You can ask our solicitors online for advice on exemption clause in contracts using the question box on the front of our website or the following free legal advice guide may answer your questions. 

There are many instances when an exemption clause may be used in a contract for goods or services. Before we explore some of the specifics about exemption clauses, it is important to understand what they are and the types of contracts where they can often appear.

When they appear in a contract, an exemption clause is designed to exclude or limit any form of liability if there is a breach of contract. This can be used as a tactic for all kinds of businesses and individuals to avoid liability if something goes wrong and the contract is breached so they cannot be held liable.

Exemption clauses can remove liability completely or they can limit it to a certain degree. Commonly this type of clause would appear in a contract with a standard set of terms and conditions. Where terms are already set, it can create an almost take it or leave it contract where the terms cannot be negotiated.

Exemption Clause Exclusion and Limitation

There are two types of exemption clause that can be found in a contract; exclusion and limitation. An exclusion clause can completely exclude any form of liability so the person issuing the contract can never be found liable, regardless of the breach. A limitation clause on the other hand will not remove liability, but it can limit the damages that are due if a breach of contract does occur.

When considering an exemption clause, there are three basic questions that need to be asked;

The first is incorporation and whether the clause formed part of the contract. Secondly, construction is important. Has the clause been suitably constructed to cover a breach that may occur and thirdly what legislation can be used? Are there any laws which cover exemption clauses such as the Unfair Terms Act 1977 or the Unfair Terms in Consumer Regulations 1997? Each of these three elements will need to be established when considering exemption.

Incorporation

This is an important aspect of exemption clauses and should be explored in detail. When a term is incorporated into a contract and this is agreed by all parties, it would be very difficult to then question whether it was incorporated into a contract. Using signatures is one of the main ways that this can be clarified. If the term is incorporated into a contract and it has been signed by both parties, the exemption clause will be valid.

When a claim for misrepresentation or fraud is brought before the court, they will need to investigate the situation.

Another way that incorporation can occur is by notice. Advertisements and unsigned documents can cause multiple issues when deciding if a term has been incorporated into a contract. If the exemption clause is clearly stated in the contract and it has been accepted by everyone, it will form part of the contract.

An exemption clause cannot be incorporated from an unsigned document or an advertisement if either of these were presented after the contract was created. When an offer is created and all parties have accepted the offer, it cannot be changed, incorporating new terms into a contract.

This would not only be immoral, but it would be unethical too. The whole process of creating contracts and contract law would be irrelevant if this was permitted, allowing any term to be added in to any contract at any time. This is why contracts are created based on the terms of the offer and acceptance at the time.

Incorporation in an unsigned document can be established by assessing whether the clause became part of the contract if the parties have been duly notified in advance.

However, it is not necessary for an unsigned document to contain the terms. There may be a reference to some other document or resource where the terms and conditions are located such as a website, a sales page or a terms of engagement letter.

The Red Hand Rule

Another factor that may be worth investigation in terms of incorporation is when an incorporation by notice may cause problems when an individual may not actually be bound by the terms which are included in a contract, but terms which they wouldn’t have agreed to if they had been notified it formed part of an exemption clause. This is referred to as the ‘red hand rule’. It states that the greater the unreasonableness of the clause, the more notice will need to be given.

Consistency

Sometimes, people who enter into a contract with a business or individual will have done so on previous occasions, perhaps because they have worked with them before. If certain people regularly enter into contracts, maybe when buying and selling products or services, certain terms can be assumed if they have been incorporated into the contract at some point.

Construction

The way that the contract is created or ‘constructed’ will be looked at when questioning any of the exemption clauses. In this case, it will be evaluated whether the exemption clause was properly worded to cover the breach that has occurred. Contra Proferentem is a term used to describe whether there is any ambiguity in relation to the validity of an exemption clause.

Exemption and Negligence

The majority of exemption clauses contained within contracts will either exclude or limit liability particularly in relation to a negligent breach of contract. A three stage process will be used to establish whether the exemption clause has been incorporated into the contract in the right way. One of the first questions to ask would be whether the clause specifically refers to negligence.

If it doesn’t then there are many general words that can be used to refer to negligence in a round about way. If none of these words are included, liability for negligence can be established or if not, another basis for liability will need to be established.

A clause that limits or restricts liability in some way are not approached with the same level of hostility as exclusion clauses.

If you are in doubt about any exclusion clauses in the terms of a contract, it is important that you seek legal advice.