Types of exemption clause in contracts

Exemption clauses

It is common practice for parties, at the time of entering a binding contract, to regulate the consequences if one or both parties broke the terms of that contract. Those clauses are known broadly as exemption clauses. Such restrictions may be in respect of terms implied into the contract by law or may extend to express terms agreed at the time of formation.

The effect of the breach could mean, depending on the term breached, that the innocent party has the right to treat its future obligations under the contract as terminated. However, this does not mean that the contract is extinguished by the breach. On the contrary, it is then when the terms relating to the consequences of a breach come into effect.

Incorporation into the contract

Exemption clauses could be incorporated into a written contract when the party seeking to rely upon the term has done what may reasonably be considered sufficient to give notice of the clause to the other party. Notice is to be given prior to the formation of the contract or at the time of formation.

But a clause may also be incorporated by an established course of dealing between the parties or because both parties are aware that it is the ordinary practice in the particular trade area. 

The types of exemption clauses

There are three types of exemption clauses and those are exclusion, limitation and indemnity clauses. They are mainly distinguished on the basis of the effect they purport to have on the contract and the ability of the injured party to recover for the breach. 

  • Exclusion clauses generally seek to exclude or cut down the defaulting party’s duties under the contract. Those duties can be defined by looking into the subject matter of the particular contract.

For example, such could be achieved by excluding express or implied terms, or limiting liability to causes of wilful neglect or even default, or by binding the buyer of goods or land in the respective contract to accepting the goods subject to faults or defects.

A party can purport to restrict liability even where the breach is caused by the negligence of the party in default. However, for such clause to be enforced, the term needs to have been sufficiently communicated to the injured party before the formation of the contract. Further, it needs to be construed in such a way to show that the parties intended, in the context of their agreement that the exclusion is to be valid. And even then, very high standards of construction are applied, where the clause purports to absolve the party of altogether liability for negligence. 

  • Secondly, limitation clauses seek to qualify the rights of the innocent party upon the breach. Examples are denying or limiting the right to rescind for breach or limiting the amount of damages recoverable. Further, such clauses could be specifying a time limit for the right to rescind or claim damages to be exercised. On the expiry of such time limit such right would be taken away from the innocent party.

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