Is the exemption Clause in my contract legally binding?

The Unfair Contract Terms Act 1977

This statutory protection is most commonly associated with exemption clauses. Many contracting parties will include exemption clauses into their contracts for added protection on the possible breach of contract. 

The First point to consider is whether the exemption clause is actually part of the contract in question, and whether it has been worded appropriately which allows it to cover the breach that has occurred.

The Basic Structure

The Unfair Contract Terms Act 1977 does not apply to all exemption clauses and therefore does not require that all types of exemption clauses apply with the idea of the requirement of reasonableness. 

This statutory act renders certain exemption clauses automatically ineffective, which means they are not legally binding and do not affect the parties to the contract in any way.

What does the Unfair Contract Terms Act 1977 include?

There are basically two types of sections contained within the act. The definition sections which are sections 11 and 12 and then the active section of the act which include sections 2, 3, 6 and 7.

The definition sections assist the active sections of the law by clarifying the meaning and intention behind the law itself. If there is any confusion as to what parliament intended to achieve when making the law or in what way should the courts reach a decision then they can look at sections 11 and 12 for definitions of what this particular law means.

When a court is making a decision regarding whether an exemption clause exists and whether it is legally binding on all the parties to the contract they must first look at the active sections of the Act.

Exemption clauses within the operation of the Act

Sections 2-7 of the Unfair Contract Terms Act 1977 (not including Section 6(4)) only apply to business liability.  

This will include situations where there may be a liability for breach of obligation and duties as a result of something done or said by a person whilst carry out business duties.  

It could also include a breach of duties where an employer uses business premises for an unauthorised purpose.

The Active sections of the Unfair Contract Terms Act 1977

The first active section the courts will look at to see if an exemption clause is legal will be Section 2 covering negligence.  

Negligent liability in terms of an exemption clause will arise in the following situations: 

A person cannot legally include an exemption clause into a contract that will exclude or restrict his liability for the death or personal injury of any person resulting from his negligence. 

In the case where a person suffers some form of loss or damage, a person cannot legally restrict or exclude himself from any liability where he has so been negligent in so far as the term satisfies the requirement of reasonableness.  

If a person suffers any other form of loss or damage then an exemption clause excluding his liability will be effective. 

Section 2 basically covers situations where the liability for negligent behaviour has tried to be abolished through an exemption clause.

Contracts where one person deals as consumer or on the others written standard terms of business.

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For more information on:

  • ‘Deals as consumer’- Section 12
  • The Requirement of Reasonableness
  • The Reasonableness Test