Exemption clause

Exemption clause is a clause in a contract by which one of the parties seeks to exclude or limit his liability. Such clauses may be used for one of two main purposes:

• to determine in advance which party is to bear the risk of certain eventualities materialising and presumably to insure against such eventualities
• to exploit the superior economic power of the supplier of goods or services over the consumer of goods or services

The first purpose is a legitimate, and indeed necessary, method of risk allocation in contracts between businessmen.However, the use of exemption clauses for the second purpose, particularly against consumers, brought the whole concept of exemption clauses, with the result that the use of exemption clauses in order to attain morally dubious ends, tended to obscure their legitimate use. This led, inevitably, to legislative control over their use.

Construction of exclusion clauses

The first step determining the effectiveness of an exclusion clause is to construe it so as to determine its effect and scope. In particular, the courts have tended to construe exclusion clauses strictly, so that any ambiguity in the wording of the clause will be resolved against the interests of the party seeking to rely on it Exclusion clauses must therefore be clearly worded.

1. Clear words must be used to exclude or limit liability for negligence
2. Similarly clauses which exclude liability for breach of "warranty" may be interpreted as not excluding liability for breach of conditions
3. There is no rule of law that an exclusion cannot cover liability for a fundamental breach of contract

In general, clauses which limit liability may be less strictly construed than those which seek wholly to exclude liability.

Incorporation of exclusion clauses

The law seeks to protect parties from full force of exclusion clauses. They do this by applying the letter of the law to see if such clauses have been incorporated correctly. Where there is uncertainty the clauses may be excluded from the contract. Such uncertainty can arise in several circumstances:

• the document containing notice of the clause must be an integral part of the contract
• if the document is an integral part of the contract, a term may not usually be disputed if it is included in a document which a party has signed
• the term must be put forward before the contract is made
• onerous terms must be sufficiently highlighted

UK legislation on exclusion clauses

Statutory UK legislation on exclusion clauses is fairly recent but very effective. It puts the power in the hands of the court to decide whether the consumer has been unfairly treated by terms that appear in the contract. There are three significant pieces of legislation:

• the Unfair Contract Terms Act 1977
• the Unfair Terms in Consumer Contracts Regulations 1994
• the Unfair Terms in Consumer Contracts Regulations 1999

Footnotes

Exemption clause — recommended articles

Consideration clause — Statutory lien — Statute barred debt — Assignment of claims — Disclosure requirements — Hammer clause — Objective theory of contract — Contractual relationship — Binding contract

References

• Bradgate R., White F., (2012).Commercial Law, Oxford University Press, New York.
• Corporate and Business Law, (2017), BPP Learning Media, London.
• O'Riordan J., (2003). A2 Law , Heinemann, Glasgow.
• Owens, (2001). Law for Non-Law Students, Cavendish Publishing, Sydney.

Author: Emilia Trzeciecka