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.

This is section 3 of the Active sections. It covers two types of contracts that may include a discrepancy over an exemption clause.  

The two situations include: 

  • Where one party deals as a consumer to the contract (i.e. Seller and purchaser) 
  • Where one party creates the contracts on the other parties terms of business 

Where one party is in breach of the contract he cannot exclude or restrict his liability in respect of his breach or; 

Claim to be entitled to a performance of the contract that is completely unreasonable compared to what the parties originally contracted or claim to not be expected to carry out any performance of the contract at all.  

If the exemption clause satisfy the requirement of reasonableness then it will become effective.

‘Deals as consumer’- Section 12

Section 12 states that a person will be classed as ‘dealing as a consumer’ if;

  • He does not make the contract in the course of a business and does not claim to be doing so 
  • If the other party to the contract does make the contract as a business deal 
  • The goods passing as a result of the contract are a type of good that is ordinarily supplied for private use or consumption 
  • And that the person claiming to deal as a consumer is an individual and not a legal business.  

If a person disagrees with the fact that the person claiming to be dealing as a consumer is actually a legal entity then it is up to the person disagreeing with the fact to provide evidence to the contrary.

The Requirement of Reasonableness

The Reasonableness Test

For the purpose of this section, the term must have been a fair and reasonable one to have been included into the contract having regard to the circumstances in which the contract was made and that should have been known or reasonably ought to have been known or available. 

It should be fair and reasonable for the term to have been relied upon, having regard to all the circumstances. 

Where a person enters a exemption clause into the contract in order to restrict payment of liability to a specific sum of money the requirement of reasonableness will apply with specific regard being given to; 

The resources expected to be available to him if liability ever occurred.

And how far would it be open to him to cover himself with liability insurance.