THE COPPERBELT UNIVERSITY

SCHOOL OF BUILT ENVIRONMENT

ES340 LAW OF CONTRACT

2018/19

11 .EXEMPTION CLAUSE

11.0 SIGNIFICANCE AND PURPOSES OF EXEMPTION CLAUSES

Written contracts often contain clauses excluding or limiting liability for breach of contract by one
party. Exemption clauses operate as safeguards against contractual claims (damages). Therefore
poorly written exemption clauses and lack of effective incorporation into the contract may leave the
business exposed to contractual actions which can prove to be very costly. Exemption clauses are
only effective if the common law rules of incorporation, construction and compliance to any
statutory provisions are satisfied. Exemption clauses apply to both business-to-business and
business-to-consumer contracts (Standard term contracts). An exemption clause is a general term
which encompass both exclusion and limitation clauses. A limitation clause attempts to limit one
party’s liability for certain breaches of contract, usually to a certain amount of damages. An
exclusion clause seeks to completely avoid one party’s liability for certain breaches of contract.

11.1 FUNCTIONS OF EXEMPTION CLUASES

The effective incorporation of exemption clauses into the contract may serve to perform the
following useful functions.

First, they operate as risk avoidance mechanisms –i.e. a means by which contracting parties can
seek to avoid the direct or indirect losses of failure to perform their contractual obligations. In this
sense, exemption clauses operate as defence mechanism by which a powerful party (e.g.,
manufacturer/supplier) may use to exploit or abuse its superior economic power for the supply of
goods and services over the consumers.

Secondly, exemption clauses play a vital role in allocation of risks under the contract – i.e. such
clauses may be used to determine in advance which party is to bear the risk of certain eventualities
that may arise.
Thirdly, exclusion clauses are often used in standard form contracts to enable certain business
enterprises to undertake mass-production of contracts, which in turn helps reduce the time and
costs involved in negotiations and making contracts.

11.1 EFFECTIVENESS OF EXEMPTION CLAUSES

In order for an exemption clause to be valid, the following common law requirements (controls)
must be satisfied:

(i) Incorporation –the party seeking to rely on the exemption clause must prove that it has
been validly incorporated into the contract. Incorporation in this context means that the
clause must be part of the contract.
(ii) Construction /Interpretation – the party relying on the exemption clause must prove that it
has been written in a clear and unambiguous way to exclude or limit liability for the loss
suffered by the claimant. This is because exemption the courts require strictly interpretation
of clauses and any vagueness will work against the party seeking to rely on the clause.
(iii) Statutory Control – the exemption clause must comply with the statutory rules –i.e. must
not be prohibited by statute or other law.

11.2 PRIMARY METHODS OF INCORPORATION

The first basic question to be considered is whether the exemption clause is part of the contract. In
order to be effective, an exemption clause must be validly incorporated into the contract. It should
be noted that the requirement for incorporation is not only confined to exemption clauses, but also
includes any contractual terms. An exemption clause will usually be considered to be incorporated
into a contract if:

(i) the affected party knew of the clause, or

(ii) reasonably sufficient steps have been taken to bring the existence of exemption clause the
attention of the affected party at or before the time the contract was concluded.

There are three ways of incorporating an exemption clause into a contract:

a) by signature;

b) by reasonable notice; and

c) by a course of dealing between the parties

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11.2.1 Incorporation by Signature
As a general rule, where a contract is made by signing a written document, a person who signs a
contractual document is bound by its terms regardless of whether they have been read or
understood. This principle is illustrated in L’Estrange v Graucob (1934) .The brief facts were:

Miss L’Estrange had signed a hire-purchase agreement for a cigarette vending machine without
reading it. The agreement contained in very small print, a broad exemption clause from liability for
the product, which said ‘any express or implied condition, statement, or warranty, statutory or
otherwise not stated herein is hereby excluded’. When the machine proved defective the plaintiff
claimed that Graucob Ltd were in breach of an implied term that the machine was reasonably fit for
its purpose.
Held: The claimant was bound by the exclusion clause regardless of the fact that she had not read
the document as she had signed it.

Exceptions
The rule that a person is bound by his or her signature in a contractual document is not an absolute
one as there are three exceptions.

(I) Misrepresentation as to the nature of the signed document

The first exception arises where the person is induced to sign the document as a result of the
exemption clause being incorrectly explained by the party or his agent seeking to rely on the clause.
Curtis v Chemical Cleaning and Dyeing Co (1951):

Mrs Curtis took a satin wedding dress to the defendants’ shop to be cleaned. She signed a receipt
after being told that it exempted the cleaners from liability for damage to beads or sequins on the
dress, when it actually exempting the cleaners from liability ‘for any damage howsoever arising’.
Owing to the cleaners’ negligence the fabric of the wedding dress was stained, but the cleaners
denied liability, relying on the exclusion clause.
Held: it was held that the defendants could not rely on the clause as they had induced the claimant
to sign the receipt by misrepresenting its contents, even though the plaintiff had signed the
document.

(II) The effect non est factum

The defence of non est factum can be invoked by someone who does not understand a document
that he has signed. In order to be successful, the claimant must satisfy to two requirements. First, he
must show that he/she was permanently or temporarily unable through no fault of his own to have
without explanation any real understanding of the document signed. The causes of the lack of
understanding can be ‘defective education, illness or innate incapacity’ Secondly, he must show that
there was a real or substantial difference between the document signed and the document which
he/she believed was signing ( see Saunders v. Anglia Building Society [1971]).

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 (III) Signing of non-contractual document

The third exception to the signature rule arises where the signed document is not contractual in
nature–i.e. an administrative document such a time sheet (see Grogan v. Robin Meredith Plant Hire
[1996]).

11.1.2 Incorporation by Reasonable Notice

The basic question that arises for incorporation of a clause contained in unsigned document or notice
is whether reasonably sufficient notice of the clause has been given. The general rule is that a party
relying on the exemption clauses in unsigned document, and notice or display must show that
reasonable steps have been taken to bring the existence of the clause to the other party’s attention.
It should be noted that the phrase ‘reasonably sufficient’ notice’ does not mean actual notice, rather
means reasonable steps taken to make the other party aware of the existence of the clause.

Factors Amounting to Reasonable Notice

The question whether a reasonably sufficient notice has been given depends on four factors:
reasonable steps must have been taken to bring the cluase to the notice of the other party; the
notice must have been given at or before the time of contracting; in a document that was intended
to have contractual effect; and where the term is ‘onerous’ or ‘unusual’ greater steps must be taken
to bring it to the attention of the other party.

(i) Reasonable steps taken to give notice

In order to determine whether or not reasonably sufficient steps have been taken to bring the
clause/term to the attention of the other party, it is important to consider factors such as the
location of the notice and its prominence (making it conspicuous). The general rule is that where the
exemption clause is contained in an unsigned document or display it will be held to be effective if it is
prominently located or referred to on the front page of the document (e.g., “see back” or “see
inside” alerting the reader to the presence of terms). This principle is illustrated in Parker v South
East Railway Co (1877). The facts briefly were:

The plaintiff deposited his bag in a station cloackroom, paid a fee and received a cloackroom ticket in
return, which he did not read. On front of the ticket there were words written ‘see back’. On the
back of the ticket there was a clause limiting the company’s liability not exceeding £10 in value. The
plaintiff’s bag was of greater value than £10 and on its loss from the cloackroom, the question was
whether the clause on the ticket limited the liability of the railway company.
Held: that the limitation for the clause had been incorporated into the contract by reasonable notice
as the defendants had taken reasonable steps to bring the clause to the plaintiff’s notice. The train
company was only required to pay £10.

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Exceptions

Caution should be given that an exemption clause is unlikely to be effective in the following
situations:

 if there are no words on the face of the document drawing attention to, or
 if words on the front of the document refer to terms on the back but the back is blank, or
 if the words have been obliterated by date stamp, or if the exemption clause is buried in a
mass of advertisements.

(ii) Time of the notice

Where notice of the existence an exemption clause is required to be brought to the other party’s
attention, the crucial question is whether notice was given in time? As a general rule, an exemption
clause is effective if notice of it is given before or at the time of concluding the contract. An attempt
to introduce an exemption clause after the contract has made will be ineffective (unless the
consistent course of dealing applies). This rule is illustrated in Olley v Marlborough Court Hotel
(1949). Brief facts were:

A married couple booked a room in the defendant’s hotel. Having made the contract at the
reception desk on their arrival, and they were shown to their room. The couple later saw a notice in
their bedroom exempting the defendants from liability for articles lost or stolen unless handed to
the management for safe keeping. While the couple was away, Mrs Olley’s coat was stolen. The
hotel sought to rely on its exemption clause to exclude its liability for her loss.
Held: The defendants could not rely on the exclusion clause displayed in the hotel bedroom because
the contract had already been made at the reception before the couple had notice of the clause. The
notice was too late to be effective; therefore, the defendants were liable for the loss.

(iii) Nature of the document

If the notice is contained in a document, the question that arises is whether the document is part of
the contract. As general rule, notice of an exemption clause will only be considered reasonable if it is
contained or referred to in a document intended to have contractual effect –i.e. a document expected
to contain contractual terms.

Chapelton v Barry Urban District Council (1940)

The claimant hired two deckchairs on the beach from the defendants. He took a chair and obtained a
ticket, and put it in his pocket without reading what was printed on it at the back. On the back of the
tickets it stated that the defendants could not be liable for any accident or damage arising from the
hire of the chair.When he sat down in the chair it finally collapsed and caused him some injury. Barry
UDC sought to rely on a clause on the ticket to exclude liability for his injuries.
Held: The court stated that a reasonable man would assume the tickets given to the claimant were
mere receipts for the money paid to hire the chair and not contractual documents which might
contain terms. Therefore the defendant Council could not rely on the exclusion clause to exclude
their liability.

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 (iv) Nature of the exempting clause
The degree of reasonable steps taken to bring an exemption clause to the other party’s attention
may vary depending on the nature of the exemption clause. As such, the general rule is: the more
unusual or onerous a particular clause or term is, the greater the degree of steps to be taken to draw
its existence to the attention of the other party. This principle requires that if the exemption clause is
of such a nature that the party adversely affected would not normally know or expect it, then the
other party will not be able enforce it by simply handing over or displaying a document containing the
clause. A party seeking relying on the clause must go further and "make it conspicuous" or take other
special steps to draw it to the attention of the affected party, for example, the clauses need to be
printed in red ink on the face of the document with a red hand pointing to it (referred to as the red-
hand rule). The operation and requirement of this principle was illustrated in Interfoto Picture
Library v Stilletto Visual Programmes Ltd (1988). The facts were:

The defendant hired photographic slides from the claimant’s library whom they have not dealt with
before. The claimant dispatched to the defendant a bag containing 47 photographic transparencies
and a delivery note containing a clause stating that, if the transparencies were not returned on time,
there was a penalty payable of £5 for each transparency per day. The claimants were 14 days late
returning 47 transparencies and this amounted to over £3,700.The question before the court was
whether or not the clause was a term of the contract.
Held: that the defendant was not contractually bound to pay the charge stating that the term
concerned was both unusual and onerous and that the other party’s attention had not been drawn
clearly for it to be incorporated by reasonable notice. At that time there was evidence that other
agencies charged a holding fee of less that £3.50 per week and only one charged £4 per week. The
court awarded damages of £3.50 per week as much as is merited in the circumstances and would not
apply the excessive charge of £5 per day per transparency.

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11.1.3 Incorporation by Previous Course of Dealings
Terms can be incorporated into a contract as result of a regular and consistent course of dealing
between the parties. The general rule is that where the parties have previously made a series of
contracts between them containing similar clauses/terms, there is a presumption that the parties are
aware of the existence of the exemption clause and have accepted to be bound by it, even though on
that particular transaction the exemption clause had not been brought to their attention before the
contract was made.
In order to constitute a course of dealing, there must have been a series of transactions between
the parties that was both consistent and regular. In summary, it is a question of fact as to what
amounts to consistent dealings.
Spurling v Bradshaw (1956)
The defendant, having dealt with the claimant company for many years, delivered eight barrels of
orange juice to the claimant’s warehouse for storage. A few days later the defendant received a
document which acknowledged receipt of the barrels and contained an exemption clause excluding
liability for damage caused by negligence. When the defendant collected the barrels they were
empty, and he refused to pay the storage charge. The claimant sued for the storage charge on the
strength of the exemption clause. The defendant, however, admitted that he had received similar
documents during previous transactions, though he had not bothered to read them.
Held: The defendant was bound by the exemption clause because there had been regular dealings
between the same parties on the same conditions for a number of years.

Exceptions
On the other hand, an exemption clause will not be effectively incorporated by a course of dealing
under the following circumstances:

 If the transaction in question was not part of a consistent course of dealings- i.e. where
transactions were spread over a long period of time and their number was so small that
they could not be said to give rise to a course of dealing. In Hollier v Rambler Motors Ltd
(1972) the court rejected the claim that the transactions between the parties for three or
four times over a five-year period constituted regular dealings.

 if the steps necessary to incorporate the clause had never been taken at any stage of the
dealings between the parties;

 If the terms of each transaction in the series had been separately negotiated and expressly
agreed between the parties.