Exemption Clauses
Definition: Clauses of various types where parties of either side try to limit the liability if they do not perform the part of
the contract or do it defectively
Exclude a certain type of liability – e.g. banks usually use a no advisory duty liability – try to limit breach of
duty of care
Exclude a certain type of loss
Rare to exclude all liability – essentially no contract since there was no obligation
Limitation on liability – puts a monetary limit on how much you will be liable
Time limit – the parties of the contract may agree on a certain time in which a claim can be brought
Level of proof – what must be shown before a claim can be brought (e.g. must prove fraud, gross negligence,
etc.)
Problem: abuse of exemption clause
Economic analysis of exemption clauses
A device to allocate the non-performance or defective performance risk to the buyer
- If there was no limitation clause in your contract, should there be a defect of product/service, then although you
can bring a claim against the supplier, there is an uncertainty if there was a loss
- The burden of proof can be expensive
- Reduces litigation: introduces a degree of certain which in theory should reduce risk → shifted the risk of non-
performance or defective performance to the buyer
- The risk of loss of profit is usually reflected by the price
o The buyer can take insurance instead to combat an exemption clause
o Then the buyer can negotiate for a lower price to cover the cost of insuring the risk they have accepted by
the seller’s exemption clause
- Quid no pro – what if the supplier did not give a reduction of price with the passing of risk
o Freedom of contract – “take it or leave it” → some suppliers have always no
o Usually use standard form contracts (used by larger co-operations)
Inequality of bargaining power/standard form contracts
Abuse of exemption clause: where the clauses causes an inequality in bargaining power
2 techniques which the courts used to avoid inequality
1. Incorporation: never part of the contract of the first place – did not do what was necessary to make it part of the
contract
2. Interpretation: accept that the clause is part of the contract, but it does not actually cover the lability in question
Limit: if the seller/supplier have sufficiently careful with the drafting, then (1) and (2) are not useful
The courts have ventured into questioning the validity or enforceability of the contract itself. The problem is that it is a
direct attack on the freedom of contract (accept that there is an agreement but did not accept that it is valid)
Developed the common law
- Commercial contracts (HL)
- Consumer contracts (CA)
The courts needed accepted that in some contracts, parties are allowed to make their agreements amongst themselves, but
some needed protection
Non-consumer contracts - Unfair Contract Terms Act 1977
Consumer contracts – Consumer Rights Act 2015
1
, Ryan Cout on Exemption Clauses
- No special rule for exemption clauses
- An exemption clause is no different than any other term of the contract – all terms of the contract simply allocates
risk amongst the parties
- Examples:
o Use exemption clause: A agrees to sell B his horse. The exemption clause is “if the horse is unsound, then
the exemption clause of no liability applies.”
o Use form of contract: If A uses “sell a horse which may or may not be sound”, then B has no claim
because A has already defined his obligation
o The effect of both scenarios is the same, but the form allows to the supplier bypass using an exemption
clause
Lord Hoffman: they are in the nature of clauses which purports to take away what has been given by another (e.g.
removing liability in the small print)
Psychology: parties sign up for absurd exemption clauses because they tend to be optimist
Incorporation
2 ways where there a clause is seen as being included:
1. Signature: if you sign a contractual document, then you will be bound by the obligations of the contract.
- L’estrange v Gracucob: “When a document containing contractual terms is signed, then, in the absence of fraud,
or, I will add, misrepresentation, the party signing it is bound, and it I wholly immaterial whether he has read the
document or not.” – Scrutton LJ
o Was unable to sue because an exemption clause written in very fine print
o Signature rule: Only bound if the document has contractual significance – a reasonable person
would have known the document is contractual
o Exceptions:
i. Fraud: if the claimant is dishonestly deceived, then the contract cannot be enforced. Even a
misrepresentation short of fraud can prevent the use of exemption clauses
2
Definition: Clauses of various types where parties of either side try to limit the liability if they do not perform the part of
the contract or do it defectively
Exclude a certain type of liability – e.g. banks usually use a no advisory duty liability – try to limit breach of
duty of care
Exclude a certain type of loss
Rare to exclude all liability – essentially no contract since there was no obligation
Limitation on liability – puts a monetary limit on how much you will be liable
Time limit – the parties of the contract may agree on a certain time in which a claim can be brought
Level of proof – what must be shown before a claim can be brought (e.g. must prove fraud, gross negligence,
etc.)
Problem: abuse of exemption clause
Economic analysis of exemption clauses
A device to allocate the non-performance or defective performance risk to the buyer
- If there was no limitation clause in your contract, should there be a defect of product/service, then although you
can bring a claim against the supplier, there is an uncertainty if there was a loss
- The burden of proof can be expensive
- Reduces litigation: introduces a degree of certain which in theory should reduce risk → shifted the risk of non-
performance or defective performance to the buyer
- The risk of loss of profit is usually reflected by the price
o The buyer can take insurance instead to combat an exemption clause
o Then the buyer can negotiate for a lower price to cover the cost of insuring the risk they have accepted by
the seller’s exemption clause
- Quid no pro – what if the supplier did not give a reduction of price with the passing of risk
o Freedom of contract – “take it or leave it” → some suppliers have always no
o Usually use standard form contracts (used by larger co-operations)
Inequality of bargaining power/standard form contracts
Abuse of exemption clause: where the clauses causes an inequality in bargaining power
2 techniques which the courts used to avoid inequality
1. Incorporation: never part of the contract of the first place – did not do what was necessary to make it part of the
contract
2. Interpretation: accept that the clause is part of the contract, but it does not actually cover the lability in question
Limit: if the seller/supplier have sufficiently careful with the drafting, then (1) and (2) are not useful
The courts have ventured into questioning the validity or enforceability of the contract itself. The problem is that it is a
direct attack on the freedom of contract (accept that there is an agreement but did not accept that it is valid)
Developed the common law
- Commercial contracts (HL)
- Consumer contracts (CA)
The courts needed accepted that in some contracts, parties are allowed to make their agreements amongst themselves, but
some needed protection
Non-consumer contracts - Unfair Contract Terms Act 1977
Consumer contracts – Consumer Rights Act 2015
1
, Ryan Cout on Exemption Clauses
- No special rule for exemption clauses
- An exemption clause is no different than any other term of the contract – all terms of the contract simply allocates
risk amongst the parties
- Examples:
o Use exemption clause: A agrees to sell B his horse. The exemption clause is “if the horse is unsound, then
the exemption clause of no liability applies.”
o Use form of contract: If A uses “sell a horse which may or may not be sound”, then B has no claim
because A has already defined his obligation
o The effect of both scenarios is the same, but the form allows to the supplier bypass using an exemption
clause
Lord Hoffman: they are in the nature of clauses which purports to take away what has been given by another (e.g.
removing liability in the small print)
Psychology: parties sign up for absurd exemption clauses because they tend to be optimist
Incorporation
2 ways where there a clause is seen as being included:
1. Signature: if you sign a contractual document, then you will be bound by the obligations of the contract.
- L’estrange v Gracucob: “When a document containing contractual terms is signed, then, in the absence of fraud,
or, I will add, misrepresentation, the party signing it is bound, and it I wholly immaterial whether he has read the
document or not.” – Scrutton LJ
o Was unable to sue because an exemption clause written in very fine print
o Signature rule: Only bound if the document has contractual significance – a reasonable person
would have known the document is contractual
o Exceptions:
i. Fraud: if the claimant is dishonestly deceived, then the contract cannot be enforced. Even a
misrepresentation short of fraud can prevent the use of exemption clauses
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