Darlington Futures Ltd v Delco Australia Pty Ltd
High Court of Australia
(1986) 161 CLR 500; [1986] HCA 82 (16 December 1986)
Case details
Court
High Court of Australia
Judges
Mason J
Wilson J
Brennan J
Deane J
Dawson J
Appeal from
Supreme Court of South Australia (Full Court)
Chief Justice King
Justice Mohr
Justice Jacobs
First Instance
Supreme Court of South Australia
Justice Prior
Issues
Construction
Exclusion and limitation clauses
Overview
The respondent engaged the appellant (a commodity broker) to enter transactions on its behalf as part of a ‘tax straddle’ arrangement designed to defer profits for tax purposes.
As part of the arrangement the respondent instructed the appellant to engage in day trading; this time limited trading was designed to minimise exposure to loss. The appellant instead engaged in longer term trading which produced significant loss. The respondent sued for damages.
At first instance the trial judge held that although the appellant had acted outside its authority in entering into the relevant trades, it was nevertheless protected by an exclusion clause (clause 6).
On appeal to the Full Court of the Supreme Court of South Australia construed the exclusion clause strictly and found that it did not apply to the unauthorised trading conduct. It also held that a limitation clause did not apply for the same reason.
On further appeal to the High Court, the Court agreed that the exclusion clause was not wide enough to operate, but found that the limitation clause was wider and effectively limited liability of the appellant.
The Court considered the principles appropriate for construction of exclusion and limitation clauses, observing:
[16] “… 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 contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity … the same principle applies to the construction of limitation clauses.”
Facts
The appellant was a commodity broker; the respondent an engineering company.
The respondent’s accountant discussed with the appellant the possibility of postponing profits until the next financial year for tax purposes, and the appellant recommended engaging in a ‘tax straddle’. The respondent followed the recommendation and instructed the appellant to enter transactions on its behalf.
Pursuant to the contract, the respondent instructed the appellant to engage in day trading. The appellant entered into several transactions but did not limit these to day trading which exposed the respondent to substantial losses.
Claims and exclusion/limitation clauses
The respondent claimed that the appellant had acted outside their authority in breach of contract and sued to recover nearly $300k in damages.
The appellant relied on an exclusion clause (clause 6) and limitation clause (clause 7).
Clause 6 provided:
"The Client acknowledges that … the Agent will not be responsible for any loss should the Client follow any of the Agent's trading recommendations or suggestions, nor for any loss, in the case of Discretionary Accounts, arising from trading by the Agent on behalf of the Client. The Client finally acknowledges that the Agent will not be responsible for any loss arising in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this Agreement or not, and that the Agent shall not be liable to account to the Client for any profit made by the Agent in any of the circumstances set out in clause 9 whether or not such circumstances result in a loss to the Client."
Clause 7 provided (emphasis added)
"a) Neither the Agent nor its servants or agents shall be liable to the Client for any loss or damage resulting directly or indirectly from delays in the transmission or execution of orders whether or not such delays involve negligence.
b) Neither the Agent nor its servants or agents shall be liable to the Client for any loss or damage arising or resulting directly or indirectly from any statement, information or advice made or given, whether negligently or otherwise, in relation to any commodity or the sale or purchase thereof.
c) Any liability on the Agent's part or on the part of its servants or agents for damages for or in respect of any claim arising out of or in connection with the relationship established by this agreement or any conduct under it or any orders or instructions given to the Agent by the Client, other than any liability which is totally excluded by paragraphs (a) and (b) hereof, shall not in any event (and whether or not such liability results from or involves negligence) exceed one hundred dollars.
d) Every exemption from liability, defence and immunity of whatsoever nature applicable to the Agent or to which the Agent is entitled hereunder shall also be available and shall extend to protect every one of its servants or agents acting hereunder or making or giving statements, information or advice as aforesaid and for the purpose of this clause the Agent shall be or shall be deemed to be acting as agent or trustee on behalf of and for the benefit of all persons who are or might be its servants or agents from time to time as well as on its own behalf and all such persons shall to this extent be or be deemed to be parties to this agreement."
First instance (Justice Prior)
At first instance Justice Prior found that Mr Kleemann (for the appellant) ‘received three general instructions: (1) to effect the closing out process as part of the straddle and to take the locked-in profit; (2) to engage in day trading and remain exposed to the market for short periods; (3) at all costs to avoid the making of losses on the closing out’ [HCA para 6] and that he had acted outside these instructions.
His Honour nevertheless found for the appellant because of the operation of an exclusion clause (clause 6).
Court of Appeal (Chief Justice King and Justices Mohr and Jacobs)
[para 8 of the High Court decision]
On appeal the Full Court of the Supreme Court (King C.J., Mohr and Jacobs JJ.) considered that the exclusion clause should be construed strictly and that, in accordance with this approach, the last sentence in cl.6 had no application to the case because the relevant trading activity was unauthorized. The Full Court also held that cl.7 did not apply. In particular their Honours considered that, as the transactions were unauthorized, the claim did not fall with cl.7(c).
The Court
[After noting the Full Court was correct in finding that the appellant had acted outside its authority and further [at 10] that ‘the failure to unlock the straddle by taking the final step on the same day, or within a day, was not a negligent performance of the respondent's instructions [but] positively committed the respondent to a form of speculation quite beyond the ambit of the authority given to the appellant, the Court continued:]
[11] The question then is whether cl.6 protects the appellant from the consequences of what otherwise would be breaches of contract. Mr Bennett relies on statements in recent decisions of the House of Lords to support the approach that exclusion clauses should be simply construed in accordance with their language and that they should not be subjected to a strained construction in order to reduce the ambit of their operation. … their Lordships have stated that, although an ambiguous exclusion clause will be construed contra proferentem, such a clause is to be given its natural construction. So, in Photo Production … Lord Diplock, observing (at p.851) that the court was not entitled to reject the exclusion clause "however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only", said (at p.851):
"In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations."
…
[13] Although these three decisions contain statements giving emphasis to the natural meaning of the words of exclusion and limitation clauses read as a whole, we do not understand the statements to deny the legitimacy, indeed the necessity, of construing the language of such a clause in the context of the entire contract of which it forms part. …
[14] … this Court has in past decisions authoritatively stated the approach to be adopted in Australia to the construction of exclusion and limitation clauses. …
[The Court referred to a series of decisions and continued]:
[16] 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 contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. … the same principle applies to the construction of limitation clauses. As King C.J. noted in his judgment in the Supreme Court, a limitation clause may be so severe in its operation as to make its effect virtually indistinguishable from that of an exclusion clause. And the principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people where no question of the reasonableness or fairness of the clause arises.
[The Court then went on to explain why they found that the exclusion clause did not operate to the relevant activity in this case but that the limitation clause did operate]:
[17] Turning now to cl.6 of the contract between the appellant and the respondent, the question is whether the relevant losses arose "in any way out of any trading activity undertaken on behalf of the Client whether pursuant to this Agreement or not". Read in context these words plainly refer to trading activity undertaken by the appellant for the respondent with the respondent's authority, whether pursuant to the Agreement or not. It can scarcely be supposed that the parties intended to exclude liability on the part of the appellant for losses arising from trading activity in which it presumed to engage on behalf of the respondent when the appellant had no authority so to do.
[18] The final question is whether the appellant is protected by cl.7(c) of the contract. This provision limits the liability of the appellant to $100 in relation to claims of three kinds : (1) claims arising out of or in connection with the relationship established by the agreement; (2) claims arising out of or in connection with any conduct under the agreement; and (3) claims arising out of or in connection with any orders or instructions given by the client to the broker. The Full Court of the Supreme Court considered that cl.7(c) by its terms had no application to claims arising out of conduct which is outside the scope of the agreement and the relationship between the parties established by it. This, in our opinion, is to place a more restrictive interpretation on the clause than its language will naturally bear. In particular, it is expressed to comprehend claims arising out of or in connection with the relationship established by the agreement. A claim in respect of an unauthorized transaction may nonetheless have a connection, indeed a substantial connection, with the relationship of broker and client established by the agreement. We are unable to discern any basis on which cl.7(c) can be construed so as not to apply to such a claim. The present case is one in which the respondent's claim arises in connection with the relationship of broker and client established by the contract between the parties, notwithstanding the finding that the relevant transactions were not authorized.
19. In the result cl.7(c) operates to limit the appellant's liability to $100 in respect of each of the unauthorized coffee and silver contracts.
20. We would allow the appeal.
[emphasis added]