and in particular Hardwick Game Farm v.

S.A.P.P.A. [1966] 1 W.L.R. 287, when commenting unfavourably on the then

budding doctrine of fundamental breach in a portion of my judgment in the

Court of Appeal that did not subsequently incur the disapproval of this House.

My Lords, it is characteristic of commercial contracts, nearly all of which

to-day are entered into not by natural legal persons, but by fictitious ones, i.e.

companies, that the parties promise to one another that some thing will be done;

for instance, that property and possession of goods will be transferred, that goods

will be carried by ship from one port to another, that a building will be con-

structed in accordance with agreed plans, that services of a particular kind will

be provided. Such a contract is the source of primary legal obligations upon

each party to it to procure that whatever he has promised will be done, is done.

[I leave aside arbitration clauses which do not come into operation until a party

to the contract claims that a primary obligation has not been proved.]

Where what is promised will be done involves the doing of a physical act,

performance of the promise necessitates procuring a natural person to do it; but

the legal relationship between the promisor and the natural person by whom the

act is done, whether it is that of master and servant, or principal and agent, or of

parties to an independent sub-contract, is generally irrelevant. If that person

fails to do it in the manner in which the promisor has promised to procure it to

be done, as, for instance, with reasonable skill and care, the promisor has failed

to fulfil his own primary obligation. This is to be distinguished from “vicarious

liability”—a legal concept which does depend upon the existence of a particular

legal relationship between the natural person by whom a tortious act was done

and the person sought to be made vicariously liable for it. In the interests of

clarity the expression should, in my view, be confined to liability for tort.

A basic principle of the common law of contract, to which there are no excep-

tions that are relevant in the instant case, is that parties to a contract are free to

determine for themselves what primary obligations they will accept. They may

state these in express words in the contract itself and, where they do, the state-

ment is determinative; but in practice a commercial contract never states all the

primary obligations of the parties in full; many are left to be incorporated by

implication of law from the legal nature of the contract into which the parties

are entering. But if the parties wish to reject or modify primary obligations

which would otherwise be so incorporated, they are fully at liberty to do so by

express words.

Leaving aside those comparatively rare cases in which the court is able to

enforce a primary obligation by decreeing specific performance of it, breaches

of primary obligations give rise to substituted or secondary obligations on the

part of the party in default, and, in some cases, may entitle the other party to be

relieved from further performance of his own primary obligations. These

secondary obligations of the contract breaker and any concomitant relief of the

other party from his own primary obligations also arise by implication of law—

generally common law, but sometimes statute, as in the case of codifying

Statutes passed at the turn of the century, notably the Sale of Goods Act 1893.

The contract, however, is just as much the source of secondary obligations as it

is of primary obligations; and like primary obligations that are implied by law,

secondary obligations too can be modified by agreement between the parties,

although, for reasons to be mentioned later, they cannot, in my view, be totally

excluded. In the instant case, the only secondary obligations and concomitant

reliefs that are applicable arise by implication of the common law as modified

by the express words of the contract.

Every failure to perform a primary obligation is a breach of contract. The

secondary obligation on the part of the contract breaker to which it gives rise

by implication of the common law is to pay monetary compensation to the

other party for the loss sustained by him in consequence of the breach; but,

with two exceptions, the primary obligations of both parties so far as they have

not yet been fully performed remain unchanged. This secondary obligation to

pay compensation (damages) for non-performance of primary obligations I will

call the “general secondary obligation”. It applies in the cases of the two

exceptions as well.

The exceptions are:

Where the event resulting from the failure by one party to perform a

primary obligation has the effect of depriving the other party of substantially

the whole benefit which it was the intention of the parties that he should

obtain from the contract, the party not in default may elect to put an end

to all primary obligations of both parties remaining unperformed. (If the

expression “fundamental breach” is to be retained, it should, in the

interests of clarity, be confined to this exception).

Where the contracting parties have agreed, whether by express words or by

implication of law, that any failure by one party to perform a particular

primary obligation (“condition” in the nomenclature of the Sale of Goods

Act 1893), irrespective of the gravity of the event that has in fact resulted

from the breach, shall entitle the other party to elect to put an end to all

primary obligation of both parties remaining unperformed. (In the interests

of clarity, the nomenclature of the Sale of Goods Act 1893, “breach of

“condition” should be reserved for this exception.)

Where such an election is made (a) there is substituted by implication of law

for the primary obligations of the party in default which remain unperformed a

secondary obligation to pay monetary compensation to the other party for the

loss sustained by him in consequence of their non-performance in the future and

(b) the unperformed primary obligations of that other party are discharged. This

secondary obligation is additional to the general secondary obligation; I will

call it “the anticipatory secondary obligation”.

In cases falling within the first exception, fundamental breach, the anticipatory

secondary obligation arises under contracts of all kinds by implication of the

common law, except to the extent that it is excluded or modified by the express

words of the contract. In cases falling within the second exception, breach

of condition, the anticipatory secondary obligation generally arises under

particular kinds of contracts by implication of statute law; though in the case

of “deviation” from the contract voyage under a contract of carriage of goods

by sea it arises by implication of the common law. The anticipatory secondary

obligation in these cases too can be excluded or modified by express words.

When there has been a fundamental breach or breach of condition, the coming

to an end of the primary obligations of both parties to the contract at the election

of the party not in default, is often referred to as the “determination” or

“rescission” of the contract or, as in the Sale of Goods Act 1893 “treating the

“contract as repudiated”. The first two of these expressions, however, are mis-

leading unless it is borne in mind that for the unperformed primary obligations

of the party in default there are substituted by operation of law what I have

called the secondary obligations.

The bringing to an end of all primary obligations under the contract may also

leave the parties in a relationship, typically that of bailor and bailee, in which

they owe to one another by operation of law fresh primary obligations of which

the contract is not the source; but no such relationship is involved in the instant

case.

I have left out of account in this analysis as irrelevant to the instant case an

arbitration or choice of forum clause. This does not come into operation until

a party to the contract claims that a primary obligation of the other party has

not been performed; and its relationship to other obligations of which the

contract is the source was dealt with by this House in Heyman v. Darwins Ltd.

[1942] A.C. 356.

My Lords, an exclusion clause is one which excludes or modifies an obligation,

whether primary, general secondary or anticipatory secondary, that would

otherwise arise under the contract by implication of law. Parties are free to agree

to whatever exclusion or modification of all three types of obligations as they

please within the limits that the agreement must retain the legal characteristics

of a contract; and must not offend against the equitable rule against penalties;

that is to say, it must not impose upon the breaker of a primary obligation a

general second obligation to pay to the other party a sum of money that is

manifestly intended to be in excess of the amount which would fully compensate

the other party for the loss sustained by him in consequence of the breach of the

primary obligation. Since the presumption is that the parties by entering into

the contract intended to accept the implied obligations exclusion clauses are to

be construed strictly and the degree of strictness appropriate to be applied to

their construction may properly depend upon the extent to which they involve

departure from the implied obligations. Since the obligations implied by law in a

commercial contract are those which, by judicial consensus over the years or by

Parliament in passing a statute, have been regarded as obligations which a

reasonable businessman would realise that he was accepting when he entered

into a contract of a particular kind, the court’s view of the reasonableness of any

departure from the implied obligations which would be involved in construing

the express words of an exclusion clause in one sense that they are capable of

bearing rather than another, is a relevant consideration in deciding what mean-

ing the words were intended by the parties to bear. But this does not entitle the

court to reject the exclusion clause, however unreasonable the court itself may

think it is, if the words are clear and fairly susceptible of one meaning only.

My Lords, the reports are full of cases in which what would appear to be very

strained constructions have been placed upon exclusion clauses, mainly in what

to-day would be called consumer contracts and contracts of adhesion. As Lord

Wilberforce has pointed out, any need for this kind of judicial distortion of the

English language has been banished by Parliament’s having made these kinds

of contracts subject to the Unfair Contract Terms Act 1977. In commercial

contracts negotiated between business-men capable of looking after their own

interests and of 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.

Applying these principles to the instant case; in the absence of the exclusion

clause which Lord Wilberforce has cited, a primary obligation of Securicor under

the contract, which would be implied by law, would be an absolute obligation

to procure that the visits by the night patrol to the factory were conducted by

natural persons who would exercise reasonable skill and care for the safety

of the factory. That primary obligation is modified by the exclusion clause.

Securicor’s obligation to do this is not to be absolute, but is limited to exercising

due diligence in its capacity as employer of the natural persons by whom the

visits are conducted, to procure that those persons shall exercise reasonable

skill and care for the safety of the factory.

For the reasons given by Lord Wilberforce it seems to me that this apportion-

ment of the risk of the factory being damaged or destroyed by the injurious

act of an employee of Securicor while carrying out a visit to the factory is one

which reasonable business-men in the position of Securicor and the Factory

Owners might well think was the most economical. An analogous apportionment

of risk is provided for by the Hague Rules in the case of goods carried by sea

under bills of lading. The risk that a servant of Securicor would damage or

destroy the factory or steal goods from it, despite the exercise of all reasonable

diligence by Securicor to prevent it, is what in the context of maritime law would

be called a “misfortune risk”—something which reasonable diligence of neither

party to the contract can prevent. Either party can insure against it. It is generally

more economical for the person by whom the loss will be directly sustained

to do so rather than that it should be covered by the other party by liability

insurance. This makes it unnecessary to consider whether a later exclusion

clause in the contract which modifies the general secondary obligation implied

by law by placing limits on the amount of damages recoverable for breaches of

primary obligations, would have applied in the instant case.

For the reasons given by Lord Wilberforce and in application of the principles

that I have here stated, I would allow this appeal.

Lord Salmon

MY LORDS,

The contract with which this appeal is concerned is a very simple commercial

contract entered into by two highly experienced business enterprises—the

appellants whom I shall call Securicor and the respondents whom I shall call

Photo Productions.

This appeal turns in my view entirely upon certain words in the contract

which read as follows :—

“Under no circumstances shall [Securicor] be responsible for any injurious

“act or default by any employee of [Securicor] unless such act or default

“could have been foreseen and avoided by the exercise of due diligence on

“the part of [Securicor] as his employer.”

We are not concerned with the Unfair Contract Terms Act 1977 since the

present contract was entered into before that Act was passed. Accordingly, I

prefer to express no view about the effect of that Act as the result of this appeal

depends solely on the common law.

The facts relevant to this case are very short. Indubitably, one of Securicor’s

servants called Musgrove committed an injurious act or default which caused

Photo Productions’ factory to be burned down; and as a result, Photo

Productions’ suffered a loss of £615,000. This disaster occurred when Musgrove

was visiting the factory on patrol one Sunday night and deliberately threw a

lighted match on some cartons lying on the floor of one of the rooms he was

inspecting. Whether Musgrove intended to light only a small fire or to burn

down the factory, and what his motives were for what he did were found by the

learned trial judge to be mysteries which it was impossible to solve.

No-one has suggested that Securicor could have foreseen or avoided by due

diligence the act or default which caused the damage or that Securicor had been

negligent in employing or supervising Musgrove.

The contract between the two parties provided that Securicor should supply a

patrol service at Photo Productions’ factory by four visits a night for seven

nights a week and two visits every Saturday afternoon and four day visits every

Sunday. The contract provided that for this service, Securicor should be paid

£8.15 a week. There can be no doubt that but for the clause in the contract

which I have recited, Securicor would have been liable for the damage which was

caused by their servant, Musgrove, whilst indubitably acting in the course of his

employment: Morris v. Martin [1966] 1 Q.B. 716. To my mind, however, the

words of the clause are so crystal clear that they obviously relieve Securicor from

what would otherwise have been their liability for the damage caused by

Musgrove. Indeed the words of the clause are incapable of any other meaning.

I think that any business man entering into this contract could have had no

doubt as to the real meaning of this clause and would have made his insurance

arrangements accordingly. The cost to Photo Productions for the benefit of the

patrol service provided by Securicor was very modest and probably substantially

less than the reduction of the insurance premiums which Photo Productions

may have enjoyed as a result of obtaining that service.

Clauses which absolve a party to a contract from liability for breaking it are

no doubt unpopular—particularly when they are unfair, which incidentally, in

my view, this clause is not. It is, I think, because of the unpopularity of such

clauses that a so called “rule of law” has been developed in the Court of Appeal

to the effect that what was characterised as “a fundamental breach of contract”,

automatically or with the consent of the innocent party, brings the contract to

an end; and that therefore the contract breaker will then immediately be barred

from relying on any clause in the contract, however clearly worded, which would

otherwise have safeguarded him against being liable inter alia in respect of the

damages caused by the default; see for example Karsales (Harrow) Ltd. v.

Wallis [1956] 1 W.L.R. per Denning L.J. at p.946 and Harbutt’s “Plasticine”

Ltd. v. Wayne Tank and Pump Co. Ltd. [1970] 1 Q.B. 447.

I entirely agree with my noble and learned friend Lord Wilberforce’s analysis

of the Suisse Atlantique case which explains why the breach does not bring

the contract to an end and why the so-called “rule of law” upon which Photo

Productions rely is therefore non-existent. This proposition is strongly sup-

ported by the passage recited by Lord Wilberforce in Lord Porter’s speech in

Heyman v. Darwins Ltd. [1942] A.C. 356 at p.399.

Any persons capable of making a contract are free to enter into any contract

they may choose: and providing the contract is not illegal or voidable, it is

binding upon them. It is not denied that the present contract was binding upon

each of the parties to it. In the end, everything depends upon the true con-

struction of the clause in dispute about which I have already expressed my

opinion.

My Lords, I would accordingly allow the appeal.

Lord Keith of Kinkel

MY LORDS,

I agree with the speech of my noble and learned friend Lord Wilberforce,

which I have had the advantage of reading in draft and to which I cannot

usefully add anything.

Accordingly I too would allow the appeal.