An exemption clause is an agreement in a contract that stipulates that a party is limited or excluded from liability. Exemption clauses can be used unfairly which may disadvantage a party. Therefore, there have been changes to the law to create more fairness and to limit the use of clauses.
There are two types of clauses, these are a ‘limitation clause’; this is where a party is limited from liability. The other is an ‘exclusion clause’; this is where a party is excluded from liability.
Usually if a court decides if an exemption clause is enforceable, they will look at the agreement and whether there is money involved. Sometimes courts may not enforce emption clauses if a clause has been placed but there has been no money involved in the agreement.
There are several stages that a court will consider before deciding if an exemption clause is enforceable.
The term of ‘incorporation’ means including the clause within the contract. Consideration will be given to whether the exemption clause is within the contract. In the case of Olley v Marlborough Court (1949), the court decided that the terms of the exemption clause were too late.
In the case of Thornton v Shoe Lane Parking (1971), this is where the court decided that the other party must have knowledge of the terms of the exemption clause.
Furthermore, in the case of Hollier v Rambler Motors (1972), it was decided that there was no ‘course of dealing’ at the time. The court decided that the defendants could not exclude themselves of liability.
Interpretation of an exemption clause is used by courts to assess liability; the legal term given to interpretation of an exemption clause is ‘construction’.
In the case of Glynn v Margeston (1893), there was a clause within the contract that allowed a ship to stop at any port in Europe and North Africa, however, its intended journey was from Spain to Liverpool. The court decided that clause that was printed must not interpret in such a way that it defeats the object of the contract and what the contract intends to do. The purpose of the contract, in this case, was that oranges were to be shipped from Spain to Liverpool.
In the case of Houghton v Trafalgar Insurance (1954), there was ambiguity in the exemption clause. The insurers in this case had a clause in their policy which caused ambiguity, they stated, ‘any load’, the court decided that the insurance company could not be exempt from liability.
When looking at contracts, the courts will usually take into account the fairness within the contract when considering liability.
In the case of Green v Cade (1978), the sellers had sold potato seeds which were infected with a virus, and as a result, the buyers had endured a loss of profit. The courts had decided that the sellers did not give any oral information to the buyers that they were different from the original bought. The sellers had stipulated that there was no complaint about the seeds within the required three days of delivery. However, it was decided that the buyers could not have known the presence of the virus in the seeds within three days of it being delivered. Therefore, the defence that was claimed by the sellers was that no complaint was made within the time stated, and this would not have been fair to the buyers.
Another case of St Albans City and DC v International Computers (1994), the court decided that there was a breach of contract by the defendants (International Computers), that there was negligence on the part of the defendants, and the clause was seen as unreasonable.
In the case of Overland Shoes Ltd v Schenkers (1998), the requirements under the Unfair Contract Terms Act 1977 had been fulfilled. This was appealed by the defendants; the court decided the defendants could not claim that the clause was unfair or unreasonable.
In the case of George Mitchell v Finney Lock Seeds (1983), the plaintiffs (George Mitchell) claimed that seeds were not the cabbage seeds that were ordered because they did not have commercial value. The plaintiff endured a financial loss. The court awarded the plaintiff, and decided that limiting liability did not apply in this contract. The defendants appealed, however, the court dismissed the appeal, deciding that the defendants liability was not limited due to ‘conditions’, and that breach of contract could not be due to conditions, without the defendants negligence. The court decided that it would not be fair to rely on ‘conditions’ when concerned in the seed business, and that defendants could provide guarantee against crop damage, without increasing price of seeds, and that it would not be fair or reasonable to depend on ‘conditions’ that were not enforceable.
This act outlines rules on liability and exemption clauses. Section 1(3) of the act states the rules surrounding liability in business. The act states that the liability will be present as a result of activities during business or from business premises. Section 12 outlines that a person becomes the consumer when that person is not part of the business. Section 2(1) states that personal injury or death that results from negligence in a contract cannot exclude or restrict liability. Section 2(2) states that if it is fair, then a contract can exclude or restrict other liability as result of negligence.
This act states that a contract is unfair if there is ‘significant imbalance’ in the contract to the disadvantage of the consumer. Section 5(1) states: ‘A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.’
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