Contents of a contract - Exemption clauses

Learning Outcomes

After studying this article, you will be able to identify and explain the main legal principles governing exemption clauses in contracts. You will understand how exemption clauses are incorporated, interpreted, and controlled by statute, and be able to apply these principles to SQE1-style multiple choice questions.

SQE1 Syllabus

For SQE1, you are required to understand the legal rules and practical implications of exemption clauses in contract law. You should focus your revision on:

  • the definition and types of exemption clauses
  • the methods by which exemption clauses are incorporated into contracts
  • the principles used by courts to interpret exemption clauses
  • statutory controls on exemption clauses, especially under the Unfair Contract Terms Act 1977 (UCTA)
  • the application of the reasonableness test under UCTA
  • practical scenarios involving exemption clauses in both domestic and international contracts

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which of the following is NOT a recognised method of incorporating an exemption clause into a contract?
    1. By signature
    2. By reasonable notice
    3. By oral agreement after the contract is made
    4. By a consistent course of previous dealings

  2. True or false? An exemption clause that seeks to exclude liability for death or personal injury caused by negligence is always valid if both parties are businesses.

  3. What is the effect of the contra proferentem rule when interpreting exemption clauses?

  4. Under UCTA, what key factor must be satisfied for an exemption clause (other than for death or personal injury) to be enforceable in a business-to-business contract?

Introduction

Exemption clauses are terms in a contract that seek to exclude or limit a party’s liability for breach or certain events. Their use is common in commercial agreements, but the law imposes strict requirements for their effectiveness. For SQE1, you must understand how exemption clauses are incorporated, interpreted, and regulated by statute.

What is an exemption clause?

An exemption clause is a contractual term that seeks to exclude or restrict liability for breach of contract, negligence, or other specified risks.

Key Term: exemption clause
A term in a contract that excludes or limits a party’s liability for breach, negligence, or other specified events.

Incorporation of exemption clauses

For an exemption clause to be effective, it must be part of the contract. The main methods of incorporation are:

Incorporation by signature

If a party signs a contractual document containing an exemption clause, they are generally bound by it, even if they have not read the clause.

Key Term: incorporation by signature
The process by which a term becomes part of a contract because a party has signed a document containing it.

Incorporation by reasonable notice

Where there is no signature, an exemption clause may be incorporated if reasonable steps were taken to bring it to the other party’s attention before or at the time of contracting.

Key Term: incorporation by reasonable notice
A term is incorporated if the party relying on it took reasonable steps to give notice of it before or at the time the contract was made.

Incorporation by course of previous dealings

A term may be incorporated if the parties have had a consistent and regular course of dealings in which the term was always used.

Key Term: incorporation by course of previous dealings
A term is incorporated if it has been consistently used in previous contracts between the same parties.

Worked Example 1.1

A dry cleaner displays a sign behind the counter stating, "All items left at owner's risk." A customer leaves a coat for cleaning without signing any document. The coat is damaged due to staff negligence. Can the dry cleaner rely on the exemption clause?

Answer: The dry cleaner can rely on the clause only if reasonable steps were taken to bring it to the customer's attention before or at the time of contracting. If the sign was clearly visible and legible at the point of contract, the clause may be incorporated by reasonable notice.

Construction and interpretation of exemption clauses

Once incorporated, courts interpret exemption clauses strictly. The main principles are:

Contra proferentem rule

Any ambiguity in an exemption clause is interpreted against the party seeking to rely on it.

Key Term: contra proferentem
A rule of interpretation where any ambiguity in a contract term is construed against the party who seeks to rely on it.

Exclusion of liability for negligence

To exclude liability for negligence, the clause must use clear and explicit wording. If the wording is unclear, the clause will not cover negligence.

Fundamental breach

Exemption clauses do not automatically fail because of a serious or fundamental breach, but the clause must clearly cover the breach in question.

Worked Example 1.2

A parking ticket states, "No liability for damage." A car is damaged due to the attendant's careless driving. Does the exemption clause protect the car park operator?

Answer: Unless the clause specifically refers to negligence or uses clear words covering negligent acts, the court is unlikely to interpret "No liability for damage" as excluding liability for negligence.

Statutory controls: Unfair Contract Terms Act 1977 (UCTA)

UCTA imposes statutory limits on the use of exemption clauses, especially in business contracts.

Prohibition of excluding liability for death or personal injury

Liability for death or personal injury resulting from negligence cannot be excluded or restricted.

Key Term: Unfair Contract Terms Act 1977 (UCTA)
A statute that restricts the use of exemption clauses in contracts, especially those excluding or limiting liability for negligence.

Reasonableness test

For other types of loss or damage, an exemption clause is only effective if it satisfies the requirement of reasonableness.

Key Term: reasonableness test
The requirement that a contract term must be fair and reasonable in all the circumstances at the time the contract was made.

The court considers factors such as bargaining power, availability of alternatives, and whether the term was brought to the other party’s attention.

Worked Example 1.3

A supplier’s standard terms limit liability for defective goods to the price paid. The buyer is a small business with no chance to negotiate. The goods fail, causing significant loss. Is the limitation clause likely to be enforceable?

Answer: The court will apply the reasonableness test. If the buyer had no real opportunity to negotiate and the supplier was in a stronger position, the clause may be found unreasonable and unenforceable under UCTA.

Exemption clauses in international contracts

In cross-border contracts, parties often specify the governing law and jurisdiction. English law may apply UCTA to some international contracts, but the effect depends on the choice of law and the location of the parties.

Exam Warning

Exemption clauses are subject to strict statutory and common law controls. For SQE1, always consider both incorporation and statutory reasonableness. Do not assume a clause is valid simply because it appears in the contract.

Revision Tip

When answering SQE1 questions, always identify the method of incorporation, check for ambiguity, and apply the UCTA reasonableness test where relevant.

Key Point Checklist

This article has covered the following key knowledge points:

  • Exemption clauses are terms excluding or limiting liability in contracts.
  • Incorporation can occur by signature, reasonable notice, or course of previous dealings.
  • Courts interpret exemption clauses strictly, applying the contra proferentem rule.
  • Liability for negligence can only be excluded with clear wording.
  • UCTA prohibits exclusion of liability for death or personal injury due to negligence.
  • Other exemption clauses must satisfy the reasonableness test under UCTA.
  • The effectiveness of exemption clauses in international contracts depends on governing law and jurisdiction.

Key Terms and Concepts

  • exemption clause
  • incorporation by signature
  • incorporation by reasonable notice
  • incorporation by course of previous dealings
  • contra proferentem
  • Unfair Contract Terms Act 1977 (UCTA)
  • reasonableness test
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