Frans Maas (UK) v. Samsung Electronics (UK)

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Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd
English Commercial Court: Gross J.: 30 June 2004
Lexa Hilliard, instructed by Eversheds, for Frans Maas
Nigel Jacobs, instructed by Clyde & Co., for Samsung
In this case, the court had to consider the circumstances in which a party is vicariously liable for the dishonesty of its employees and, if so, whether it is entitled to limit its liability for such dishonesty. Under consideration were the limitation of liability clauses in the British International Freight Association ("BIFA") standard terms and the question whether they satisfied the test of reasonableness under the UK Unfair Contract Terms Act 1977.

DMC Category Rating: Developed

This case note is based on an Article in the July 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website

On Sunday 10 February 2002, 25,738 mobile telephones belonging to Samsung were stolen from Frans Maas' warehouse facility in Hayes. There were no signs of a break-in and the suspicion was that this was an inside job. These proceedings actually started life as a claim by Frans Maas against Samsung for unpaid invoices, but Samsung (or rather its insurers exercising their right of subrogation) counterclaimed for £2 million for the stolen mobiles.

The warehouse was an Enhanced Remote Transit Shed approved by HM Customs & Excise. An ERTS is not a true storage warehouse, as goods are normally there for only a matter of days until customs formalities are dealt with and the goods despatched.

Which terms?
The first issue to be decided was what, if any, standard terms governed the relationship between the parties. Samsung said it had never accepted that either British International Freight Association (BIFA) or United Kingdom Warehousing Association (UKWA) terms applied. In any event, it claimed there had been a collateral oral agreement under which Frans Maas agreed to provide on-site security guards and that this displaced any standard terms. Since there had been no guards present on the night of the theft, Samsung was entitled to claim damages for breach without reference to BIFA or other standard terms.

The parties had done business with each other for some 14 years. On a number of occasions, Frans Maas had sent documents that reminded Samsung that all transactions were handled in accordance with BIFA terms. Not only that, but all its invoices referred to BIFA terms. Whilst there was no document from Samsung formally accepting the terms applied, there was also nothing that directly challenged their application. In August and September 2001, there had been some correspondence suggesting the UKWA terms would apply to warehousing operations, but this was followed by a further letter from Frans Maas confirming BIFA terms applied. Again, Samsung did not respond formally accepting BIFA terms, but nor did it challenge them.

Clauses 24, 25 and 27 of the BIFA terms provide:
"24 The Company shall perform its duties with a reasonable degree of care, diligence, skill and judgment."
25 The Company shall be relieved of liability for any loss or damage if and to the extent that such loss or damage is caused by
(A) Strike, lock-out, stoppage or restraint of labour, the consequences of which the Company is unable to avoid by the exercise of reasonable diligence;
(B) Any cause or event which the Company is unable to avoid and the consequences whereof the Company is unable to prevent by the exercise of reasonable diligence".
27(A) Subject to…sub-clause (D) below the Company's liability howsoever arising and notwithstanding that the cause of the loss or damage is unexplained shall not exceed
[the various limits set out in sub-clauses (A) to (C)]…
(D) By special arrangement agreed in writing, the Company may accept liability in excess of the limits set out in Sub-clauses (A) to (C) above upon the Customer agreeing to pay the Company's additional charges for accepting such increased

Vicarious liability
The circumstances of the theft pointed overwhelmingly to an inside job. The thieves had entered through the front door without any forced entry and it seemed likely that they had been assisted by one or more unidentified Frans Maas employees. Virtually all warehouse employees had the key and access to the code that operated the alarm.

The question, therefore, was whether Frans Maas was vicariously liable for the wilful default of its employee(s). If so, then it was clearly in breach of clause 24 of the BIFA terms and would not be released from liability by clause 25.

Limiting liability
If Frans Maas was vicariously liable, the next issue was whether Frans Maas could limit its liability under the BIFA terms. .No special arrangement had been made under clause 27(D), so, if the answer were yes, its liability would be reduced from £2 million to some £25,000.

The crucial clause was 27(A). Samsung argued that 27(A) applied to negligence but could not apply to limit liability for employees' deliberate, criminal wrongdoing. The words had to be construed contra proferentem - against the party that sought to rely on them. Frans Maas, however, argued that this was a limitation clause, not a clause exempting it from liability, so the strict rules regarding interpretation of exemption clauses did not apply. There was no rule of law to say that liability could not be limited and the wording of the clause was clearly wide enough to cover its liability for its employees' wrongdoing. Had Samsung wanted to, it could have agreed a higher limit of liability under 27(D).

Unfair Contract Terms Act
The last issue was whether the Unfair Contract Terms Act 1977 applied. Section 3 of the Act provides that, where one party deals on the other's written standards terms of business, the other cannot rely on a contract term to restrict his own liability for breach unless the term satisfies the requirement of reasonableness. Reasonableness means the term "shall have been a fair and reasonable one to be included having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of the parties when the contract was made".

The application of the Act in a commercial context was looked at by the Court of Appeal in Granville Oil v Davis Turner [2003] EWCA Civ 570, which concerned the application of the time bar for claims under the BIFA terms. In that case, it was held that the time limits were not unreasonable, Lord Justice Tuckey observing that, although the 1977 Act played an important role in protecting vulnerable consumers, he was "less enthusiastic about its inclusion into contracts between commercial parties of equal bargaining strength, who should generally be considered capable of being able to make contracts of their choosing and expect to be bound by their terms".

Which terms?
On the evidence, the court was satisfied that BIFA terms governed the bailment of the mobile phones in question, whether those terms had been accepted by conduct or had been incorporated by way of a course of dealing.

The court concluded that the relationship between the parties either involved an over-arching general agreement for Frans Maas to act as Samsung's agent, under which Frans Maas became bailee of Samsung's goods from time to time or, alternatively, separate individual contracts on each occasion Frans Maas handled a consignment of goods. Because of the nature of the ERTS, the bailment on this occasion was more of a transit operation than a true storage, which made the BIFA terms more appropriate. But, if that was wrong, then the UKWA terms applied.

Having heard evidence from both sides, the judge was also satisfied that there had not been any collateral agreement to provide on-site security guards as alleged. Even if there had been, it would not necessarily have ousted BIFA or other standard terms.

Vicarious liability
An employer can be vicariously liable for an employee's deliberate wrongdoing, but vicarious liability is not established just because the employee's employment has merely given him the opportunity to commit the wrongdoing. If, however, an employee is employed to perform a duty and his wrongdoing amounts to a failure to perform that duty, that action comes within the scope of his employment and the employer will be vicariously liable (Lister v Hesley Hall Ltd [2001] UKHL 22).

In the judge's view, the custody of the premises could not be divorced from the custody of the goods. Almost all Frans Maas employees, whether warehouse staff or secretaries, were entrusted as part of their employment with the security of the premises (and hence the goods) by virtue of having the front door keys and knowledge of the alarm code. This went beyond mere opportunity. Frans Maas was, therefore, vicariously liable for the wilful default of the employee(s) in question.

Even if this was not the case, the judge was satisfied that Frans Maas had been negligent and that its negligence caused the loss. It was bad practice to let all members of staff have the key and the security code (which had only been changed once in two or three years) and there were no proper records of who had keys or who knew the code. It could be inferred that these factors materially assisted in the commission of the theft.

Limitation of Liability
On this issue the judge agreed with Frans Maas. Limitation clauses are not regarded by the courts with the same hostility as exclusion clauses (Ailsa Craig v Malvern Fishing [1983] 1 WLR 864). On public policy grounds, the law does not permit a contracting party to exclude liability for its own fraud. But whether it can do so in respect of an agent was left open in HIH v Chase [2003] UKHL 6, although that case concerned excluding liability for fraud in the making of a contract, not in its performance. The House of Lords in HIH, however, commented that any such exclusion would have to be expressed in the clearest terms.

In this case, the commercial context of section 27(A) was relevant. A corporate bailee performs its duties vicariously and so will inevitably be exposed to the risk of vicarious liability, particularly where, as here, the nature of the goods makes them attractive to thieves. Against the background of such an apparent and obvious risk, the wording of the clause ("howsoever arising") was certainly wide enough to include deliberate wrongdoing for which Frans Maas was vicariously liable. In practical terms, one or other party would be well advised to insure against the risk of employee wilful default and, in this case, SamsungFrans Maas had done just that

Unfair Contract Terms Act
On this point the judge was satisfied the limitation provision passed the reasonableness test. The BIFA terms are commonly used by freight forwarders and are well known. The parties had equal bargaining power and, had it wanted to, Samsung could have contracted for a higher limit under 27(D). Frans Maas was, therefore, entitled to limit its liability. Had UKWA terms applied, the judge considered that the result would have been the same.

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