What is an exemption clause?
Exemption clauses (also known as exclusion clauses) are terms in a contract limiting or excluding the liability of one of the contractual parties in certain circumstances. Exemption clauses can be used unfairly which may disadvantage a party.
Many contracts are standard form contracts where the terms are fixed. In other cases, particularly in business, the parties to a commercial contract are free to negotiate the terms of the contract between themselves. It is common for one or both parties to limit or even exclude their liability in the event of a breach of contracts. However, sometimes such terms can be highly unfair to one of the parties.
What are the different types of exemption clause?
There are two types of exemption clauses:
- Exclusion clauses excluding a contractual party from liability.
- Limitations clauses that limit a party’s liability.
Such clauses may, for instance, list some types of loss a party will not be liable for under the contract; set a limit on the amount of compensation a party will be liable for; or limit the remedies available in the event of a breach.
Are exclusion or limitation clauses enforceable?
The law protects contractual parties from unfair terms. The court will only uphold an exclusion or limitation clause that is clear and unambiguous in its terms. If the term is unclear, it is likely to be construed against the party seeking to rely on it. The courts will consider a number of factors when considering whether or not to enforce the clause; for example, whether it is clearly incorporated within the contract. The other party must have knowledge of the terms of the exemption clause in order for it to be ‘incorporated’ in the contract terms.
An exemption clause must not be prohibited by law. For instance, a limitation clause seeking to limit liability for statutory implied terms, or for fraud or misrepresentation, will not be allowed.
How will the courts construct exclusion and limitation clauses?
The legal term given to the interpretation of contract clauses is ‘construction’, and the courts have given useful guidance on the construction of exclusion and limitation clauses. The objective test is to be adopted, ie. what would a reasonable person in possession of all background information reasonably available to both (not just one of) the parties, at the time the contract was entered into, would think they meant.
The courts will take into account the respective strength and bargaining powers of the parties, whether it is a business-to-business, or business-to-consumer contract, and whether the price was affected because of the exclusion/limitation clause.
For more information on:
- What specific legislation applies?