On 16 December 1986, the High Court of Australia (“High Court”) in Darlington Futures Ltd v Delco Australia Pty Ltd[1] (“Darlington v Delco”) handed down its decision in relation to the interpretation of exclusion and limitation of liability clauses in commercial contracts.

What happened in this case?

The appellant, Darlington Futures Ltd, and the respondent, Delco Australia Pty Ltd, entered into a contract on 12 June 1981 under which the appellant was to provide the respondent with brokerage services (“Contract”).

The front page of the Contract contained a number of questions. One of the questions was “do you wish this account to be traded at the discretion of Darlington Futures Limited?” – the respondent’s answer was “no”. Accordingly, a provision in the Contract authorising the appellant to operate a discretionary account on behalf of the respondent was struck out. Clause 9 of the Contract expressly provided that unless the respondent’s account was to be traded as a discretionary account by the appellant, the respondent would be solely responsible for operating and controlling it.

The appellant recommended that the respondent engaged in transactions known as tax straddles which are intended to help avoid exposure to trading losses. This is achieved by matching contracts to sell and buy the same quantity of the same commodities. In July 1981, the respondent instructed the appellant to enter into such transactions and engage in day trading, which leaves the respondent exposed to the market for one day only.

Throughout August and September 1981, the appellant engaged in such transactions on behalf of the respondent in three instances and in each instance, left the respondent exposed to the market for more than one day. In increasing the respondent’s exposure in the market, the appellant generated heavy losses and the respondent sought to recover $279,715.36 in damages from the appellant.

Consideration of the damages payable in this case required an interpretation of clauses 6 and 7 of the Contract.

Clause 6 (referred to as “the Exclusion Clause”) states:

‘… The Client finally acknowledges that the Agent will not be responsible for any loss arising in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this Agreement or not, and that the Agent shall not be liable to account to the Client for any profit made by the Agency in any of the circumstances set out in clause 9 whether or not such circumstances result in a loss to the client.’

Clause 7(c) (referred to as “the Limitation Clause”) states:

‘Any liability on the Agent’s part or on the part of its servants or agents for damages for or in respect of any claim arising out of or in connection with the relationship established by this agreement or any conduct under it or any orders or instructions given to the Agent by the Client, other than any liability which is totally excluded by paragraphs (a) and (b) hereof, shall not in any event (and whether or not such liability results from or involves negligence) exceed one hundred dollars.’

Exclusion Clause

The approach of the House of Lords is that ‘exclusion clauses should be simply construed in accordance with their language and that they should not be subjected to a strained construction in order to reduce the ambit of their operation’[2]. In Photo Production v Securicor Ltd,[3] Lord Diplock held that the courts were not entitled to reject an exclusion clause ‘however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only’[4].

In Darlington v Delco, the High Court followed its previous applications of the principles of contractual interpretation,[5] and essentially rejected the House of Lords’ approach.

The High Court stated, in Australia, ‘the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in 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 proferentum in case of ambiguity’.[6]

Using this approach, the High Court considered the natural and ordinary meaning of the Exclusion Clause and found that the words refer to ‘trading activity undertaken by the appellant for the respondent with the respondent’s authority’. The High Court found that the actions of the appellant to leave the exposure for over a day, were unauthorised, and when the clause was considered in light of the context, it could not be supposed that ‘the parties intended to exclude liability on the part of the appellant for losses arising from trading activity in which it presumed to engage on behalf of the respondent when the appellant had no authority to do so’. Accordingly, the Exclusion Clause could not be upheld.

Limitation Clause

In Alisa Craig Fishing Co. Ltd v Malvern Fishing Co. Ltd, the House of Lords observed that ‘the principles applicable to exclusion clauses do not apply in their full rigour to conditions which merely limit liability, thought such conditions will be read contra proferentum’.[7]

This was rejected by the High Court in Darlington v Delco where it concluded that the Limitation Clause was to be construed in the same manner as the Exclusion Clause. In following the same approach and applying the same contractual principles, the High Court held that the claim by the respondent did, in fact, arise ‘out of or in connection with’ the relationship between the appellant and the respondent as an agent and client, and clearly fell within the scope of the Limitation Clause.

Contra proferentum

Contra proferentum is one of the canons of construction used in contractual interpretation where there is an ambiguity, that is, where a particular term of the contract is capable of more than one meaning.

When an ambiguity arises in a commercial contract, under the doctrine of contra proferentum, the preferred meaning of the ambiguous clause should be the one that works against the interests of the party who provided the wording.

Commentary

The approach of the High Court when dealing with an exclusion clause is to:

  • construe the clause in accordance with its natural and ordinary meaning;
  • read the clause in light of the contract as a whole to give weight to the context in which the clause appears; and
  • in the case of ambiguity, apply the doctrine of contra proferentum.

The approach of the High Court appears to be centred on the balancing of the rights of the parties to a contract. This is illustrated in Darlington v Delco in two ways. Firstly, the approach of the High Court does not accept that an exclusion clause is simply an agreed allocation of risk and/or loss between the parties, and has opted for a stricter interpretative approach to avoid one party for being able to exclude damages or claims by the other party, for unauthorised actions and/or acts of negligence. Secondly, in affirming the doctrine of contra proferentum, the High Court is demonstrating an inherent dislike for standardized contracts which often arise from a position of uneven bargaining power, and gives the benefit of any ambiguity in favour of the receiving party of the contract.

However, although the High Court in Darlington v Delco interpreted the Exclusion Clause in manner favourable to the respondent in not allowing the appellant to deny liability for its unauthorised actions, this was counterbalanced by the High Court’s interpretation of the Limitation Clause, which allowed the appellant to limit its liability, for actions arising out of its relationship with the respondent, despite such actions being unauthorised.

Conclusion

The High Court decision in Darlington v Delco demonstrates the complexity and unpredictability of judicial interpretation of exclusion and limitation of liability clauses in commercial contracts. The High Court’s application of the principles of interpretation, as seen in this case, and in previous cases, illustrates that although Australia has a clear position in its understanding of the principles of commercial interpretation, the application of such principles by the Australian courts are extremely difficult for parties to a contract to predict. If you have any questions about exclusion and limitation of liability clauses, or you’re looking for a lawyer to help you out with a legal dispute, LegalVision can help! Call us today on 1300 544 755.

 

[1] (1986) 161 CLR 500.

[2] Ibid, 4.

[3] [1980] A.C. 827.

[4] Ibid, 851.

[5] See Sydney Corporation v West (1965) 114 CLR 481 and Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353.

[6] Above n 1.

[7] Alisa Craig Fishing Co. Ltd v Malvern Fishing Co. Ltd [1983] 1 WLR 964.

Priscilla Ng

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