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.
There is also a general principle that a contract should not be interpreted in a way that excludes or reduces the remedies which would otherwise apply, unless the agreement clearly specifies this. Again, this will be subject to the reasonable test.
The courts will take into account the fairness of the exclusion or limitation clause when considering its validity. In the case of George Mitchell v Finney Lock Seeds (1983), the plaintiffs (George Mitchell) claimed that seeds were not the cabbage seeds that were ordered because they did not have commercial value, so they suffered a significant financial loss as a result. The court allowed the plaintiff’s claim, ruling that a clause in the contract limiting the defendant’s liability to the price of the seeds did not apply. The defendants appealed unsuccessfully: the plaintiffs would not have been aware of the fault in the seeds, whereas the defendants were (the wrong seeds were supplied), so it would not be fair or reasonable to allow the limitation clause to apply.
What specific legislation applies?
There is legislation dealing specifically with unfair contract terms such as exclusion and limitation clauses. Notably, the Consumer Rights Act 2015 (CRA) replaces the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) and some provisions of the Unfair Contract Terms Act 1977 (UCTA). The CRA applies only to contracts (and notices) entered into between consumers and businesses since October 2015. Consumers are given greater protection under the CRA than previously (although note that UCTA still applies to contracts entered into before October 2015).
The general rule is that a term is unfair if “contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer”. In addition, personal injury or death resulting from negligence in a contract cannot exclude or restrict liability. Under section 2(2) of the CRA, if it is fair, then a contract can exclude or restrict other liability as result of negligence.
What’s clear is that any exemption clause must be clear and unambiguous, fair in the circumstances, and not illegal bye its very nature. However, if you have any concerns about the unfairness or otherwise of an exemption clauses, we strongly recommend you take specialist legal advice.