Exemption Clauses in Contract Law

What is an Exemption Clause?

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. 

What are the different types of Exemption 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 the Exemption Clause

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. 

Fairness in Contracts

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.

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For more information on:

  • The Unfair Contract Terms Act 1997
  • The Unfair Terms in Consumer Contracts Act 1999