CONTRACT - Australasian Legal Information...

6 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #103 JULY/AUGUST 2005

CONTRACT

EXCEPTION CLAUSES IN AUSTRALIAN DEFENCE CONTRACTS—LEGAL ISSUESPeter Bowers, Solicitor

Royal Australian Navy

INTRODUCTIONParties to contract are often not content to leave to the common law alone, the responsibility of allocating risk between them. Exclusion clauses are a means by which contract drafters attempt to alter that allocation.1 Without these and other tools, liability for loss and damage arising in the contract context would fall on the party which was held responsible at law. To what extent are parties permitted to do this? One early policy argument was that ‘freedom of contract’ properly allows parties to dictate the nature and extent of their obligations as they see fit.2 The development of the doctrine of ‘fundamental breach’ required that parties not be permitted to retract their obligations to the extent that threatened their performance of fundamental obligations under the contract.3 Another influence has been the rise of protection for consumers whereby stronger parties to contract have had curtailed their propensity for limiting their own obligations.4 More recently, there is a recognition that parties which are both ‘commercial’ in nature, that is, where both have a degree of commercial sophistication, ought properly to be permitted to alter their obligations as they see fit, provided the words used are sufficiently clear.5

In Part One this paper will examine the passage from the doctrine of fundamental breach to a focus on the construction of the contract, as a prime factor in determining the enforceability of exclusion clauses. Part Two will examine particular rules of construction. Part Three will examine several different heads of loss or damage which are at issue in exclusion clauses, including negligence and consequential losses. Part Four will consider the issues raised in the earlier parts as they apply to a

particular standard form contract proposed by the Department of Defence6 in Australia for use in its contracts with Defence industry. As a substantial purchaser of capital works with the largest government department outlay in the country, Defence has a great stake in the framing of risk allocation clauses in its contracts. Events such as the fire in HMAS WESTRALIA in May 1998 bring to attention the potential for catastrophic loss involved in operating and maintaining a Defence Force. In a situation where increased reliance is being placed on industry7 to maintain and support the Australian Defence Force (ADF) through commerce, the question of the distribution of liability between contracting parties for loss or damage is of great interest. Exclusion clauses are one particular aspect, amongst many, to be considered.

While most of the discussion in this paper takes place in the context of the acquisition of capital equipment, there is some consideration of the purchase of goods by Defence, which has some relevance at the lower end of the scale in terms of value. In particular, however, this paper considers the issues surrounding exclusion clauses as contained in a particular standard form document used by Defence, the Australian Defence Contract (Strategic Materiel) (‘ASDEFCON’).8 This document is the standard form for the acquisition of strategic-level materiel, such as warships, by the Department of Defence.9 In particular the clauses which limit the liability of the contractor will be examined, clauses 8.5.1 and 8.5.2, and will be referred to as the Defence limit of liability clauses.10 Other clauses will also be referred to.

In the discussion of these issues in the Defence environment,

AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #103 JULY/AUGUST 2005 7

there will be consideration of the legislative and regulatory requirements of Commonwealth officers making decisions regarding liability incurred by them on the Commonwealth’s behalf.

PRELIMINARY ISSUESAs to terminology, the phrase ‘exemption clause’ is often used as a general term encompassing both attempts to exclude liability altogether and attempts to limit liability in a particular case.11 The term ‘exclusion clause’ is too used to refer both to clauses purporting to exclude altogether as well as to limit liability. In this paper the term ‘exclusion’ is used in the broader sense and where it is necessary to distinguish it as referring to clauses of total exclusion only, and not to limitations, then this will be made clear as required.

While indemnities, insurance, warranty and liquidated damages clauses are other important examples of how parties manage the distribution of risk between themselves, in this paper they are dealt with only to address issues relating to exclusion clauses.

Many of the cases on exclusion clauses are decided in the context of bailment contracts and in particular carriage of goods at sea. Of course, caution needs to be taken in terms of extrapolating general conclusions from cases decided within a narrow field. Even so, the bailment and carriage cases do provide some guidance as to the state of the law in general and are useful provided the difference in context is taken into account.

During discussion of the law in Parts One, Two and Three, some references will be made to specific points which will be referred to in the later examination of the issue in the Defence context. For example, Point 1, addressing the ‘natural

and ordinary reading’ of clauses will be raised again later in Part 4 to consider this issue with respect to Defence.

Consumer issues are addressed but not to any great extent as the focus for Defence is on the common law aspects of the law.

PART 1: BACKGROUND TO EXCLUSION CLAUSES— THE PATH FROM ‘FUNDAMENTAL BREACH’ TO A ‘CONSTRUCTION’ APPROACHIn theory, all contracts would be drafted in such a way that the intentions of the parties as expressed in writing in the contract are clear enough to allow for a ready understanding of the agreement. However, in circumstances such as those considered here, where parties may be agreeing to terms which are possibly onerous and which deny one of them a cause of action which would otherwise lie, an examination of the intention of the parties is important. A discussion of the early path taken by the courts on exclusion clauses is useful because it sheds light on some basic questions at issue:

(a) How can one party rely on a clause which exempts it from accepting responsibility with respect to fundamental obligations undertaken in the agreement in which the exemption clause exists?

(b) To what degree can parties themselves determine contract terms in this context, without external intervention?

(c) To what extent are exemption clauses applicable narrowly to the performance of work by the contractor under the contract (in Defence terminology – the Statement of Requirement (SOR)) and to what extent are they applicable to liabilities other than those, such as liability for damage to property owned by

third parties, personal injury, or to the profits of a principal? For the purpose of this paper, these risks will be termed respectively, ‘performance risks’ and ‘other risks’.

An early English rule of law, ‘fundamental breach’, held that there were categories of contract terms which were so fundamental that no exception expressed in contract would apply to relieve a party of the obligation to perform them.12 In Karsales (Harrow) Ltd v Wallis, Denning LJ as he then was, held that exempting clauses no matter how widely expressed are only available to the party relying on them when that party is carrying out the contract in its essential terms.13 The judgement expanded the application of this principle from the previously confined area of bailment to be applied generally to commercial transactions.14

A criticism of the doctrine of fundamental breach was made on the basis that the nature of exemption clauses are that in fact they qualify the promise, fundamental or not, at the time the contract is made and not as a defence to an allegation of breach at the time of adjudication.15 The doctrine was qualified in England as a unified rule of law in the case of Suisse Antlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale.16 This case raised the principle that the contract needs to be read in terms of the parties contractual intentions and that application of the doctrine of fundamental breach ought not to be applied universally as a matter of course.17 In particular, Lord Reid in Suisse Antlantique emphasised the importance of upholding the terms of the contract as entered into – that is, to apply the ‘rule of construction’ approach18 as opposed to the doctrine of fundamental breach. In addition, Lord Upjohn referred to the


…well-known canon of construction, that wide words which taken in isolation would bear one meaning must be construed as to give business efficacy to the contract and the presumed intentions of the contract...19

The notion of giving commercial effect to provisions is evident here.

Not long prior to the House of Lords decision in Suisse Antlantique, the Australian High Court had already entertained the rejection of the doctrine of fundamental breach in favour of a view that rules of construction ought to be applied, in Sydney City Council v West.20 While this is a bailment case and therefore not directly applicable in every case, the principles behind the move towards a construction-oriented approach are worth examining. On parking his car in a car park, the plaintiff was handed a ticket which contained, first amongst other things, the condition that:

The Council does not accept any responsibility for the loss of or damage to any vehicle or for loss of or damage to any article or thing in or upon any vehicle or for any injury to any person however such loss, damage or injury may arise or be caused.21

Beneath the conditions and on the same side of the ticket appeared the words: ‘IMPORTANT. This ticket must be presented for time stamping and payment before taking delivery of the vehicle’.22

Consistent among the judgments was the notion that, for the exemption clause to be called into effect, the loss must have arisen from activity which, while negligent, was an activity undertaken properly in the course of carrying out the contract, in this case, for bailment and must not be some positive act by the appellant outside the

bounds of the contract terms23 noting that one of the common law obligations of bailees is to keep secure the goods which are the subject of the bailment. The appellant was held to have engaged in a deliberate act which was outside the terms of the contract and which led to damage being suffered by the respondent. All members of the High Court treated the issue as one of construction.24 In the words of Barwick CJ and Taylor J in their reference to Tozer Kemsley & Millbourn (A/asia) Pty. Ltd. v Collier’s Interstate Transport25 …in the absence of express words or necessary intendment it would be going too far to construe the clause as excusing loss by misdelivery or delivery to an unauthorized person.26 That is, the choice of expression of the parties is what is important as opposed to a broadly applicable rule of law which restricts the use of exclusion clauses in general. As words covering deliberate acts by the carpark owner or its employees were not included in the very broadly drafted exemption clause quoted above, damage arising from those acts were not included within the scope of the exemption. In addition the carpark’s non compliance with the additional words under the heading ‘IMPORTANT’ put its actions outside the scope of the contract and therefore of the exemption clause also. Kitto J further referred to the four corner’s rule as espoused in Gibaud v Great Eastern Railway Co27 whereby a person can not rely on a certain condition which would provide protection (exclusion clause) where that person has broken the contract by not meeting obligations under it.28

The move towards an interpretation of exemption clauses in a manner which supports their effectiveness is

provided in academic circles by Professor Brian Coote in his advocacy for a position which permits viewing such clauses as not only a shield against claims for damages but as a qualification to the substantive rights of the other party, such that the contractual obligations are delimited from contract commencement.29 This position is contrary to the view that such a clause ought to be considered only after liability has been established. This position can be described as one advocating a focus on the function of exclusion clauses in defining the promisor’s obligations.30

In Photo Production Ltd v Securicor Transport Ltd31 Lord Wilberforce referred to the creation of trade practices legislation in the UK (the Unfair Contract Terms Act 1977) as part of the justification for no longer applying the doctrine of fundamental breach to commercial agreements outside the consumer arena, that is, between parties of equal strength. He said:

After this Act, in commercial matters generally, when 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.32

In what is the most important recent Australian case in this field the Australian High Court in Darlington Futures Ltd v Delco Australia Pty Ltd33 stated, in reference to previous High Court decisions34 that:

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 case….35 Point 1

The position outlined in Photo Productions and in Darlington Futures above are sometimes represented as the principle of commercial construction.36 Darlington Futures was commented on approvingly in a later decision of the same court in Nissho Iwai Australia v Malaysian International Shipping Corporation Berhard.37 In a shipping carrier case, the Court38 stated that:

In determining whether an exemption clause should be construed so as to apply to an event which has defeated the main object of the contract, much must depend upon the nature of the events which the clause identifies as giving rise to the exemption from liability. If the happening of a stipulated event [to which an exemption clause applies] will always result in the defeat of the main object of the contract, there will be no scope for holding that that object requires the conclusion that the exempting clause is not applicable to that event. But even in cases where the occurrence of the events stipulated in the exemption clause will not always defeat the main object of the contract, the nature of those events may nevertheless give rise to the inference that the clause was intended to apply to those events even when they occur in circumstances which defeat the main object of the contract.39

Thus the move in court decisions away from the principle of fundamental breach towards a process of construction in interpreting contract is

made clear. While the primary case cited in support of the construction approach in Australia is Darlington Futures, there is a line of authority leading in this direction to that case. Subsequently, the tract cited above from Nissho Iwai is expressed in terms which are quite contrary to the principle of fundamental breach. As is apparent in Darlington Futures, as well as in Nissho Iwai this result is confined to business-to-business transactions where both parties are of roughly equal bargaining strength and therefore generally outside the consumer context.40 This is not the case with respect to consumer transactions. Point 2

Having said this, it is apparent that tension still exists between (i) a notion which almost amounts to parties having complete freedom of choice in determining terms, as long as there is a commercially satisfactory result (in the opinion of the courts cited immediately above) and (ii) the tendency towards strict construction of contract terms. Ascertaining the exact position in Australia is complicated by a wide mix of views. An example of the latter position is provided by Mr Paul Elliot, QC, of Melbourne, who has written in a way that suggests that the move away from the doctrine of fundamental breach has been more one of emphasis than as solid a departure as Professor Coote would claim in his ‘substantive clause’ analysis. Mr Elliot still maintains that ‘Where the performance offered is totally different from that contracted for, the party will be prevented from relying upon any clause of exemption or limitation in subsequent proceedings on the contract’.41 This statement does reflect an adherence to, or at least an affection for, the doctrine of fundamental breach which is not present in Darlington

Futures itself and in other cases, such as Nissho Iwai. It might also have been said in the consumer context, as opposed to business-to-business context considered here. The view in support of the former position is provided by J.W. Carter who says that where appropriate, the better view is that strict construction is not today a viable secondary rule with respect to exclusion clauses.42 Darlington Futures provides judicial authority for this position.

A further important point is that Darlington Futures represents a departure in the Australian approach from that of the United Kingdom in terms of distinguishing between the treatment of clauses which attempt to exclude liability altogether and those which attempt only to limit the liability of one party or another. In the United Kingdom a distinction between the two types of clauses was maintained in Ailsa Craig Fishing v Malvern Fishing43 where the House of Lords stated that the principles applicable to exclusion clauses do not apply as rigorously to clauses limiting liability.44 However, in Darlington Futures the approach to the two types of clause is unified by the High Court who said that the same principles apply to limitation clauses as to exclusion clauses.45

So, to answer the questions posed at the beginning of this Part:

(a) Where the parties are of equal strength and the contract terms give clear indication of the parties’ intention, then a party is able to rely on qualifications to its primary promises under contract, to exclude liability. This is based on the positive reception given a full interpretation of clauses in Darlington Futures and other cases, as well as the Professor Coote-inspired construction of exemption clauses as affecting


substantive rights from contract commencement.

(b) To a significant degree, outside of the consumer context and in the commercial field, with adequately expressed clauses and contract, parties are able to determine contract terms themselves.

(c) The question of how this state of play affects a party specifically with respect to ‘performance risks’ and ‘other risks’ as defined, turns on the particular framing of the clause and contract. While this can not be done in the abstract, that is, without specific facts at hand, Parts Three and Four will shed light on certain aspects of the issue.

PART 2: RULES OF CONSTRUCTIONThe purpose of this part is to examine some of the key rules of construction applied to exemption clauses. Primary rules are distinguished from secondary rules.46

Primary Rule—Intentions of the PartiesThe primary rule of construction is to give effect to the intentions of the parties.47 The interpretation of contract relies on expressed intention and in doing so the law makes the assumption, as a starting point, that the parties have said what they meant to say.48

Primary Rule—Commercial ConstructionThe effect of the commercial construction requirement imposed on the interpretation of contracts is that contracts should be given effect in a way which is most commercially sensible.49 This is the same as the notion of ‘business efficacy’ referred to earlier. Of course, rules of construction are only necessary to apply where the parties have not chosen words which clearly indicate their intention.50

Following on from the comments above regarding Professor Cootes’ proposition, the commercial construction approach focuses on identifying the function of a clause as a tool of construction, at the expense of emphasising form.51 This is made easier in Australia, where following Darlington Futures, the same rules of construction are to apply to clauses of limitation as well as to exclusion clauses.52

Secondary Rule—contra proferentumAs discussed above, in Darlington Futures, the High Court found that an exclusion clause is to be construed according to its natural or ordinary meaning read in the context of the whole contract. In addition, the court said that where appropriate and in the case of ambiguity, such a clause should be construed contra proferentum.53 This means that if ambiguity exists in the meaning of a phrase, it must be resolved against the proferens.54 Although a general rule of construction in cases of ambiguity of drafting, it has particular application to exclusion clauses.55

The application of the rule can be self-fulfilling in that a strict construction of a clause can create an artificial ambiguity56 thereby requiring application of the rule. This is said57 to have occurred in Thomas National Transport (Melbourne) Pty Ltd v May and Baker (Australia) Pty Ltd58 when Windeyer J stated that an exclusion clause is ‘ordinarily construed strictly against the proferens’.59

It should be noted that in Jennings Construction Ltd v Q H & M Birt Pty Ltd60 the rule was determined to have less application in relation to standard form documents prepared by representatives of both parties. Point 3

Secondary rule—Whole ContractAs stated also in the High Court’s comments in Darlington Futures, extracted above, exemption clauses must be read in the context of the whole of the contract. Point 4

PART 3: SPECIFIC HEADS OF DAMAGEThis part of the paper will address specific heads of damage and gauge the position of the courts as to how effectively an exclusion clause can encompass damage suffered under that head.

NegligenceCanada SS Lines Ltd v The King61

is of interest in terms of how it acted to exclude a proferens from liability with respect to claims of negligence. In this United Kingdom case the Privy Council relied on three rules, which in terms of exclusion clauses, are summarised as follows:

1. Effect in an exclusion clause must be given to a clause which expressly exempts the person in whose favour it is made from liability for negligence.

2. If there is no express reference to negligence, consideration must be given to whether or not the words used are wide enough, in their ordinary meaning, to cover negligence. If there is doubt, it is resolved against the proferens.

3. Where words which are given their ordinary meaning are wide enough to apply to negligence, a consideration must be made whether the head of damage against which the proferens seeks protection may be based on some ground other than negligence. This other ground must not be so fanciful or remote that the proferens can not be supposed to have sought protection under it on the terms as expressed.62


However, it was decided by McGarvie J in Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd63

that the Canada SS decision was inconsistent with the principles laid down in Darlington Futures in terms of the point made in the latter case that exclusion clauses are to be given their natural meaning in light of the contract as a whole.64 McGarvie J was of the opinion that the Darlington Futures principles were of universal application and that therefore they were in conflict with those laid down in Canada SS.65 There is some dispute as to whether the Schenker v Maplas decision was good in terms of its rejection of the application of the Canada SS principles to exclusion clauses in Australia and there is a view that in fact there is no inconsistency.66 This view focuses on the omission by McGarvie J of the ‘ordinary meaning’ element of the second of the Canada SS rules, which is so important to the Darlington Futures decision.67 Further, the Darlington Futures case itself is not advocating an unqualified examination of the actual words used in exemption clauses, but employs a secondary rule of construction as appropriate.68 Of course, the Canada SS judgement regarded an indemnity as well as exclusion provision; while Schenker v Maplas addressed only an indemnity provision it is regarded to some extent of being applicable to exclusion clauses in terms of its interpretation of Canada SS .69

In Australia, the issue of negligence as a head of damage from which a proferens is protected was specifically dealt with in Davis v Pearce Parking Station,70 a car-park case. In that case, a car park station required drivers parking vehicles there to agree to conditions whereby, among other things ‘The motor

recovery under that limb is not available in many instances.80 Therefore, unless some form of special loss was foreseen by the party claiming damages and communicated to the other party (which is relying on the clause), reference in an exclusion clause to consequential losses is redundant.81 Point 6

The difficulty presented with the consideration of ‘consequential losses’ as being covered by the second limb of the rule in Hadley v Baxendale is that, if this aspect is not appreciated by those drafting and relying on the clause, it could lead to a result where the loss intended to be excluded is in fact not excluded as a liability against that party. That is, if an actual loss is construed as falling within the first limb, the limb associated with losses which are more direct than the second, in a situation where there was an attempt to exclude from liability that loss under the guise of a ‘consequential losses’ phrase in the clause, then the clause will in the event not offer any protection. The following cases illustrate.

Is a loss of profit on the part of a principal a consequential loss which can be excluded from the contractor’s liability? Under the rule in Hadley v Baxendale as applied to Deepak Fertilisers & Petrochemcial Corporation v Davy McKee (London) Ltd & Anor that loss of profit and overheads on the part of a principal falls outside the description of consequential losses because such losses were in fact a direct and natural result of the contractor’s breaches of contract.82. In Australia, in the Federal Court case of GEC Alsthom Australia Ltd v City of Sunshine.83 involving an agreement to supply gas, a claim was mounted for loss of revenue arising out of the contractor’s failure to ensure the agreed amount of gas to the principal. In that case, Ryan J too

vehicle mentioned on the other side hereof is garaged at the owner’s risk and Gough’s Auto Parking Station will not be responsible for loss or damage of any description.71 While a generally framed exception, this was deemed sufficient by the High Court to justify construction as excluding liability for negligence.72 Unfortunately no substantive reference to the Canada SS case was made in Davis v Pearce Parking Station.73 Point 5

Consequential LossesConsequential losses are typically regarded as being difficult to define ahead of an event and this arises out of the inherent difficultly of knowing what ‘consequences’ will flow without reference to specific facts. This difficulty is reflected in the reluctance of courts to define it in any substantive way.74 In Hadley v Baxendale,75 the criteria for discerning what is the test for remoteness in general with respect to claims for damages arising out of breach of contract was set down.76 In that case Baron Alderson drew a distinction between loss or damage arising in the usual course of events (the ‘first limb’) and loss or damage in the contemplation of both parties as the probable result of the breach of contract (‘second limb’)77 (sometimes referred to as ‘special loss’).78

The general approach with respect to exclusion clauses has been to treat references to ‘consequential losses’ as being within the second limb of the rule in Hadley v Baxendale.79 Given that a claim for damages under the second limb is predicated on the party which suffered the loss having communicated the likelihood of the loss to the other party prior to entry into the contract, (and evidence that the other party assumed responsibility for the risk associated with the loss suffered)


regarded that a consequential loss was one incurred a step removed from the transaction and its immediate effects and that the complex nature of the contractual relationship between the parties imputed a high degree of knowledge including regarding revenue generation.84 In the context the judge regarded consequential loss as confined to that loss which the principal would incur as a result of his being unable to use its capital investment, (the gas was used to generate electricity), for a purpose which was extraneous to that directly contemplated by the contract document.85 Thus from a contractor’s point of view, specification of a particular head of loss would be preferable to avoid a court using the ‘second limb’ of Hadley v Baxendale to determine what constitutes consequential loss.

Separate to the analysis above, while the courts have been reluctant to provide an overall indicator of what constitutes consequential losses in general they have been prepared to point to certain examples of what might fall within this head, under individual circumstances. These include the cost of rebuilding a wall,86 the cost of rebuilding a factory burnt down87 or medical expenses incurred by a plaintiff injured by defective goods.88

Separately again, there is an interesting question here which is analogous to the question of whether or not negligence must be expressly referred to in order for a proferens to be afforded protection under an exclusion clause for that head of damage. The question is, given the vagaries associated with defining ‘consequential losses’ even where expressly referred to, can such losses be excluded from liability by some even broader form of words. For example, is the phrase ‘X will not

be responsible for loss or damage of any description’, as was used above in Davis v Pearce Parking Station, sufficient to include what are known as ‘consequential losses’ in an exclusion clause? This issue was addressed in Nissho Iwai Australia v Malaysian International Shipping Corporation Berhard where their Honours stated89 that ‘…loss…in connection with Goods’ in cl. 8(2)(d)90 should be read as covering ‘loss caused by loss of goods’, that is, indirect, consequential or financial loss arising from the loss of the goods.91 Clause 8(2)(d) of the contract at issue in Nissho Iwai is a very long sub-clause which specifically includes many particular heads of loss but does not include by name ‘consequential loss’. It appears that, because of the extensiveness of the specific list, the court decided that, in general, the clause amounts to exclusion of ‘consequential loss’ broadly. It should be noted that an additional statement at the bottom and within clause 8(2),92 is ‘In this clause the expression ‘loss or damage of any kind’ includes loss and damage to or in connection with Goods, financial and consequential loss and damage…’. Presumably, this does not effect the reading of clause 8(2)(d) because the words used in clause 8(2)(d), while wide and many, do not anywhere include the words ‘…of any kind… ‘.

Thus, at least judging from this case, a widely constructed exclusion clause might exclude liability for consequential losses even without express reference to that phrase. However, the view of the author is that this is not the case in general, given the difficulty courts have in defining the phrase. Point 7

Misleading and Deceptive ConductThere does need to be some consideration of the ability of parties to exclude or limit their liability under s52 of the Trade Practices Act (1974) because there is a case history which applies to business-to-business situations whereby such parties are prevented from excluding their liability under this head.

Section 68A Trade Practices Act permits certain exclusions of liability where the goods or services supplied are of a kind not ordinarily acquired for personal, domestic or household use.93 Therefore, because it is not a consumer94 the Commonwealth is put into a position where it is potentially exposed to liability in the form of the legislative affirmation in s68A for exclusion clauses in favour of suppliers, provided they otherwise comply with common law requirements.

In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1)95 the Full Federal Court stated that irrespective of the framing of the exclusion clauses, they were not effective to exclude liability for breach of s52 of the Trade Practices Act.96 This position is well established and was also reflected in Ferro Corporation (Aust) v International Pools (Aust) Pty Ltd.97 Of course this principle operates only to prevent the reliance on exclusion clauses with respect to claims made under the Trade Practices Act.

An interesting approach to contract drafting is provided in advice to cast positive obligations in contract in more narrow terms in order in order to avoid the use of exclusion clauses altogether and in so doing avoid statutory prohibitions on their use.98

Deliberate ActsThe question of the effectiveness of exclusion clauses in relation to loss or damage arising from


deliberate acts was addressed in Kamil Export (Aust) Pty Ltd v NPL (Australia) Pty Ltd.99 In this case, the words used were, in part, ‘The Carrier shall not in any circumstances whatsoever be liable for any loss or delay or damage to the goods ... howsoever caused……’100 Just how far are parties at liberty to curtail obligations otherwise held under the contract to the extent referred to in Photo Productions and in Darlington Futures? Surely it ends at deliberate acts of the principal? In the particular case of Kamil Export this was indeed the result. The Appeal Division found that the exclusion clause was not effective to protect the contractor from liability with respect to the conversion of goods which had been carried at sea, but, to a significant extent the judgement relied on a possibly unwise concession by the legal representatives of the proferens in the case, to acknowledge that the act of manageress of the carrier’s agent was an act of the carrier itself.101

Of particular interest is that similar issues arise regarding this head of damage as for negligence, that is - are general words of exclusion enough to exclude losses arising from deliberate acts? This was considered in the United Kingdom in Joseph Travers and Sons v Cooper102 where Phillimore LJ referred to the effect of widely framed exclusions as being effective – phrases such as ‘howsoever caused’, or ‘under any circumstances’ do give sufficient warning to an otherwise prospective claimant that the contractor is not accepting responsibility on a wide-ranging basis.103 Later, a standard approach to general words was formulated in the Canada SS case, as discussed above. This supports the contention that a broad framing of an exclusion

clause can in fact provide protection from liability in the event of a deliberate act of a contractor. In reading Professor Coote’s analysis of the Kamil Export case104 it is difficult to escape the conclusion that the mistake of counsel in conceding that the act of an agent’s employee was the act of the contractor was the reason found by the judge to arrive at the decision, but that, on general principles, the phrase ‘howsoever caused’ is wide enough in a properly drafted clause to provide protection to a proferens. Darlington Futures itself involved the successful exclusion from liability of a contractor involved in deliberate acts, contrary to contract provisions from which losses arose.105 Therefore, notwithstanding the judgement in Sydney City Council v West, referred to above there does need to be awareness that deliberate acts may well be covered in broadly drafted clauses using ‘general words’. Point 8

Onerous TermsThis issue was raised in Maxitherm Boilers Pty Ltd v Pacific Dunlop106 where the contract included a term which obliged the purchaser to return defective goods to the supplier at no cost in order for them to be made good under warranty.107 In the context of considering circumstances where the document at issue was unsigned, which was prominent in the case, Buchanan JA in delivering the leading judgement, said the question in that case was whether a contracting party can reasonably be taken to have assented to a particular term, not whether a contracting party should be subject to an unreasonable term.108 While there is some indication from UK judgements that conditions requiring return of defective goods to a supplier at the cost of

Section 68A Trade Practices Act permits certain exclusions of liability where the goods or services supplied are of a kind not ordinarily acquired for personal, domestic or household use.


the purchaser have been found to be onerous,109 the decision in Maxitherm does not assist in establishing the proposition in an Australian jurisdiction. While this case is decided in the context of sale of goods, the transaction was conducted in a business to business context and on this basis is relevant to the context in which this paper is written.

PART 4: APPLICATION TO DEFENCEThe performance risk for work undertaken under a Defence contract would, unless otherwise agreed, lie largely with the contractor, rather than Defence as principal. In addition, ‘other risks’, as previously described, are also borne largely by the contractor as the party undertaking risk related work. As the Defence limit of liability clause is drafted in favour of the contractor, the clause amounts to a transfer of risk from contractor to Defence.

As already discussed, while contracts will be interpreted according to their natural and ordinary meaning, any lack of clarity in drafting will be interpreted against the party seeking to rely on the clause. As the party which in effect relies on the limit clause, contractors have the most to gain by the drafting of a clear and enforceable clause. (Of course, both parties benefit from clarity in clause drafting in terms of dispute avoidance.) Therefore, any analysis of the Defence limit of liability clause in terms of the rules of construction is instructive insofar as any ambiguity or lack of clarity found would be read in terms commercially favourable to Defence.

Bearing this in mind a critical analysis of the Defence limit of liability clauses follows.

Defence Legislative FrameworkAs a Commonwealth government agency, Defence is required to comply with the Financial Management and Accountability Act (1997) and regulations.110 Pursuant to regulation 8, government officials involved in procurement are to have regard to ‘Commonwealth Procurement Guidelines’ (‘CPG’) which may be issued by the finance minister under regulation 7. The CPG111 promulgates the Commonwealth government position with respect to limitation of liability provisions which may be considered in contracts to which it is party.112 As it is nearly always the principal, and therefore not generally carrying ‘performance risk’ or ‘other risk’ (as described in Part 1) in terms of its contractual obligations, the Commonwealth’s preference is, naturally, that liability be determined according to common law. That is, it prefers that there be no limitation clauses and that the party best able to address the risk, bears it.113 The Commonwealth, however, does recognise the commercial reality that, in some cases, it may have to agree to provisions which limit a contractor’s liability under contract. In these cases, the CPG provides guidance to officials to undertake a risk assessment in order to fully understand the likelihood and consequences of the risk accepted in doing so.114 Insurance is also encouraged as an avenue of addressing this.

While of course insurance is a method of resolving the issue of risk distribution between parties, where limits of liability provisions are considered, it only provides an answer to the level of limit provided in the clause. Without addressing methods of risk assessment or particular limits chosen in any instance, the central issue here is that attempts will be made by contractors to

rely on limit clauses in the event of catastrophic failure, where the extent of damage exceeds the limit agreed.

Beyond the CPG rests policy guidance from Defence regarding drafting of provisions. This is contained in the ASDEFCON (Strategic Materiel) Handbook.115 This provides detailed guidance to government officials regarding the drafting of limitation of liability clauses.

The CPG do not countenance exclusion of all liability. Recalling the Darlington Futures decision, the rules generally applicable to exclusion clauses apply to the Defence limit of liability clauses considered here.

General Comments on Defence Limit of Liability ClausesFrom a Defence perspective, clause 8.5.2 is positive in that certain important heads of liability are not included within the scope of the limit, they being for personal injury and death of any person, loss of or damage to third party property and an indemnity relating to obligations with respect to intellectual property rights.116

Another positive aspect from a Defence perspective is that there are no provisions relating to less direct heads of damage such as consequential losses or economic loss.

However, under clause 8.5.1, the heads of liability which are subject to a limit are in respect of obligations and warranties under the contract, for loss of or damage to the supplies under contract117 and for loss of or damage to Commonwealth property.

As such, from a Defence perspective the clause provides well for contingencies as to ‘other risks’ as described in Part 1 but not as well for ‘performance


An interesting point regarding the contra proferentum rule as applied in the government context is the fact that it is sometimes stated that the rule applies to the party drafting it.118 In this case, notwithstanding the remarks above concerning the mechanics of drafting the ASDEFCON provision, Defence has drafted a clause which is inherently against its own interest, being the party, as principal, with the most interest in ensuring that each side bears the risks as they fall. While this has been done in an effort to control and direct the course of inevitable negotiations in this area, it would be unfortunate if a clause was construed against Defence as the drafter but not the party relying on the clause.

POINT 4: SECONDARY RULE OF CONSTRUCTION—THE WHOLE CONTRACTAmong the most relevant of clauses elsewhere in the ASDEFCON are the indemnity119 provisions, under which a prospective contractor is required to indemnify the Commonwealth in respect of a range of matters. Where the indemnity deals with property in the supplies, clause 8.3, it is made subject to the limitation provisions of clause 8.5, as is appropriate for the purpose of consistency between provisions. In relation to personal injury and death as well as loss of or damage to property other than Commonwealth property and the supplies there is no provision for making those terms subject to the limit clause, as is also appropriate, because these heads of loss are specifically excluded from that clause.

The clarity in terms of the inter-action of these provisions contributes to the drafting integrity of the provisions.

risks’. As such the clause dealing with ‘performance risks’, clause 8.5.1, is given greatest focus in the comments below.

Comments on Specific Aspects of Defence Limit of Liability ClausePOINT 1: CLAUSES TO BE READ ACCORDING TO A NATURAL AND ORDINARY READINGTaking a natural and ordinary reading, clause 8.5.1 is likely to be construed, on its face, as indicating an intention of the parties to agree to the limits established. It is relatively clear as far as can be ascertained without specific facts in issue.

POINT 2: BUSINESS-TO-BUSINESS TRANSACTIONSIn the Defence context, major contracts for capital works are engaged in between parties of broadly equal strength. The consideration of relative bargaining strength between parties is largely made in the context of whether or not one of the parties is a consumer in terms of the Trade Practices Act 1977. While it is sometimes said that the Commonwealth has unusually great strength in terms of its financial and commercial position, supported in some respects by legislation (for example the provision for Crown copyright at s183 Copyright Act), political constraints sometimes apply to discourage government from exercising these to the extent to which they may be permitted at law. On the whole and in the context of major capital work being considered here, the Commonwealth and its commercial partners are equal in bargaining strength. Thus there is no reason why the principles of construction outlined in Darlington Futures and the cases leading up to it would not apply to cases involving the Commonwealth as represented by Defence.

POINT 3: SECONDARY RULE OF CONSTRUCTION—CONTRA PROFERENTUM APPLIES LESS TO ‘STANDARD FORM’ DOCUMENTATIONThe reduced applicability of the contra proferentum rule in the context of standard form clauses developed by both parties could be relevant in the Defence context. The standard forms developed by Defence are almost always the subject of negotiation, in particular in relation to the exemption clause, which in practice is a source of difficulty during negotiation. Further, in an attempt to forge a general way ahead, Defence has engaged industry representatives to some extent in arriving at the Defence limited liability provision now included in its standard form ASDEFCON. It could be construed then, that negotiated amendments meet the requirement stated in Jennings Constructions for a standard to have been developed by both parties, such that the contra proferentum rule ought to be applied to a lesser extent.

Jennings Constructions was not decided in the context of a consumer transaction. Both parties were businesses in their own right. This supports the theme which is touched on throughout this paper, that exclusion clauses in such a context ought to be construed without the application of external rules, as much as possible with reference to the expressed intentions of the parties. This is so particularly in a business to business context, and makes it applicable to the Defence context.

If Jennings Constructions is to be relied on as authority, then Defence would have less of an argument to support the application of the contra proferentum rule.


POINT 5: ARE ACTS OF NEGLIGENCE COVERED BY THE EXCLUSIONThe first part of the discussion under this point disregards for the moment sub-clause 8.5.1(e). While specific mention of negligence as a head of damage is not made in the Defence limit of liability clause 8.5.1(a) –(d), a worthwhile question is whether or not the words used in that part of clause 8.5.1 are wide enough to permit negligent performance being afforded exclusion clause protection for a contractor.

The answer is that the negligence head is probably not covered in that exclusion. The reason for this is that there is no use of a broad-ranging phrase, such as ‘…for loss or damage of any description’ in Davis v Pearce Parking Station. Instead the words used in Defence clause 8.5.1(a)-(d) are quite narrow – ‘… for liability for obligations and warranties under…’ and ‘…for loss of or damage to…’.

While the Canada SS principles have been rejected in Australia in the decision of Schenker v Maplas120 that rejection has been questioned on the basis that the analysis of them was not rigorous and that in fact they are not inconsistent with the ‘natural and ordinary meaning’ approach of Darlington Futures and Photo Productions.121 Without attempting to resolve that question the Canada SS principles (repeated at page 10) are prominent enough to warrant their examination against Defence clause 8.5.1(a) – (d).

Considering the first principle, as no express mention is made of negligence, the proferens will not be able to rely on the clause. Considering the second principle, are the words used framed widely enough that, in their ordinary meaning, negligence could be covered by them? Using

indemnity provisions, whereby the contractor is required to indemnify the Commonwealth (clause 8.1 and 8.2) in respect of personal injury and death as well as loss of or damage to property other than Commonwealth property and the supplies. This aspect is positive for Defence.

Clause 8.3 provides for an indemnity by the contractor in favour of the Commonwealth in respect of loss or damage caused to the supplies by the contractor, except, among other things, where there is negligence by the Commonwealth (8.3.2(a)). Thus the combined effect of clauses 8.5.1(e) and 8.3.2(a) is that while the Commonwealth bears the risk of its own negligence in relation to loss or damage to the supplies, the contractor, which is the party in whose hands care of the supplies largely rests until delivery under the contract, has managed to pass the risk of its negligence for the loss or damage to the supplies to the Commonwealth beyond the limit established.

POINT 6: CONSEQUENTIAL LOSSES—POLICY GUIDANCEDefence guidance in the Strategic Materiel Handbook discourages the use of terms which are difficult to define such as ‘consequential loss’. Even so, the term is used in the indemnity provision (clause 8.2.1) whereby the contractor shall indemnify the Commonwealth in relation to property damage and public risk.

POINT 7: CONSEQUENTIAL LOSSESIn attempting to achieve improved terms, contractors often attempt to limit their liability under contract with respect to the consequential losses of the Commonwealth and others. Negotiations often strike difficulty in coming to terms with what is covered under the term ‘consequential losses’ and leads

Davis v Pearce Parking Station for guidance, as well as on an ordinary reading, it is probable that they are not wide enough. There can be no consideration of the third principle with respect to examination of a standard form because it requires facts of a particular case to be known, that being knowledge of whether heads other than negligence exist to found a particular claim.

Tantalisingly then, the question cannot be answered with certainty. However, in the opinion of the author, Defence limit clause 8.5.1(a)-(d) is drafted narrowly enough to conclude that acts of negligence by a contractor will not be captured by it. Therefore, on the basis of clauses 8.5.1(a)-(d) if a contractor is negligent such that work performed under the contract is not met, or damage to Defence property occurs, it will bear that liability, as far as can be determined on examination of the standard form.

From a Defence commercial perspective then, regarding the possibility of negligence as a head of claim, if it has to exist at all, clause 8.5.1(a) to (d) are well drafted.

Notwithstanding the above, the critical part of clause 8.5.1 is sub-clause (e). This provides for a limit with respect to negligent acts arising from a breach by the contractor of obligations and warranties provided under the ASDEFCON contract, for loss of or damage to the supplies and for loss of or damage to Defence property. The intention is clear, there is no ambiguity which would call for the application of secondary rules of construction – Defence intends to bear the risk of damage in these areas in the event of negligence on the part of the contractor.

Reference is made to ‘negligence’ in the insurance and


some contractors to attempt to specify particular heads of loss of the more remote nature in order to better define the risk at issue and move close to agreement. For example, sometimes loss of profit is one such head.

The scope of any agreed clause excluding contractor liability for consequential losses could be quite important in considering the effect of a clause, which given the type of provision being used in Defence – a limit of liability provision, will only be drawn on if the limit of damage provided for is exceeded (assuming the provision is effective) - that is, in the event of a catastrophic failure causing damage. Assuming that the more direct consequences are properly dealt with in text of the limit clause provisions, any definition of consequential losses under contract will be quite significant.

POINT 8: DELIBERATE ACTSIn contrast to point 5 above, under the negligence head, there is no express mention in clause 8.5.1 of deliberate acts, although acts of omission, referred to in 8.5.1(e) may include deliberate acts. Considering deliberate acts as ones of commission, if the Defence limit clause 8.5.1 was broadly framed it might be regarded as excluding from contractor liability deliberate acts. However, because no broad terms such as loss ‘…howsoever caused …’ are present in the clause, it is probable that the clause will not protect the contractor from deliberate acts which cause damage or loss. Note must be made here that this is not consistent with the decision in Sydney City Council v West, yet is consistent with the influential case of Darlington Futures.

CONCLUSIONFollowing a period of evolution in case law beginning with the application of the principle of fundamental breach, Darlington

Futures now provides the starting point for consideration of exclusion clauses in Australia. Exclusion clauses should be given their natural and ordinary meaning, unless there is ambiguity, in which case secondary rules of construction apply. While there is some question over the point, a prudent drafter will consider the Canada SS rules when drafting exclusion clauses. If acts of negligence or deliberate acts are intended to be covered by such a clause, then the best way to ensure this is to state it expressly. Of course this hardly inspires confidence in a potential business partner, so the next best option is to use general words wide enough to ensure that negligence and deliberate acts are covered by the clause. Trade practices issues are of increasing importance and need to be taken account of.

This paper draws on a variety of sources which are outside the specific construction law context. Much of the case law regarding exclusion clauses is made in the shipping carrier and bailment contexts, each being a specific area of practice and scholarship. Nevertheless, in general, many of the principles are applicable to construction law provided regard is held for the different contexts in which various rules arise and for the possibility that one rule may have a different effect in another context. Further, they may be applicable in the context of Defence capital equipment acquisition as well as to the smaller-scale purchase of equipment, which is field to which more general principles of contract law apply.

While there are limits to how useful will be an examination of a standard form contract outside of any particular fact context, the following comments can be made about the ASDEFCON contract. The Commonwealth is well

protected with respect to ‘other risks’ as described here. It is clear on the face of the standard limit of liability clause that the Commonwealth will not be liable for heads of damage which might constitute consequential losses.

However, it is not as well protected with respect to ‘performance risks’ (clause 8.5.1) depending of course on the outcome of risk assessment and the financial limits set following negotiations with prospective contractors. It appears from the clarity of the limit clause dealing with ‘performance risks’ that the intention of Defence is to accept a passing of some level of risk from contractor to Commonwealth of liability which may otherwise lie against the contractor with respect to performance of work under the contract and with respect to Commonwealth property itself. The principle, stated in Darlington Futures, of giving a clause its natural and ordinary meaning as far as possible, would apply to ensure that the clause operated effectively in the contractor’s favour, as far as can be determined from an examination of a standard provision. This conclusion ought not to be surprising as Defence has drafted a clause which is not in its interest, so the intention of the drafter is fairly clear.

Primarily because of clause 8.5.1(e), loss of or damage to Defence property and the arising from acts of negligence and of omission will be borne by Defence over the limit set.

Whether the Defence limit of liability clause provides Defence with a sound commercial position is a question which is beyond the scope of this paper. However (given no specific fact situation is considered here) as clarity of the parties’ intentions is the prime aim of drafting from a legal


Heffey, P. (et al.) Contract: Cases and Material 2003

Livermore, J. Exemption Clauses and Implied Obligations in Contracts (1986)

Livermore, J. Exemption Clauses and Implied Obligations in Contracts for the Supply of Goods and Services (Report for the Law Reform Commission of Tasmania) (1980)

Murphy, R. ‘Exclusion of Consequential Damages: A Toothless Tiger’ 67 ACLN 1999

Nyuk-Yin, C. Excluding Liability in Contracts (1985)

Stephenson, A. Variations, Clayton Utz presentation - October 2003

Swanton, J. ‘Concurrent Liability in Tort and Contract: The Problem in Defining the Limits’ 10 Journal of Contract Law (1996) 21

Swanton, J.P. ‘Non-delegable Duties: Liabilities for the Negligence of Independent Contractors: Part 1’ 4 Journal of Contract Law (1991) 183

Swanton, J.P. ‘Non-delegable Duties: Liabilities for the Negligence of Independent Contractors: Part II’ 5 Journal of Contract Law (1992) 26

Turner, S.C. Insurance Coverage of Construction Disputes (Construction Law Series – USA)

Uff, J. Construction Law (Fifth edition, 1991)

Yates, D. Exclusion Clauses in Contracts (Second edition, 1982)

perspective, the clause is well drafted.

BIBLIOGRAPHYBrereton, P. ‘Interpretation of Commercial Contracts – Indemnity Clauses and the Canada SS Case’ 4 Journal of Contract Law (1995) 261

Brown, P. ‘Assessing and Using Exclusion and Limitation Clauses – Part 2’ 19 Australian and New Zealand Trade Practices Law Bulletin 4 (July/ August 2003) 46

Carter, J.W. ‘Commercial Construction and the Canada SS Rules’ 9 Journal of Contract Law (1995) 69

Carter, J.W. ‘Contractual Issues for Trustees’ 17(1) Journal of Contract Law (2001) 276

Carter, J.W. and Stewart, A. ‘Commerce and Conscience: The High Court’s Developing View of Contract’ 23 Western Australian Law Review (July 1993) 49

Chow, C. (Co-ordinating Editor) The Laws of Australia, LBC

Christou, R. Boilerplate: Practical Clauses (First edition, 1990)

Coote, B. ‘Exception Clauses, Deliberate Acts and the Onus of Proof in Bailment Cases’ 12 Journal of Contract Law (1997) 169

Coote, B. Exception Clauses (1964)

Dal Pont, G.E. ‘The Exclusion of Liability for Trustee Fraud’ 6 Australian Property Law Journal (1986) 41

Elliott, P. ‘Exemption Clauses: The Practicalities’ 14 Australian Construction Law Bulletin 8 (October 2002) 85

Finlay, A. ‘Exclusion Clauses, Entire Contracts and s52’ 10 Australian and New Zealand Trade Practices Law Bulletin 8 (January/February 1995) 90

EXTRACT FROM ASDEFCON (STRATEGIC MATERIEL): DRAFT CONDITIONS OF CONTRACT

8 Insurance and Liability8.1 Contractor’s Employees (Core)

8.1.1 The Contractor shall indemnify the Commonwealth against liability of the Commonwealth for death of or personal injury to any person employed by the Contractor on work under the Contract, except to the extent that such death or injury results from any unlawful or negligent act or omission on the part of the Commonwealth or any person acting through the Commonwealth.

8.2 Property Damage and Public Risk (Core)

8.2.1 The Contractor shall indemnify the Commonwealth, its officers, employees and agents against:

(a) claims by any person in respect of personal injury or death, except to the extent that the Contractor’s indemnity under clause 8.1.1 applies;

(b) loss of, or damage to, any property (other than the Supplies and GFM); and

(c) costs and expenses including the costs (on a solicitor and own client basis) of defending or settling any claim referred to in clauses 8.2.1a and 8.2.1b, arising out of or as a consequence of a default or unlawful or negligent act or omission on the part of the Contractor, its officers, employees, agents or Subcontractors except to the extent that such death, injury, or property loss or damage results from any unlawful or negligent act or omission on the part of the Commonwealth or any person acting through the Commonwealth.


8.3 Care of the Supplies (Core)

8.3.1 Subject to clause 8.5, the Contractor shall make good any loss or damage caused to the Supplies while risk resides with the Contractor, except to the extent that the loss or damage was a direct consequence of an excepted risk.

8.3.2 For the purposes of clause 8.3.1, ‘excepted risks’ means:

(a) any negligent act or omission of the Commonwealth, the Project Authority or officers, employees or agents of the Commonwealth;

(b) war, invasion, acts of foreign enemies, hostilities between nations, civil insurrection or militarily usurped power;

(c) confiscation by governments or public authorities; or

(d) ionising radiation, contamination by radioactivity from nuclear fuel or waste, or combustion of nuclear fuels, which in the case of clauses 8.3.2c and 8.3.2d is not caused by the Contractor.

8.4 Intellectual Property Indemnity (Core)

8.4.1 The Contractor shall indemnify the Commonwealth its officers, employees, agents, licensees or sub-licensees against any liability, loss, damage, cost (including the cost of any settlement and legal costs and expenses on a solicitor and own client basis), compensation or expense sustained or incurred by the Commonwealth which arises out of any action, claim, dispute, suit or proceeding brought by any third party in respect of any:

(a) infringement or alleged infringement of that third party’s IP where the infringement or alleged infringement arises out of any activity permitted under any licence or assignment referred to in clause 5 or otherwise under the Contract; or

(b) breach or alleged breach of any duty of confidentiality owed to that third party, where the breach is caused by any act or omission on the part of the Contractor or any of its Subcontractors, officers, employees or agents (whether or not such act or omission constitutes a breach of the Contract).

8.4.2 For the purposes of this clause 8.4, ‘infringement’ includes unauthorised acts which would, but for the operation of section 163 of the Patents Act 1990, section 40A of the Designs Act 1906, section 183 of the Copyright Act 1968, and section 25 of the Circuits Layout Act 1989, constitute an infringement.

8.4.3 The Commonwealth shall notify the Contractor in writing as soon as practicable of any action, claim, dispute, suit or proceeding (‘Proceedings’) threatened or brought, against the Commonwealth arising from an infringement or alleged infringement referred to in clause 8.4.1.

8.4.4 If the Contractor agrees to comply at all times with government policy relevant to the conduct of the Proceedings, including the Legal Services Directions in force from time to time issued in accordance with the Judiciary Act 1903 (‘the Legal Services Directions’), and the Commonwealth is granted leave to withdraw from the Proceedings:

(a) the Commonwealth may withdraw from the Proceedings; and

(b) the Contractor shall, in its own name and at its own expense, conduct the Proceedings.

8.4.5 For Proceedings where the Commonwealth is not granted leave to withdraw, if the Contractor admits its obligations under the indemnity in clause 8.4.1 and upon request lodges

security in a reasonable amount with the Commonwealth, the Commonwealth shall:

(a) continue to keep the Contractor informed of all developments; and

(b) defend, arbitrate, appeal, settle or otherwise conduct the Proceedings as the Contractor may from time to time reasonably direct subject to government policy, including the Legal Services Directions.

8.4.6 If a final judgment or award is made against the Commonwealth in the Proceedings, or if a settlement is agreed with the plaintiff in a situation covered by the indemnity under clause 8.4.1, but without limiting the Contractor’s obligations under that indemnity, the Contractor shall pay to the Commonwealth by bank cheque a sum equivalent to the sum that the Commonwealth is required to pay under that judgment, award or settlement:

(a) at least 7 days before the date on which the Commonwealth is required to pay; or

(b) where no date for payment has been fixed under the judgement, award or settlement, within 7 days of receipt of a notice from the Commonwealth that it intends to pay the amount referred to in the judgement, award or settlement.

8.4.7 The Commonwealth shall consult with the Contractor prior to agreeing to a settlement referred to in clause 8.4.6.

8.4.8 If the Contractor fails to comply with clause 8.4, the Commonwealth has the right without prejudice to any other right or remedy it may have to suspend any payment due under the Contract until such Proceedings have been finalised.

8.5 Limitation of Liability (RFT Core)


Note to tenderers: This clause will be included where tenderers propose and the Commonwealth agrees to limit liability under the Contract.

8.5.1 Subject to clause 8.5.2, the liability of the Contractor to the Commonwealth arising out of the Contractor’s performance of the Contract shall be limited as follows:

(a) for liability for obligations and warranties under clause 9, in aggregate to […INSERT AMOUNT…];

(b) for loss of, or damage to, the Supplies, in aggregate to […INSERT AMOUNT …];

(c) for loss of, or damage to, Commonwealth property, including GFM, in aggregate to [...INSERT AMOUNT...];

(d) for liquidated damages recoverable under the Contract, in aggregate to [...INSERT AMOUNT...]; and

(e) for a breach of contract, breach of statute or negligent act or omission not mentioned in clauses 8.5.1a to d, in aggregate to [...INSERT AMOUNT...].

Note to drafters: A risk assessment should be undertaken by the Commonwealth prior to release of the RFT to determine appropriate caps for inclusion in clause 8.5.1.

8.5.2 The limitations in clause 8.5.1 do not apply to liability of the Contractor for:

(a) personal injury and death;

(b) loss of, or damage to, third party property; or

(c) the IP indemnity provided by the Contractor under clause 8.4.

8.5.3 To avoid doubt, if more than one limitation mentioned in clauses 8.5.1a to 8.5.1e is capable of applying to a particular liability, and the cap under one limitation is reached, the Commonwealth may recover from the Contractor

for the remainder of that liability under the other limitation up to the applicable cap.

8.5.4 If a change to the Contract is proposed by either party that:

(a) by itself or cumulatively with previous changes to the Contract, represents an increase in the original Contract Price of more than [...INSERT AMOUNT...]; or

(b) varies the Statement of Work, including by exercise of an option, the parties shall negotiate in good faith to make appropriate amendments to the liability caps specified in clause 8.5.1 and to the liquidated damages set out in Attachment D.

8.6 Insurance (Core)

8.6.1 Before commencing work under the Contract, the Contractor shall be fully insured or registered with the appropriate statutory authority against liability for death of or injury to persons employed by the Contractor, including liability under statute and common law. The insurance shall be maintained until all work under the Contract is completed.

8.6.2 The Contractor shall ensure each Subcontractor is insured against the Subcontractor’s corresponding liabilities.

8.6.3 Before commencing work under the Contract, the Contractor shall be insured in respect of (...DRAFTER TO INSERT INSURANCE REQUIRED PRIOR TO CONTRACT SIGNATURE...).

8.6.4 The Contractor shall maintain the insurance required under clause 8.6.3 for the duration of the work under the Contract and, on request, shall produce satisfactory evidence of the insurance to the Project Authority.


REFERENCES1. JW Carter ‘Contractual Issues for Trustees’ 17(1) Journal of Contract Law (2001) 276

2. David Yates, Exclusion Clauses in Contracts (Second edition)1982 at p1

3. John Livermore, Exemption Clauses and Implied Obligations in Contracts (1986) at p4

4. S68A Trade Practices Act 1975 (Cth)

5. Darlington Futures Ltd v Delco Australia Pty Ltd 68 ALR 385 (16 Dec 86) 389 (Hereafter ‘Darlington Futures’) Mason, Wilson, Brennan, Deane and Dawson JJ citing Lord Diplock in Photo Production Ltd v Securicor Ltd [1980] AC 827

6. In this paper, the Commonwealth represented by the Department of Defence is referred to as ‘Defence’

7. Commonwealth Department of Defence, Defence and Industry: Strategic Policy Statement, June 1998 iii [http://www.defence.gov.au/dmo/id/di_policy/policy.pdf]

8. Australian Defence Contract (Strategic Materiel) ASDEFCON (Draft) [http://www.defence.gov.au/dmo/lsd/asdefcon/asdefcon.cfm] As at 25 January 2004

9. ibid, under heading ‘Contracting’. While standard forms are merely a starting point for acquisitions, their influence in determining final form is such that an examination is worthwhile.

10. A short extract of the ASDEFCON contract is attached to this paper, containing limit of liability clause 8.5 and indemnity clauses 8.1, 8.2 and 8.3.

11. Paul Elliott, ‘Exemption Clauses: The Practicalities’ 14 Australian Construction Law Bulletin 8 (October 2002) 85 at p88

12. Livermore, above note 3 at p4

13. ibid at p7, Livermore referring to Denning LJ in Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936

14. ibid at p7

15. ibid at p8

16. [1967] 1 AC 361


18. Chin Nyuk-Yin Excluding Liability in Contracts (1985) 81

19. Suissue Atlantique, above note 16 at p427

20. (1965) 114 CLR 481. (‘Hereafter Sydney City Council v West’) Rejection by that court of fundamental breach doctrine is referred to by Livermore, above noye 3 at pp9-10

21. Sydney Corporation v West, above note 20 at p487 Barwick CJ, Taylor J

22. ibid at p487

23. ibid Barwick CJ and Taylor J at p490 (paragraph 8); Kitto J at p495 (paragraph 11); Menzies J at p503 (paragraph 7).


25. (1956) 94 CLR 384

26. Sydney Corporation v West above note 20, Barwick CJ and Taylor J at p490 (paragraph 10)

27. (1921) 2 KB 426, at p435

28. Sydney Corporation v West above note 20, Kitto J at p495. Admittedly, Kitto J does also refer approvingly in this part of his judgement to the doctrine of fundamental breach, indicating the fact that it was not universally discarded altogether, at this point.

29. Brian Coote, Exception Clauses (1964) 7

30. JW Carter ‘Commercial Construction and the Canada SS Rules’ 9 Journal of Contract Law (1995) 69 at p77

31. [1980] AC 827 (‘Hereafter Photo Productions’)

32. ibid at p843

33. Darlington Futures, above note 5

34. Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 (Windeyer J’s dissenting opinion relied on ); H&E Van Der Sterren v Cibernetics (Holdings) Pty Ltd (1970) 44 ALJR 157 and Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 238

35. Darlington Futures, above note 5 at p391. Note that the qualification to this phrase regarding the rule of contra proferentum will be dealt with later in the paper.

36. Carter, above note 30 at p71

37. (1989) 167 CLR 219 (Hereafter ‘Nissho Iwai’) [http://www.austlii.edu.au/cases/cth/HCA/1989/32.html]

38. Mason CJ, Brennan, Deane, Gaudron and McHugh JJ in a single judgement

39. Nissho Iwai, above note 37 at paragraph 13. Note that where page numbers are not provided in a case extracted from the internet, paragraph numbers are provided in their place.

40. Elliott, above note 11 at p88. I gather from the introduction to this article that the focus of Elliot is on consumer transactions.

41. iIbid at p88


43. [1983] 1 WLR 964

44. Elliott, above note 11 at p88

45. Darlington Futures, above note 5 at p391

46. Carter distinguishes between primary and secondary rules in his article, above note 30. For example, at p90, he refers to contra proferentum as a secondary rule, as well as at pp78-79. Termed here, a primary rule, the term ‘commercial


Baker (Australia) Pty Ltd, above note 58 at p376

60. 6 Aust Const LR 11; 3 BCL 189, as referred to in Peter Nygh (et al, editors) Butterworths Australian Legal Dictionary (1997) at p263

61. [1952] AC 192


63. [1990] VR 834 (Hereafter ‘Schenker v Maplas’)

64. P Brereton ‘Interpretation of Commercial Contracts – Indemnity Clauses and the Canada SS Case’ 4 Journal of Contract Law (1995) 261 at p263

65. ibid at p263

66. Carter, above note 30 at pp88-9; Brereton, above note 64 at p263

67. Carter,above note 30 at p88

68. Reference to contra preferentum by the High Court at 68 ALR 385 392

69. Brereton, above note 64 at p263; Carter, above note 30 at p86

70. (1954) 91 CLR 642

71. ibid at p646

72. Peter Heffey (et al.) Contract: Cases and Material 2003 at p400

73. Davis v Pearce Parking Station, above note 70 at p651. Canada SS is mentioned only in passing

74. See for example Dean J in Commonwealth v Amman Aviation (1992) 174 CLR 64

75. (1854) 9 Ex 341

76. C Chow (Co-ordinating Editor) The Laws of Australia, LBC, Volume 7, Part 7.9 at paragraph 44. The criteria was set out generally with respect to claims for breach of contract and not especially for definitions in the context of an exclusion clause reference to ‘consequential losses’.


78. ibid at p288

79. ibid at p288

80. ibid at pp288-9

81. ibid at p288

82. [1998] CILL 1448, referred to in: R Murphy ‘Exclusion of Consequential Damages: A Toothless Tiger’ 67 ACLN 1999 41

83. Federal Court, Ryan J, 20 February 1996, unreported, referred to in R Murphy, above note 82 at p41

84. ibid

85. ibid

86. Smith v Johnson (1899) 15 TLR 179 referred to in McGregor on Damages (15th edition) 1988, Section 56

87. Harbutt’s ‘Plasticine’ v Wayne Tank and Pump Co [1970] 1 QB 447 (CA) referred to in McGregor, above note 86, Section 56

88. Cf. Square v Model Dairies [1939] 2 KB 365 (CA) and Wilson v Rickett Cockrell [1954] 1 QB 598 (CA) referred to in McGregor, above note 86, Section 56. Note that a major case of the High Court, Ronald Wallace Gould and Another v Peter Vaggelas and Others [1984] HCA 68 (6 November 1984), sheds little light on the determining a general description of ‘consequential losses’.

89. Nissho Iwai, above, note 39 at paragraph 16

90. Clause 8(2)(d) states as follows:

(2) Under no circumstances shall the Carrier be liable or responsible in any capacity for or in respect of –

(a) …

(b) …

(c) any loss or damage to or in connection with Goods arising or resulting at any time from fire not caused by the actual fault

construction’ is more of a broad approach to construction than a specific rule. Note that the term ‘rule’ is used very broadly. They are perhaps better described as ‘guidelines’ than strict rules to be applied in a statute-like manner, according to Carter at p79.


48. L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at p263, referred to in Carter, above note 30 at p72. In that case Lord Simon approves a passage in Norton on Deeds, 1906

49. Gollin and Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464, referred to in Carter, above note 30 at p72

50. Carter, above note 30 at pp73-5

51. ibid at p101

52. ibid at p101

53. Darlington Futures, above note 5 at p391 (161 CLR 510) The contra proferentum rule is regarded as a general rule whereby exclusion clauses should be read against the party relying on them and that it was Darlington Futures which limits the application of that general rule to exclusion clauses only in situations where there is ambiguity. See: Paul Brown, ‘Assessing and using exclusion and limitation clauses – Part 2’ 19 Australian and New Zealand Trade Practices Law Bulletin 4 (July/ August 2003) 46


55. Andrew Stephenson, Variations, Clayton Utz presentation during October 2003 class of ‘Construction Contracts’ 2; Peter Nygh (et al, editors) Butterworths Australian Legal Dictionary (1997) at p263


57. ibid at p82

58. (1966) 115 CLR 353, as referred to in Carter, above note 30 at p82

59. Thomas National Transport (Melbourne) Pty Ltd v May and


or privity of the Carrier, Act of God, act of war, act of public enemies, arrest or restraint of princes, rulers or people, seizure under legal process, quarantine restrictions, act or omission of a Merchant or the agent or representative of a Merchant, strikes, lockouts or stoppage or restraint of labour from whatever cause, and whether partial or general, riots or civil commotions, saving or attempting to save life or property, insufficiency or inadequacy of marks, latent defects in Goods, latent defects in any Vessel, vehicle, Conveyance, Container, cargo carrying equipment or other plant or equipment, terminal, store or premises not discoverable by due diligence, insufficiency of packing, wastage in bulk or weight or any other loss or damage arising from inherent defect, quality or vice of goods, or any cause or event which the Carrier could not avoid or the consequences of which the Carrier could not prevent by the exercise of reasonable diligence.

91. ibid at paragraph 16

92. as restated at paragraph 8 of the internet record of Nissho Iwai

93. S68A TPA. Also see Carter 2001 at p290

94. The Commonwealth represented by Defence does not purpose goods which are acquired for a personal, domestic or household use.

95. (1988) 79 ALR 83

96. Brown, above note 53 at 47

97. [1994] ATPR (Digest) 46-136. Referred to in Anne Finlay ‘Exclusion clauses, entire contracts and s52’ 10 Australian and New Zealand Trade Practices Law Bulletin 8 (January/February 1995) 90

98. Richard Christou Boilerplate: Practical Clauses (1990) First Edition at p97

99. [1996] 1VR 538

100. Brian Coote ‘Exception Clauses, Deliberate Acts and the Onus of Proof in Bailment Cases’ 12 Journal of Contract Law (1997) 169 – referring to clause (1) of the relevant contract but not to clause (2) which was drafted in similar terms.

101. ibid at pp172-3

102. [1915] 1 KB 73, referred to in Coote, above note 100 at p171

103. Coote, above note 100 at p171. This was reflected in the more recent case of Gillespie Brothers & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400

104. As presented in Coote, above note 100 at pp171-2

105. ibid at p175

106. [1998] 4 VR 559

107. Elliott, above note 11 at p90

108. ibid at p90, quoting Buchanan JA in Maxitherm Boilers Pty Ltd v Pacific Dunlop at p569

109. ibid at p90 – referring to AEG (UK) Ltd v Logic Resource Ltd unreported, 20 October 1995

10. Financial Management and Accountability Regulations (1997)

111. Commonwealth Procurement Guidelines and Best Practice Guidance, February 2002 [http://www.dofa.gov.au/ctc/docs/CPGs_- Amended_version_changes_edited_19.06.2003.pdf]

112. ibid at p9

113. ibid at p9

114. ibid at p9

115. ASDEFCON (Strategic Materiel) Handbook

116. Above note 8, clause 8.5.2 (ASDEFCON contact for Strategic Materiel)

117. Note the term ‘supplies’ refers to the works to be performed by the contractor for the Commonwealth under the statement of requirement.

118. Stephenson, above note 55 at p2

119. ASDEFCON above note 8, clauses 8.1 – 8.3

120. Discussed above at p10

121. Carter, above note 30 at p88; Brereton, above note 64 at p263

CONTRACT - Australasian Legal Information...

Documents

Transcript of CONTRACT - Australasian Legal Information...