Background
On 18 December 2001 Euro Cellular issued movement orders to Danzas in relation to two consignments of mobile phones worth €uros 801,500, which were to be collected from a warehouse in Croydon (UK) and shipped to and retained "on hold" at Danzas' warehouse in Barcelona. On 3 January 2002, Euro Cellular instructed Danzas to release 2,000 phones to a company called Special Mobile Trading. It was at this point that Danzas discovered that the phones were missing.

By an agreement reached in about August 2000, Danzas provided Euro Cellular with freight forwarding, carriage and warehousing services. Initially, Danzas said it would only trade on BIFA standard terms, which limit liability to 2 SDRs per kilo. Euro Cellular, however, wanted Danzas to abide by its own Freight Forwarders Guide, which defined Danzas' duties when goods were retained on hold. This set out a release procedure that had to be followed and provided that Danzas' liability for negligent release of the goods would be for their full value. Under a further clause entitled "Key Support Requirements", Euro Cellular required certain assurances, including that Danzas accepted that its liability would not be limited to any maximum amount.

Danzas would not provide this assurance and eventually an acceptance of liability clause was agreed to take its place. This provided "All cover for negligent release will be covered by the insurers of [Danzas] and full cover for any and all other eventualities leading to the loss of goods be covered by the insurers of [Euro Cellular]. This clause will not diminish our standard liabilities as per our standard trading conditions 2000 edition eff.1/7/00".

Those standard terms stated that Danzas would perform its duties with a reasonable degree of care and skill. It would not be liable for losses that it was unable to avoid or prevent by the exercise of reasonable diligence but, if liable, its liability would not exceed the value of the goods or 2 SDRs per kilo, whichever was less.

Under this scheme of liability, if goods were lost because of an event that could have been avoided by the exercise of reasonable diligence, Danzas would be liable, but its liability would be limited to 2 SDRs per kilo, unless the loss had been caused by negligent release, in which case its liability was for the full value.

As a result, if the mobile phones had been stolen, Danzas could claim the limitation, but if they had been negligently released, Danzas would be liable in full. Who then had the burden of proving what really happened?

Euro Cellular argued that the burden fell on Danzas because Danzas had promised to take care of the goods and be liable in the event of their loss. Danzas, however, argued that the provision for unlimited liability for negligent release was an exception in the contract. It is for the party who wants to take advantage of an exception to prove that the circumstances fell within it. Euro Cellular, therefore, had to prove that the loss was due to a negligent release.

Judgment
In the judge’s view, the correct approach to deciding whether a provision is an exception, or an exception to an exception, and the effect this has on the burden of proof, is to look at the substance of the contract agreed by the parties, rather than the form in which they have chosen to express their agreement (William Soanes v S E Walker [1946] 79 Ll Rep 646).

The substance here was that Danzas' liability was limited in certain, but not all, cases of loss. In the judge's view, therefore, it was for Danzas to prove that the loss was caused by something other than negligent release. Euro Cellular only had to show that the goods were lost while in the possession of Danzas. That gave rise to an inference of negligence in the performance of Danzas' duties. Danzas could rebut this if it could show it had exercised reasonable care. If it could not, then it could only claim that its liability was limited if it could prove that the cause of loss was an event other than negligent release.

This was supported by simple common sense. Where bailed goods are lost, the burden of proof lies on the bailee to prove that it was not at fault because the bailee had the goods in its possession and so is in a better position than the bailor to say what happened to them (Levison v Patent Steam Carpet Cleaning [1978] QB 69).

On the available evidence, the judge found that, on the balance of probabilities, the goods were lost by reason of a negligent release. If he was wrong on that, he was satisfied that, on the construction of the contract and as a matter of justice and common sense, the burden of showing what had happened to the goods fell on Danzas. Danzas had not been able to prove that the goods were lost in circumstances where it was entitled to limit liability so it was liable for the full value of the missing phones.