Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827

Key point

  • Lord Denning MR’s doctrine of fundamental breach is not a rule of law

Facts

Background

  • Photo Productions (C) engaged Securicor (D) to provide security in its factory
  • D’s employee started a fire to keep warm and burnt D’s factory down
  • C sued D in negligence for the damage
  • D sought to rely on an exemption clause in their contract: ‘under no circumstances shall the company be responsible for any injurious act or default of any employee of the company unless such act or default could have been and avoided by exercise of due diligence’

Court of Appeal ruling

  • The Court of Appeal held that D is liable it had committed a fundamental breach that could not be excluded by a contractual term
  • Lord Denning MR held that under the doctrine of fundamental breach, where there is a breach so great as to be a fundamental breach of contract, the guilty party cannot rely on an exception or limitation clause to escape from his liability for breach
  • Lord Denning MR also stated that the doctrine was a rule of law

Held (House of Lords)

  • Appeal allowed; D is not liable as the exemption clause applied
  • There is no rule of law preventing exclusion of a fundamental breach

Lord Wilberforce

On the doctrine of Fundamental Breach

  • The doctrine of fundamental breach is a rule of construction and not a rule of law
  • Lord Denning MR’s reasoning is contrary to the Suisse Atlantique case [1967] 1 AC 361
  • The question of whether an exclusion clause should be applied to a fundamental breach is a matter of construction of the contract

Justifications for rejecting the doctrine

Statutory intervention

  • After the UCTA 1977, in commercial matters generally, when parties are not of unequal bargaining power, when risks are normally borne by insurance, there is no case for judicial intervention
  • It is parliament’s intention to allow parties to freely apportion risks

Uncertainty

  • It is difficult to estimate when a breach would be regarded as fundamental
  • Parties should be allowed to determine their claims by contractual provisions they have made

Fundamentally unsound

  • The basis for the doctrine as put forth in Harbutt [1970] 1 QB 447 was wrong
  • The idea was that the clause was wiped away on termination of the contract
  • The correct doctrine is that termination merely results in the innocent party not having to perform, the innocent party is not allowed to treat the contract as coming to an end
  • Claims for damages are secondary obligations which arise from the contract itself and should be governed by the relevant contractual terms

Current case

  • The words of the clause must be read contra proferentem
  • Liability was exempted