Canada Steamship Lines Ltd v The King 21 Jan 1952 [1952] AC 192, PC

A fire caused by the Crown's employees' negligence destroyed goods in a shed leased to Canada Steamship Lines. The court established a seminal three-stage test to determine if an indemnity or exemption clause in their contract covered liability for negligence.

Facts

The appellant, Canada Steamship Lines Ltd., leased a freight shed on a wharf in Montreal harbour from the respondent, the Crown. The lease stipulated that the lessee (appellant) would not have any claim against the lessor (Crown) for damage to goods in the shed (Clause 17) and that the lessee would indemnify the lessor against all claims for injury or damage to property (Clause 7). During maintenance work carried out by the Crown’s servants, an employee negligently used an oxy-acetylene torch, which started a fire that destroyed the shed and its contents. The appellant had stored goods in the shed valued at over $533,000, and third parties had goods valued at over $40,000. The appellant sued the Crown to recover for the loss, claiming the fire was caused by the negligence of the Crown’s servants.

Issues

The central legal issue before the Privy Council was the proper construction of the exemption and indemnity clauses in the lease. Specifically, the court had to determine whether the clauses were worded sufficiently broadly to relieve the Crown from liability for loss caused by the negligence of its own servants.

Judgment

The judgment was delivered by Lord Morton of Henryton. The Privy Council held that the Crown was liable for the damage caused by its employees’ negligence. The court determined that neither Clause 17 (the exemption clause) nor Clause 7 (the indemnity clause) was sufficient to protect the Crown from the consequences of its own negligence.

Rules of Construction for Indemnity/Exemption Clauses

In his judgment, Lord Morton laid down a three-stage test for interpreting clauses that purport to exempt a party from liability for negligence. This test has become a foundational principle in contract law. Lord Morton stated:

(1.) If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens’) from the consequence of the negligence of his own servants, effect must be given to that provision…

(2.) If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens…

(3.) If the words used are wide enough for the above purpose, the court must then consider whether ‘the head of damage may be based on some ground other than that of negligence’… The ‘other ground’ must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; but subject to this qualification… the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants.

Application to the Case

Applying this test, the court first noted that neither clause expressly referred to negligence, failing the first limb. On the second limb, the words ‘any claim… for… damage… to… property’ in Clause 7 were found to be potentially wide enough to cover negligence. However, the court then moved to the third limb. It found that the Crown had another basis of liability under the contract, specifically a strict obligation under the Civil Code of Lower Canada to maintain the property. Since there was another head of liability besides negligence (even if it was a less likely basis for a claim), the general words of the indemnity clause would be interpreted as applying only to that other liability, not to negligence. The clauses were therefore construed against the Crown, the party seeking to rely on them (the proferens).

Implications

The decision in Canada Steamship Lines v The King is of paramount importance in the common law of contract. It established the definitive ‘Canada Steamship test’ for construing exemption and indemnity clauses where liability for negligence is at issue. The judgment reinforces the principle of contra proferentem, meaning any ambiguity in such a clause will be resolved against the party seeking to benefit from it. The case mandates that if a party wishes to exclude or be indemnified against its own negligence, it must use clear and explicit language to that effect, leaving no room for doubt. This restrictive approach ensures that parties are not casually relieved from a fundamental duty of care unless they have made their intention to do so unequivocally clear in the contract.

Verdict: The appeal was allowed. The Crown was held liable for the damage caused by the negligence of its servants, as the contractual clauses were not effective to exclude or provide indemnity for such liability.

Source: Canada Steamship Lines Ltd v The King 21 Jan 1952 [1952] AC 192, PC