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Rajah Lehal

Agents and employees, watch out! It's all in the hands of the principal...

October 26, 2016

When drafting a limitation of liability clause, ensure that all persons who may be covered by the liability exemption clause are included and specify the degree of coverage.

Courts have stated that persons acting as agents on behalf of an employer may also be extended the benefits of a limitation of liability clause so long as an agent-principle relationship has been properly created. This relationship is created when:

  1. there is clear intention to create an agency relationship and to protect the relationship;
  2. the contracting party is contracting not only for himself but also for the agent(s);
  3. there is authority to act as an agent (or subsequent rectification); and
  4. consideration flows from agent to contracting party.

For example, in New Zealand Shipping Co. Ltd. v. A.M. Satterthwaite & Co. Ltd. [1975 – PC], there was a contract between Satterthwaite and another company, to carry a drill. This contract included the following limitation of liability clause:

“It is hereby expressly agreed that no servant or agent of the carrier (including every independent contractor from time to time employed by the carrier) shall in any circumstances whatsoever be under any liability whatsoever to the shipper, consignee or owner of the goods or to any holder of this bill of lading for any loss or damage or delay of whatsoever kind arising or resulting directly or indirectly from any act neglect or default on his part while acting in the course of or in connection with his employment and, without prejudice to the generality of the foregoing provisions in this clause, every exemption, limitation, condition and liberty herein contained and every right, exemption from liability, defense and immunity of whatsoever nature applicable to the carrier or to which the carrier is entitled hereunder shall also be available and shall extend to protect every such servant or agent of the carrier acting as aforesaid and for the purpose of all the foregoing provisions of this clause the carrier is or shall be deemed to be acting as agent or trustee on behalf of and for the benefit of all persons who are or might be his servants or agents from time to time (including independent contractors as aforesaid) and all such persons shall to this extent be or be deemed to be parties to the contract in or evidenced by this bill of lading.”

The carrying company hired New Zealand Shipping’s stevedores to unload the drill. The drill was dropped by the stevedores and damaged. The court held that the limitation of liability clause extended to the stevedores because they were acting as agents to the contracting party.

Similarly, employees may benefit from a limitation of liability clause found in a contract between an employer and client if two requirements are satisfied: the limitation of liability clause, expressly or impliedly, extends its benefit to the employee(s) seeking to rely on it; and the employee(s) seeking the benefit of the limitation of liability clause must have been acting in the course of their employment and must have been performing the very services provided for in the contract when the loss occurred.

London Drugs v Kuehne & Nagel [1992 - SCR], stands for a precedent of this rule. In this case, London Drugs (the customer) delivered a transformer to Kuehne & Nagel for storage pursuant to terms and conditions of a standard form contract of storage. The contract for storage included a limitation of liability clause stating that the warehouseman’s liability on any one package is limited to $40 unless the value was declared in writing to be more than $40 and additional insurance was purchased. London drugs did not purchase the additional insurance. Kuehne & Nagel’s employees dropped the transformer while loading it causing close to $34,000 in damages. London Drugs sued the employees that dropped the transformer. The court stated that the employees should not be held liable because:

  1. the contract between the employer and customer impliedly extended the benefit of the limitation of liability clause to the employees; and
  2. they clearly were acting in the course of their employment.

In some cases, the courts have even allowed employers to rely on an exemption clause even when the damage occurred was intentional or negligent. For example, in Photo Production v. Securicor [1980 – HL], the Defendant, a provider of patrol guards, entered into a contract with the Plaintiff to guard the Plaintiff’s factory. The Defendant’s employees, guarding the factory, deliberately started a fire to warm up but the fire got out of control. The damage caused was 615 000 Pounds. The Defendant successfully relied on the exemption of liability clause. The court started that exemption clauses are to be interpreted the same as any other term regardless of whether a breach has occurred and the clause can be relied on even though the cause of damage was intentionally initiated.

Contract Drafting
Case Law
Limitation of Liabilitgy

Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.