The exclusion of vicarious liability of employers in exemption clauses

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Abstract

May employers exclude their vicarious liability for their employees’ unlawful conduct by way of exemption clauses? The established common-law rules applicable to the enforcement of exemption clauses provide that these clauses must be narrowly interpreted: in the case of justus error, the exemption clause will not be enforced; if there is ambiguity, the clause must be interpreted against the proferens and finally a clause that is against public policy will not be enforced. This article argues that in light of the development of the doctrine of vicarious liability, excluding vicarious liability in an exemption clause should in certain circumstances be regarded as against public policy.

The common-law doctrine of vicarious liability of employers was developed and extended in a watershed judgment of the Supreme Court of Canada in Bazley v Curry. In this case, the court extended the vicarious liability of employers by moving away from the requirement that unlawful conduct of employees must be within the scope of their employment. The court instead adopted the sufficiently close connection test which requires a close connection between the unlawful act and the duties of the employee. Employers could in terms of this test be held liable for intentional unlawful conduct by an employee which was not possible under the scope of the employment test. The risk (created by the employer by entrusting certain duties to the employee) that the unlawful conduct could take place, was held to be an important factor in establishing whether there was a sufficiently close connection to establish vicarious liability. The court acknowledged that the doctrine of vicarious liability is anchored in public policy; furthermore that the two most important public policy considerations were seen as a fair remedy for the victim and as a deterrent for employers in that employers would, to avoid possible liability, take measures to ensure that an unlawful act would not take place. The South African Constitutional Court in K v Minister of Safety and Security developed the doctrine of vicarious liability in light of constitutional principles and held the Minister of Police liable in terms of the close connection test for the intentional unlawful conduct of police officers.

It is submitted that given the important policy considerations of fair compensation for victims and deterrence of employers underlying the doctrine of vicarious liability, it could in certain circumstances be against the public interest and thus the boni mores to enforce an exemption clause that excludes vicarious liability. To establish whether this argument is valid, this article briefly discusses two Constitutional Court decisions that dealt with the enforcement of contractual clauses in which the parties argued that upholding these clauses would be against the boni mores. In Barkhuizen v Napier the court elucidated that the boni mores is the general sense of justice of the community, which recognises the need to do simple justice between contracting parties. This concept encompasses fairness, justice and reasonableness. In Beadica 231 CC v Trustees for the time being of the Oregon Trust, the Constitutional Court held that although pacta sunt servanda is not “a relic of the past”, parties can indicate the specific instances why a specific contract is contrary to the boni mores. If the court then finds that the contract is so unfair, unreasonable or unjust that it is contrary to public policy, it will be held to be unenforceable. I agree with Davis J in Mort NO v Henry Shields Chiat. He argued that the concepts underlying boni mores in the law of delict are similar to the principles of good faith in the law of contract and can inform the concepts of fairness, justice and reasonableness underlying public policy in the law of contract.

Most past judgments dealing with exemption clauses excluding vicarious liability, notably Goodman Brothers (Pty) Ltd v Rennies Group Ltd, Afrox Health Care v Strydom and First National Bank of SA Ltd v Rosenblum (Rosenblum), leaned towards a strict pacta sunt servanda approach. Some judgments, inter alia Rosenblum, further held that broadly phrased, all-inclusive and non-specific exemption clauses could also include intentional unlawful conduct by employees, although not specifically mentioned in the exemption clause. These judgments did not give effect to the common-law principle that exemption clauses should be narrowly interpreted. However, in Hotels, Inns & Resorts v Underwriters at Lloyds (Hotels) the court held that the parties’ intention should be taken into account when interpreting an exemption clause and that it is untenable to hold that parties intended to conclude an exemption clause excluding liability for acts that goes to “the root of the contract”.

The question of whether a broadly formulated exemption clause should be enforced in the case of theft of goods by an employee of a company to whom goods were entrusted, came to the fore in Fujitsu Services Core (Pty) Limited v Schenker South Africa (Pty) Limited (Fujitsu). The exemption clause excluded damages resulting from a negligent act of “whatsoever nature” and “howsoever arising” by Schenker and its employees unless the claim arose at a time when the goods were in the actual custody of Schenker and under its actual control. The court firstly established whether Schenker was vicariously liable by applying the close connection test and held that the risk that Schenker created by giving authority to their employee forged a close connection to hold Schenker vicariously liable.

The next question was whether the exemption clause excluded Schenker’s liability. The court affirmed that exemption clauses should be interpreted narrowly and further followed Hotels in that there cannot be reliance on an exemption clause where the contract was not being executed, except when it was the explicit intention of the parties. The court emphasised that the intention of parties should always be established, not only where there is ambiguity. The court found that the goods were not under the control of Schenker when it was stolen and for that reason the exemption clause did not cover the theftuous conduct of the employee. It is suggested that the approach in Fujitsu, in which the court narrowly interpreted the exemption clause and took the intention of the parties into account, is the correct approach.

The Consumer Protection Act 68 of 2008 (CPA) is relevant in this context since it protects consumers by limiting their suppliers’ reliance on exemption clauses in certain circumstances. Importantly section 51(1)(c)(i) provides that suppliers or their employees may not be exempted from gross negligence or on conditions that are unfair, unreasonable or unjust. Section 49 provides that contracts that limit the risk of suppliers where the risk is unexpected must be brought to the attention of the consumer. This section does not afford broad protection, since as soon as the risk is pointed out to the consumer, the supplier is exempted. However, consumers can then still argue that the exemption clause is unfair, unreasonable or unjust in terms of section 52(3). Certain clauses excluding the risk of the supplier are further contained in a so-called grey list in the regulations to the act in that there is a presumption that such clauses are not fair and reasonable in terms of section 44(1). The list includes an exemption for injury or death of a person and clauses exempting an employer for the vicarious liability of its employee. The presumption can of course be rebutted by the supplier. Section 113 under the heading “vicarious liability” provides that if an employee is liable in terms of the CPA for conduct in the course of the employee’s employment, the employee will be jointly and severally liable with their employer. This section only pertains to conduct that relates to the CPA. The CPA thus provides only limited protection to consumers against the exclusion of vicarious liability in exemption clauses.

It is recommended that courts should, in dealing with exemption clauses excluding vicarious liability, adhere to the common-law rule that exemption clauses should be narrowly interpreted; apply the contra proferentem rule in broadly phrased exemption clauses; and establish the intention of parties especially where non-performance goes to the root of the contract. Further, exemption clauses not specifically excluding intentional conduct should not be interpreted to cover intentional conduct and even where intentional conduct is explicitly included in exemption clauses, courts should not automatically give effect to such clauses, but should consider whether it is against public policy to enforce such a clause. Ultimately courts should in light of the importance of policy considerations underlying vicarious liability, develop the rules of the common law of contract in terms of section 39(2) of the Constitution. These policy considerations should inform the law of contract regarding rules for the enforcement of exemption clauses which exclude vicarious liability.

Keywords: boni mores; close connection test; Consumer Protection Act; deterrence; employment relationship; exemption clauses; intentional unlawful conduct; policy considerations; remedy for victims; unlawful conduct; vicarious liability

 

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