Contract Law – Prepare 3 26.10.21
Unit 3 – Contents of a Contract
Tutorial – Exemption Clauses
1 – Introduction
Exemption clauses are common, they all try to exclude or restrict the liability of D or the
claims or remedies of C
Lawyers see risk instead of blame, so when things go wrong, they’re working out who bears
the consequences of D’s mistake, rather than pointing the finger
Who takes the risk – Ds:
o The law already limits the responsibility of D for breach of contract in some ways –
the main way is through the rules of remoteness of loss
o They are liable for losses which arise naturally from the breach or are in the
reasonable contemplation of parties at the time the contract is made
Who takes the risk – Cs:
o D won’t be liable for losses which are too remote a consequence of D’s breach
o The risk of these losses lay with C despite D causing them
Freedom of contract means it’s up to the parties to contract on the terms that they want to
The laws always recognised that parties could use exemption clauses legitimately to allow
parties to allocate risks between them, rather than be an underhand, unfair inclusion
o It’s also sought to prevent exemption clauses being used in ways it regards as unfair
Common law has created two tests relating to exemption clauses – incorporation and
construction
Incorporation:
o First set of tests determines whether an exemption clause is truly part of the
contract between the parties – a test of incorporation
o Lawyers put the question this way – “Is the exemption clause incorporated into the
contract?”
o Once the common law has decided that an exemption clause is part of the contract,
it then has a second set of tests
Construction:
o These tests relate to the meaning/construction of the exemption clause
o The tests answer the question “Does the clause actually exempt the liability in
question?”
o Common law tests between them answer the questions of whether, and what, the
parties have agreed
o But they don’t really solve many of the problems of misuse of exemption clauses
1977 – Parliament legislated to control the use of exemption clauses, by passing the Unfair
Contract Terms Act 1977 (UCTA)
o UCTA lays down further tests to decide whether an exemption clause can be relied
upon – its provisions apply to many exemption clauses (but not all)
Here, we assume that D is trying to rely on the exemption clause to defeat C’s case (as this is
usually the case)
2 – Incorporation
1
,Contract Law – Prepare 3 26.10.21
Law of contract doesn’t see exemption clauses as things which are imposed by one party on
another, which is how people often view these clauses
Tests are here to determine whether the parties have agreed to include the exemption
clause in their contract
The two main ways an exemption clause might be incorporated into a contract are:
o By signature
o By giving reasonable notice at or before the time of the contract
3 – Incorporation by Signature
The normal rule is that if you sign a contract, you’re bound by it
o Assumed that signature is a form of assent to the terms of what’s being signed
However, if you enter into a contract after the seller misrepresents to you the effect of one
of the exemption clauses, then you are not bound to that exemption clause
o Although you’d generally still be bound by the rest of the contract, because you’ve
not been misled about that
You are still bound to a contract if you don’t read it before you sign it
You sign to show you agree to the terms, not to show that you’ve read them
The incorporation by signature rule won’t apply where the document signed was not
intended to be a contractual document (e.g. signing a timesheet)
You are bound to a contract if you sign it but don’t understand what the terms mean
o The law sees it as irrelevant that you haven’t understood the contract
o The courts have also accepted that “in extreme circumstances, even a signature
might not be enough” to incorporate an exemption clause if it’s particularly unusual
Although this situation is rare, the whole contract won’t be binding if the signatory has
made a fundamental mistake as to the effect of the document
o E.g. if you sign a mortgage of your house, having been misled into believing you’re
just selling your car
o But even here, you won’t be able to get out of the contract if the court thinks you
were careless about signing it
4 – Incorporation by Giving Reasonable Notice At/Before the Time of the Contract
The position isn’t always clear cut where terms, in particular exemption clauses, are set out
in a document or notice which hasn’t been signed
E.g. where terms are contained in notices at the point of sale/transaction, or on the back of
tickets, D will need to show that they’ve given reasonable notice of the terms at or before
the time of the contract
o Without this, the terms won’t be incorporated into the contract
The law takes a tougher line where the exemption clause being relied on is unusual
o Terms like this may need to be drawn to your attention in the most explicit way –
e.g. you are referred in particular to ‘clause five overleaf’
The time of contract:
o This is significant, due to the principle that it’s simply because the exemption clause
will only be incorporated if it was agreed
2
, Contract Law – Prepare 3 26.10.21
o The time of contracting is the point at which the terms of the contract are agreed –
anything after that is too late to be part of the deal
Incorporation by course of dealings:
o What if D merely forgets to give reasonable notice, and they’ve dealt with C before
and before D’s given notice of the term or its been part of the contract C signed?
o D may want to say to C “surely we just took it as read that my T&Cs would apply this
time too?”
Here, he is arguing for “incorporation by course of dealings”
When the course of dealings between parties are insufficiently frequent and consistent for
A to be taken to have treated the terms as agreed on an occasion, A isn’t bound by them
Where there is a “sale note” with terms set out, they are to be held by the court to be
incorporated, especially if the transactions have taken place frequently
One’s terms could be treated as incorporated when the contracts between the parties were
concluded on the same terms and effected in the same manner, especially when dealings
have been consistent
5 – Construction
We assume that the relevant term is incorporated into the contract
Construction test is the second of the common law tests – D has to show that on a true
construction of the exemption clause, it does exclude or restrict the liability in question
We construe the exemption clause considering the:
o Words used
o The other terms of the contract
o Any relevant commercial background to the contract
Before the UCTA came in, the common law rules provided the only constraints on the use of
exemption clauses
o As a result, courts often twisted the meanings of exemption clauses where they
perceived them to be unfair
o By finding a meaning of the clause which didn’t cover the liability in question, they
could prevent the clause from being effective
UCTA has provided an extra level of protection against the improper use of exemption
clauses, which has largely done away with the need for courts to apply strained and
unnatural constructions to words
If there is any ambiguity or uncertainty about the meaning of a clause, the courts will apply
the rule of construction, known as the “contra proferentum rule”
o The courts will give the clause whatever meaning is more favourable to C
D has contractually undertaken an obligation, and it’s only fair that they should be liable for
the performance of that obligation unless the contract very clearly states otherwise
o The result is that the clause is construed against the person seeking to rely on it
If a party wishes to exclude liability for negligence or lack of care, then the language of their
exemption clause must make it very clear that they are not to be liable even in the event of
their negligence or carelessness
6 – Introduction to UCTA 1977
UCTA provides the most systematic control of exemption clauses in contracts generally
3
Unit 3 – Contents of a Contract
Tutorial – Exemption Clauses
1 – Introduction
Exemption clauses are common, they all try to exclude or restrict the liability of D or the
claims or remedies of C
Lawyers see risk instead of blame, so when things go wrong, they’re working out who bears
the consequences of D’s mistake, rather than pointing the finger
Who takes the risk – Ds:
o The law already limits the responsibility of D for breach of contract in some ways –
the main way is through the rules of remoteness of loss
o They are liable for losses which arise naturally from the breach or are in the
reasonable contemplation of parties at the time the contract is made
Who takes the risk – Cs:
o D won’t be liable for losses which are too remote a consequence of D’s breach
o The risk of these losses lay with C despite D causing them
Freedom of contract means it’s up to the parties to contract on the terms that they want to
The laws always recognised that parties could use exemption clauses legitimately to allow
parties to allocate risks between them, rather than be an underhand, unfair inclusion
o It’s also sought to prevent exemption clauses being used in ways it regards as unfair
Common law has created two tests relating to exemption clauses – incorporation and
construction
Incorporation:
o First set of tests determines whether an exemption clause is truly part of the
contract between the parties – a test of incorporation
o Lawyers put the question this way – “Is the exemption clause incorporated into the
contract?”
o Once the common law has decided that an exemption clause is part of the contract,
it then has a second set of tests
Construction:
o These tests relate to the meaning/construction of the exemption clause
o The tests answer the question “Does the clause actually exempt the liability in
question?”
o Common law tests between them answer the questions of whether, and what, the
parties have agreed
o But they don’t really solve many of the problems of misuse of exemption clauses
1977 – Parliament legislated to control the use of exemption clauses, by passing the Unfair
Contract Terms Act 1977 (UCTA)
o UCTA lays down further tests to decide whether an exemption clause can be relied
upon – its provisions apply to many exemption clauses (but not all)
Here, we assume that D is trying to rely on the exemption clause to defeat C’s case (as this is
usually the case)
2 – Incorporation
1
,Contract Law – Prepare 3 26.10.21
Law of contract doesn’t see exemption clauses as things which are imposed by one party on
another, which is how people often view these clauses
Tests are here to determine whether the parties have agreed to include the exemption
clause in their contract
The two main ways an exemption clause might be incorporated into a contract are:
o By signature
o By giving reasonable notice at or before the time of the contract
3 – Incorporation by Signature
The normal rule is that if you sign a contract, you’re bound by it
o Assumed that signature is a form of assent to the terms of what’s being signed
However, if you enter into a contract after the seller misrepresents to you the effect of one
of the exemption clauses, then you are not bound to that exemption clause
o Although you’d generally still be bound by the rest of the contract, because you’ve
not been misled about that
You are still bound to a contract if you don’t read it before you sign it
You sign to show you agree to the terms, not to show that you’ve read them
The incorporation by signature rule won’t apply where the document signed was not
intended to be a contractual document (e.g. signing a timesheet)
You are bound to a contract if you sign it but don’t understand what the terms mean
o The law sees it as irrelevant that you haven’t understood the contract
o The courts have also accepted that “in extreme circumstances, even a signature
might not be enough” to incorporate an exemption clause if it’s particularly unusual
Although this situation is rare, the whole contract won’t be binding if the signatory has
made a fundamental mistake as to the effect of the document
o E.g. if you sign a mortgage of your house, having been misled into believing you’re
just selling your car
o But even here, you won’t be able to get out of the contract if the court thinks you
were careless about signing it
4 – Incorporation by Giving Reasonable Notice At/Before the Time of the Contract
The position isn’t always clear cut where terms, in particular exemption clauses, are set out
in a document or notice which hasn’t been signed
E.g. where terms are contained in notices at the point of sale/transaction, or on the back of
tickets, D will need to show that they’ve given reasonable notice of the terms at or before
the time of the contract
o Without this, the terms won’t be incorporated into the contract
The law takes a tougher line where the exemption clause being relied on is unusual
o Terms like this may need to be drawn to your attention in the most explicit way –
e.g. you are referred in particular to ‘clause five overleaf’
The time of contract:
o This is significant, due to the principle that it’s simply because the exemption clause
will only be incorporated if it was agreed
2
, Contract Law – Prepare 3 26.10.21
o The time of contracting is the point at which the terms of the contract are agreed –
anything after that is too late to be part of the deal
Incorporation by course of dealings:
o What if D merely forgets to give reasonable notice, and they’ve dealt with C before
and before D’s given notice of the term or its been part of the contract C signed?
o D may want to say to C “surely we just took it as read that my T&Cs would apply this
time too?”
Here, he is arguing for “incorporation by course of dealings”
When the course of dealings between parties are insufficiently frequent and consistent for
A to be taken to have treated the terms as agreed on an occasion, A isn’t bound by them
Where there is a “sale note” with terms set out, they are to be held by the court to be
incorporated, especially if the transactions have taken place frequently
One’s terms could be treated as incorporated when the contracts between the parties were
concluded on the same terms and effected in the same manner, especially when dealings
have been consistent
5 – Construction
We assume that the relevant term is incorporated into the contract
Construction test is the second of the common law tests – D has to show that on a true
construction of the exemption clause, it does exclude or restrict the liability in question
We construe the exemption clause considering the:
o Words used
o The other terms of the contract
o Any relevant commercial background to the contract
Before the UCTA came in, the common law rules provided the only constraints on the use of
exemption clauses
o As a result, courts often twisted the meanings of exemption clauses where they
perceived them to be unfair
o By finding a meaning of the clause which didn’t cover the liability in question, they
could prevent the clause from being effective
UCTA has provided an extra level of protection against the improper use of exemption
clauses, which has largely done away with the need for courts to apply strained and
unnatural constructions to words
If there is any ambiguity or uncertainty about the meaning of a clause, the courts will apply
the rule of construction, known as the “contra proferentum rule”
o The courts will give the clause whatever meaning is more favourable to C
D has contractually undertaken an obligation, and it’s only fair that they should be liable for
the performance of that obligation unless the contract very clearly states otherwise
o The result is that the clause is construed against the person seeking to rely on it
If a party wishes to exclude liability for negligence or lack of care, then the language of their
exemption clause must make it very clear that they are not to be liable even in the event of
their negligence or carelessness
6 – Introduction to UCTA 1977
UCTA provides the most systematic control of exemption clauses in contracts generally
3
