Law of Contract
Exemption Clauses
Exemption clauses
Exemption clauses are clauses that seek to
either,
1) exclude all liability on the part of a party for
certain breaches : EXCLUSION CLAUSE
or
2) limit or specify the liability by a party for a
breach : LIMITATION CLAUSE
Exemption Clauses
The principle of freedom to contract means that
parties are free to choose to add any terms or
conditions to their contracts and be bound by
them. (including exclusion and limitation
clauses)
Courts have developed rules to control this
freedom so that it would not be unfair on
weaker parties, by
1) incorporation of terms rules
2) rules of construction
Exclusion Clauses
Courts common law control over exclusion
clauses:
1) Incorporation of terms/clauses :
Is the term/clause part of the contract?
2) Construction of terms/clauses “
Does the clause cover the breach?
Statutory control
Statutory control over exclusion clauses:
Unfair Contract Terms Act 1977
Unfair Terms in Consumer Contracts
Regulations 1999
Exemption Clause
Incorporation
Has the exemption clause been incorporated ?
1. Signature
2. Reasonable notice
4. Previous course of dealing
Construction
1. Applying Contra proferentum rule
2. Does exemption apply to clause
Statutory Control
1. UCTA 1977
2. UTCC 1999
1) Incorporation of clauses
Common law incorporation of
terms/clauses :
1) by signature
2) by reasonable notice
3) by a previous course of dealing
Incorporation by signature
Incorporation of clause by signature :
If a document is signed at the time of
formation of the contract, its
terms/clauses become terms of the
contract and are deemed to have been
read.
L’Estrange v Graucob (1934)
Incorporation by signature
L’Estrange v Graucob (1934)
Facts : A woman signed a hire purchase
agreement for a cigarette vending machine,
without having read the agreement.
The agreement was contained in small print, and
a exemption from liability for the product.
Held : Not having read the agreement does not
protect one who has signed the contact that
contains the terms/exemptions.
Incorpn by signature
The incorporation by signing does not apply if the
incorporated terms were misrepresented as covering
some other requirement.
Curtis v Chemical Cleaning & Dyeing Co(1951)
Facts : Ms Curtis sent her wedding dress to the cleaners
and signed a document that exempted the cleaners from
liability for “any damage howsoever arising”. She asked
about the said terms but was told that they would not
accept liability for the damage to sequins or bead etc.
A stain was found in the dress.
Held : D could not rely on the exemption clause, even
though claimant signed the doc as it was misrepresented.
Incorpn by reasonable notice
If the terms or exclusion clause was contained on a
ticket or a sign board etc, it would be incorporated
only if the party being notified has reasonable notice
of it.
Parker v South Eastern Railway (1877) CA
Facts : The plaintiff deposited a bag in the railway cloak
room. He paid 2 pence and was given a ticket, which
stated on the face, “see back”, and on the back a clause
stated that the railway company would not be liable for
any loss of item more then £10.
Held : There was reasonable notice.
Incorpn by reasonable notice
Time of notice
Time of Notice : Exemption clause will only be
incorporated into contract if notice is given before or
at the time of contracting.
Olley v Marlborough Court Ltd (1949)
: Notice found in the wall of the hotel room
Thornton v Shoe Lane Parking (1971)
: Notice on the ticket issued by automatic barrier at
car park
Incorpn by reasonable notice
Form of notice
A document would be considered to have
incorporated the terms/exclusion clause only if the
document was to have contractual effect.
If a reasonable person would consider it to have
contractual effect then even terms in a receipt/ticket
would be incorporated.
Chapelton v Barry UDC (1940) CA
Held : by CA that ticket served as a receipt thus did
not incorporate the exclusion clause.
Incorpn by reasonable notice
Unusual terms
The more unusual and/or onerous the term, the
greater the degree of notice required.
Interfoto Picture Liabrary v Stiletto Visual
Programmes (1988)
Facts : CA held that the terms were very onerous and
were not brought to notice of the other party.
A greater degree of notice is required if terms/exclusion
clause is onerous and unusual.
Incorpn by previous dealing
If parties have previously made a series of contracts
and the contracts contained exemption clauses, these
clauses are deemed to be incorporated.
Spurling v Bradshaw (1956)
: Barrels of orange case, in warehouse case.
Held : Defendant had received these terms before in
previous dealings but did not read them.
On the current contract he was held to have had notice
due to previous dealings.
2) Construction of terms
The 2nd common law test (control over clauses) is the
Construction of terms test :
Once its deemed that the exclusion clause is
incorporated into the contract, the courts will ask
whether, the clause :
Actually covers the the breach that has
occurred.
2) Construction of terms
When construing whether the clause actually covers
the breach that has occurred,
and if the clause is ambiguous,
the court will, interpret the clause in such a way that
its least favourable to the party relying on them.
This rule is known as the
“Contra
proferentem rule”
2) Construction of terms
The Contra Proferentem rule is particularly useful as
most parties who would want to limit or exclude their
liabilities would usually use,
very broad , unclear and ambiguous clauses so
as to conceal their purpose
Contra proferentum
Houghton v Trafalgar Insurance Co (1954)
Facts : A five seater car, carrying six people,was involved
in an accident. The policy under which the car was
insured excluded the insurer’s liability, where an excessive
“load” was being carried.
Held : CA held that the words “load” should be
interpreted (against the insurance co.) narrowly to mean
“goods” only and not people.
The claimant succeeded in his insurance claim.
Statutory controls
Unfair Contract Terms Act 1977
Purpose :
1) to control the use of clauses excluding or
limiting liability for breach of contract.
2) To safeguard mainly, consumers from
“unfair” contract terms.
Consumer contracts
The UCTA uses two methods of controlling exemption
clauses :
1) By declaring certain clauses void/ineffective
2) Making clauses subject to the test of
reasonableness
Clauses void under UCTA
Clauses that exclude liability for the following
are made void under the UCTA 1977 :
liability for :
1) death / personal injury S2 (1) UCTA
2) breaches of implied terms under SS 12 - 15
SGA in consumer contracts.
3) breaches of implied terms under 13-15 in Sale &
Supply of Goods Act 1982, in consumer contracts
4) any similar provisions in the Consumer Credit Act
1974.
Consumer contracts
Dealing as a Consumer :
Many of the provisions in the UCTA 1977 only apply
where one of the contracting parties was dealing as a
consumer.
S12 explains that a party is ‘dealing as a consumer’
where they are not making the contract in the course
of a business.
Consumer contracts
The fact that a party is itself a business does not
necessarily prevent it from ‘dealing as a consumer’.
R & B Customs Brokers Co Ltd v United
Dominions Trust (1988)
Facts : The Plaintiffs were a shipping company owned by
Mr and Mrs Bell. The company bought a 2nd hand car
from the defendant., for both business and personal use.
Held : The Bells were purchasing the car and ‘dealing as
a consumer’ although the car was also to be used for the
business.
It was incidental and not integral to the business.
Other limitations on UCTA
The Unfair Contracts Terms Act 1977 does not apply to
the following:
1) Contracts concerning land
2) Contracts that create and transfer intellectual property
3) Contracts under company law
4) Contract of Insurance.
What UCTA limits
The most important provisions of the UCTA have been
the following : UCTA S2 (1) and S 2(2).
S2(1) Liability for death or personal injury resulting in
negligence cannot be excluded or limited, by any clause
in a contract. (Includes liability in tort & contract)
S2(2) Liability for “some harm” short of personal injury
or death can be limited if it was “reasonable” to do so.
S1 defines negligence as breach of any express or implied
contractual obligation ‘to take reasonable care or to
exercise reasonable skill in the performance of the
contract”
What UCTA limits
Other limitations :
S 3 : In a consumer contract or when dealing with a
party’s standard business terms, a contract term cannot
exclude or limit liability for, Non performance or for
performance which is substantially different from what
was agreed, unless it is reasonable to do so.
What UCTA limits
A case concerning the S3 issue of non performance or
different performance.
Timeload Ltd v British Telecommunications
(1995)
Facts : Time load was setting up a free telephone inquiry
service and had obtained some phone numbers from BT.
After timeload had begun to market its service, BT
withdraw one of the numbers given as it was supposed to
be used for directory inquiries. BT relied on one of its
exclusion clauses that said they had the right to terminate
phone services.
Held : BTs reliance on the clause which came under S3,
was held unreasonable, and thus not valid.
What UCTA limits
S4 Indemnity clauses
An indemnity clause is one which provides that one party
will reimburse (indemnify) the other in the event of any
loss arising from the contract.
Usually a party would be required to indemnify the party
that would made out the clause and thus would rely on
the clause.
S4 : provides that such a clause would only be valid if
it is reasonable.
What UCTA limits
“Limited Guarantees” for consumer goods
S5 UCTA provides :
Exclusion/limitation clauses that offer limited
guarantees, for goods but excludes liability for
more serious defects or personal injury etc,
would be ineffective.
What UCTA limits
Implied terms of contracts from the
Sale of Goods Act 1979,
from S 13-15, cannot be excluded, by exclusion
clauses, if, one of the parties deal with the
contract as a consumer.
Reasonableness
The act gives some guidelines on what is reasonable:
S11 (1) provides that :
The court should ask itself whether the term in question
is a ‘fair and reasonable one to be included having regard
to the circumstances which were, or ought reasonably
have been, known to or in the contemplation of the
parties, when the contract was made.
Reasonableness
S 11(2) refers to Schedule 2 which lays down a number
of issues that the courts may consider when deciding
whether a term is reasonable for the purpose of
SS 6 and 7.

Relative strengths of the parties bargaining positions..
Whether the consumer received an inducement to agree
to the terms/clause.

Whether the consumer knew or ought reasonably to
have known about the term.

Reasonableness
S 11(4) specifies that where reasonableness of limitation
clauses is being considered, the courts should bear in
mind, the resources which the party putting forward the
term, could expect to be available for meeting the liability
if it should arise, and also how far it was practicable to
take out insurance against the liability.
Judges interpretation of reasonableness
George Mitchell v Finney Lock Seeds(1983) HL
Facts : D were seed merchants. The P bought seeds and
found out that they were a different kind and in fact were
defective. The crop harvested was a failure and the Ps lost
and claimed £60,000, for the value of crop lost.
The Ds relied on a clause that purported to limit liability to
replacing or refunding the price.
Held : The HL held that the clause was not reasonable on
the grounds that :
1. The Ds had previously given ‘ex gratia’ payments to
farmers who had suffered such losses.
2. The breach was serious, and the Ds had been careless.
3. It was easier for the seller to have taken insurance .
Judges interpretation of reasonableness
Phillips Products v Hyland (1987)
Facts : The P hired, from D a digging machine with a
driver. The driver’s negligence caused the damage to the Ps
property.
The Ds tried to rely on an exclusion clause that placed
liability on the P for damage caused by the digger.
Held : The court held that the clause was not reasonable
because :
1. P did not regularly hire digging machinery so was not
familiar with such clauses.
2. Hiring was at short notice, with no time to know terms.
3. P had no control over the risks since he did not choose
the driver and knew nothing about operating the machine.
Judges interpretation of reasonableness
Smith v Eric Bush (1990)
Facts : A surveyor limited his liability for an inaccurate
report given to the P on his (value of )house.
Held : The court took into account the fact that the job of
surveying the value of a ordinary house, based on the facts,
cannot be a difficult job, thus it was unnecessary to limit
the liability.
The clause was held unreasonable.