The Definition of an exemption clause
An exemption clause is basically a section in the contract that limits or excludes or appears to limit or exclude any form of liability for breach of contract. Many contracting parties will use this technique to avoid liability for breach of contract.
An exemption clause may go as far as to completely exclude any liability or may just limit the amount or form of liability to certain amount.
Exemption clauses most commonly appear in standard form contracts. In contracts were the terms are already set, and they form a kind of ‘take it or leave it’ contract, where there is no negotiation of the terms.
An Exclusion clause
The term exclusion clause is used to refer to those terms that completely exclude any form of liability.
A Limitation clause
The term limitation clause is used to refer to those terms which do not remove liability but restrict the damages payable if there is ever to be a breach of contract.
Three basic questions
When considering exemption clauses, there are three basic questions that need to be considered;
- Incorporation- is the clause part of the contract?
- Construction- is the clause appropriately worded in order to cover the breach that has occurred?
- Legislation- Is the clause affected by any of the laws governing exemption clauses, such as, The unfair contract terms act 1977 or the unfair terms in consumer regulations 1999
Incorporation by Signature
Where a term is incorporated into the contract, which is consequently signed by all parties involved, there is very little room for questioning whether incorporation into a contract has occurred. Incorporation b y signature has the benefit of certainty.
Providing the term is set out in the contract that has been signed by both parties, and then the exemption clause will be valid.
If there is a claim of fraud or misrepresentation, then the courts will have to investigate the situation.
Incorporation by Notice
Unsigned documents or advertisement signs cause problems when determining if a term is incorporated into a contract. If the exemption clause is freely known and accepted by all parties there will be no issue, it will then clearly form part of the contract.
Exemption clauses cannot be incorporated from unsigned documents or advertisement signs if those documents or signs are introduced after the contract have been created.
Once offer and acceptance has occurred, one party to the contract cannot turn around and say ‘by the way’ these terms are also part of our contract. This would be unethical and immoral and the whole basis on which the contract has been created would be completely irrelevant if terms can always be added into the contract.
The contract is established on the terms of the offer that are later accepted.
The basic test for incorporation
The basic test to establish if an exemption clause has been incorporated into an unsigned document or sign is that such a clause becomes part of the contract providing there has been reasonably sufficient notice of it.
It is not necessary for the unsigned documents or signs to contain the terms themselves. There may be a reference in these documents that provide information about where the terms are located.
The ‘red hand’ rule
Incorporation by notice may cause difficulties where a person may be bound by terms that have been incorporated into the contract, but which they would not have agreed to if they had actual notice of the exemption clause.
The red hand rule provides that the more unreasonable the clause is, the more notice of the clause has to be given.
Consistent course of dealings
Sometimes, the courts may find that certain terms are incorporated into the contract due to previous dealings the parties may have had in the past.
If certain parties regularly contract to, for example, buy and sell certain goods, then due to the fact that it is a regular occurrence, certain terms that have previously always be incorporated into the contract may be found to be valid in new contracts.
The construction of a contract will look at the interpretation of any exemption clauses, asking whether the exemption clause is sufficiently worded to cover the breach that has occurred.
Any ambiguity regarding the validity of an exemption clause will be resolved against the person seeking to rely upon the exemption clause.
Many exemption clauses in contracts will limit or exclude liability in relation to negligent breach of contract.
There is a three stage approach in establishing if an exemption clause referring to negligence has been validly placed into the contract.
Firstly does the clause expressly refer to negligence?
If not, are there any general words wide enough in the stating of the exemption clause to refer to negligence in some way?
If so then is there only liability for negligence or is there another basis for liability.
If the answer to the last question is yes, it is unlikely that the courts will allow this sort of exemption clause to limit or exclude breach of contract by negligence.
If the answer to the last question is no then the most obvious outcome would be that the clause expressly cover breach by negligence, and providing all the correct formalities have been followed, the clause will be valid.
Limitation of liability
Clauses that limit liability to a certain amount are not treated by the courts with the same hostility as those that completely exclude liability all together.