When can parties exclude liability?

When entering into a written agreement, contracting parties may wish to safeguard themselves against potential liability which may arise from their agreement. Parties can limit or exclude liability by including exemption or indemnity clauses in their written agreements. It is a pillar of South African contract law that parties are allowed freedom of contract, and exemption clauses are generally enforceable if properly agreed upon. However, parties are not simply allowed to contract out of any and all forms of liability. There are some special circumstances which prohibit broad, sweeping exclusions of liability. What then are the parameters of these clauses and what kind of liability can be lawfully excluded?

The Consumer Protection Act

Should a contract be classified as a consumer agreement, clauses limiting a supplier’s liability should adhere to the relevant provisions the Consumer Protection Act 68 of 2008, as amended (“the CPA”). As per section 48(1)(c) of the CPA a consumer agreement may not contain an exemption clause which is “unfair, unreasonable or unjust”.

Section 48(1)(c) provides that a supplier must not—

“(c) require a consumer, or other person to whom any goods or services are supplied at the direction of the consumer—

(i) to waive any rights;

(ii) assume any obligation; or

(iii) waive any liability of the supplier,

on terms that are unfair, unreasonable or unjust, or impose any such terms as a condition of entering into a transaction.”

Section 48(2)(a) provides that a contractual term or condition is “unfair, unreasonable or unjust” if —

“(a) it is excessively one-sided in favour of any person other than the consumer or other person to whom goods or services are to be supplied;

(b) [it is] so adverse to the consumer as to be inequitable;”

The CPA Regulations provide further clarity on unfair contractual terms in consumer agreements. As per Regulation 44(3), in consumer agreements concluded between suppliers “operating on a for-profit basis and acting wholly or mainly for purposes related to [their] business or profession” and individuals who enter into such agreements for purposes unrelated to their business, the following contractual terms are presumed to be unfair:

• 44(3)(a) – clauses excluding or limiting the liability of the supplier for death or personal injury caused to the consumer through an act or omission by a supplier subject to section 61 (1) of the Act;
• 44(3)(b) – clauses excluding or limiting the legal rights or remedies a consumer has against a supplier who breaches or partially breaches a consumer agreement;
• 44(3)(d) – clauses which limit a supplier’s vicarious liability;
• 44(3)(e) – clauses which compel a consumer to indemnify the supplier against liability incurred by it to third parties;

Further, as per section 51(1)(c)(i) of the CPA, a consumer agreement cannot include a clause exempting a supplier from liability arising from its gross negligence.

In summary, the CPA requires exemption clauses to be fair, reasonable and just. Exemption clauses are unfair and unreasonable if they are excessively one-sided against a consumer or inequitably adverse to a consumer. As per Regulation 44(3), certain exemption clauses are presumed to be unfair and, as per section 51(1)(c)(i), exemption clauses which exempt a supplier from liability for gross negligence are totally prohibited from consumer agreements.

This may come as a surprise to many consumers, given that these clauses are so often included in the fine print of supplier contracts.

Agreements Not Subject to the CPA

When agreements are not subject to the CPA, the Courts’ interpretation of the common law has to be considered when assessing the validity of an exemption clause. In determining the enforceability of exemption clauses, the Courts weigh up a party’s right to freedom of contract against public policy considerations.

In Afrox Healthcare Bpk v Strydom 2002 (6) SA 21 (SCA) the Court upheld the validity of an exemption clause which excluded the liability of a hospital and its staff for negligently causing injury or illness to patients. The Court rejected the Respondent’s arguments that such exemption clause infringed the public interest and the principles of good faith.

The Court in Government of the Republic of South Africa v Fibre Spinners & Weavers 1978 (2) SA 794 (A) further recognised a party’s ability to contractually exclude liability arising even from gross negligence. Judge Wessels ACJ provided as follows:

“…nor is there any reason, founded on public policy, why it should be held that, in so far as the clause refers to loss or damage caused by defendant’s gross negligence, it is not enforceable.”

Notwithstanding the above, public policy considerations in the context of our constitutional dispensation have played larger role and have been given a wider scope in assessing the enforceability of exemption clauses in more recent years.

In Freddy Hirsch (Pty) Ltd v Chickenland (Pty) Ltd 2011 (4) SA 276 (SCA) the Court provided that a clause, in terms of which a supplier attempted to exclude “all conditions, terms, warranties or representations (express or implied statutory or common law) as to quality fitness, performance or otherwise in relation to the goods”, was unenforceable as it was completely contrary to public policy. The Court further provided that a clause in terms of which a customer indemnified the supplier against “all claims, loss, damage, expense or proceedings of whatsoever nature against or on the part of the Company arising out of the sale or distribution of the goods whether defective or not for any reason whatsoever” unenforceable. The Court stated that such indemnity was “so gratuitously harsh and oppressive that public policy could not tolerate it”

In Naidoo v Birchwood Hotel 2012 (6) SA 170 (GSJ) the Court declared a clause which absolved a hotel from liability for personal injury or death caused by the negligence or gross negligence of their employees unenforceable. The Court argued that such clause was unfair and unjust as it would deny a party appropriate judicial redress.

In assessing whether a contractual term may be considered unenforceable, the Court in Beadica 23 CC and Others v Trustees for the time being of the Oregan Trust and Others 2020 (5) SA 247 (CC) provided that the determinative test is whether such contractual term is so unfair, unreasonable and unjust that it would be considered contrary to public policy.

General Exclusions

In no circumstances can a party exclude liability for loss or damages resulting from its fraud or dishonesty. The Court in Wells v SA Alumenite Co 1927 AD 69 gave a clear decision in this regard:

“On grounds of public policy the law will not recognise an undertaking by which one of the contracting parties binds himself to condone and submit to the fraudulent conduct of the other. The courts will not lend themselves to the enforcement of such a stipulation; for to do so would be to protect and encourage fraud.”

The Court in Elgin Brown & Hamer (Pty) Ltd. v Industrial Machinery Suppliers (Pty) Ltd. (272/92) [1993] ZASCA further confirmed that a party cannot exclude liability for loss or damages arising from its own wilful or deliberate misconduct.

Further, certain legislation plainly prohibits the operation of certain exemption clauses. The National Credit Act 34 of 2005 is an example of this. Section 90(2)(g) prohibits exemption clauses which exclude or limit the liability of credit providers for:

 “(i) any act, omission or representation by a person acting on behalf of the credit provider; or (ii) any guarantee or warranty that would, in the absence of such a provision, be implied in a credit agreement”

Conclusion

Exemption clauses are not enforceable solely on the basis that they were agreed to by the free will of contracting parties. The CPA protects consumers against unfair, unreasonable and unjust exemption clauses. Exemption clauses not subject to the CPA will still be unenforceable if they are contrary to public policy or if prohibited by statute. Determining what infringes public policy is however not always a straightforward assessment and will have to be determined on a case-by-case basis, with reference to case law and the unique circumstances every scenario may present.

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