Exemption Clause

• Sometimes contract terms are considered to be so unfair to one of the

contracting parties that the legislature or the courts have been prepared to
intervene to prevent an injustice.
• This has tended to arise in the context of exemption clauses and these are
controlled both by the common law and by the Unfair Contract Terms Act 1977.
• In some cases, one party to a contract may seek to avoid incurring liability for
certain breaches of the contract, or may specify that their liability will be
limited, usually to a certain amount in damages. For example, photographic
processing companies often include a clause in their conditions of trading
stating that if a film is lost or damaged, the compensation payable will be
limited to the value of a replacement film. This is called a limitation clause.
• A clause which seeks to exclude all liability for certain breaches is called an
exclusion clause. An example might be the terms often imposed by holiday
companies, which exclude liability for holiday problems caused by events beyond
the company’s control such as war or natural disasters. The term exemption clause
includes both limitation and exclusion clauses. Over the past 40 years, the law has
sought to control the use of these clauses, first by the efforts of the judges, and
later by statutory intervention in the form of the Unfair Contract Terms Act 1977
(UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999.
• Exemption Clause is a clause through which a person can limit their liability.
Through this clause a person defines responsibility for a particular act. If
exemption clause is defined in a contract then a person will not be responsible for
that act.
• Benefits of Exemption Clause include:
• Time gets saved as now liabilities get defined and parties do not
pursue in court as already it was defined that other party bears no
liability.
• Litigation cost is also saved as there is no need to file claim for that
particular act as already one of the parties exempted its liability for
that act. This will save cost in form of lawyer fees and court fee.
• Disadvantage of Exemption Clause is that due to exemption clause,
party in default/error gets exempted from any liability. It is considered
unfair.
• Controls over exemption are divided in two heads:
• Common law controls: Controls devised by judges through their past decision.
• Statutory controls: Another control over exemption clause is defined by parliamentary
law.
• Common law controls
• These controls over exemption clause are defined by judges in past decisions. In general,
courts have found two ways to regulate exclusion clauses.
• 1. They may question whether a clause has actually been incorporated into the contract,
in which case it is for the party seeking to rely on the clause to prove incorporation
• 2. They may question whether the words used in the clause can be construed as covering
alleged breach.
• Incorporation control: it means that exemption clause must be
incorporated in such a way that it is known to both parties. If one of
the party claims that it did not have knowledge that exemption clause
existed then exemption clause will be considered as cancelled.
• There are three ways in which exemption clauses may be
incorporated into a contract; by signature; by reasonable notice and
by a previous course of dealing.
• Incorporation by signature
• If a document is signed at the time of making the contract, its contents become terms of that
contract, regardless of whether they have been read or understood.
• Case: L’Estrange V Graucob
• A woman had signed a hire-purchase agreement for a cigarette vending machine, without
reading it. The agreement contained in very small print, a broad exemption from the liability
of the product. When the machines proved defective, it was held that signing the contract
meant that the woman was bound by the exclusion clause, and therefore had no remedy.
• Incorporation by reasonable notice
• Exemption clause can be validly incorporated through a notice to other party. This notice
must be provided before the contract is formed. If notice is provided after the contract is
formed then that particular notice holds no value. The notice must be provided reasonably.
• Time of notice
• As a rule, exemption clause is only incorporated into the contract if notice is given before or at the
time of contracting.
• Case: Olley V Marlborough Court Ltd
• A married couple booked hotel room at reception desk and paid for a week’s stay.
• When they went up to the room, they found a notice stating that the hotel accepted no liability for
loss of guests’ property.
• Later, some valuables were stolen.
• Defendant argued on the basis of exemption clause but courts rejected it.
• Court held that the exemption clause wasn’t valid because it was given to customer when they
reached the hotel room rather than on the reception where contract was formed.
• Court of law claimed that contract was formed at counter therefore notice should have been given
there rather than in room.
• Case: Thronton V Shoe Lane Parking
• Exemption Clause was incorporated through a ticket which was generated from an automatic machine
placed at entrance of car park.
• Clause restricted liability for any loss caused to person or property.
• The claimant sued for damages, the defendants argued that they were exempt from liability, because of
the clause.
• Lord Denning analyzed the situation in terms of offer and acceptance, in order to decide when the
contract was complete.
• He reasoned that the offer was made by the car park proprietors placing the machine ready to receive
money.
• Acceptance took place when the customer drove up to the machine, and the contract was then
complete.
• The terms printed on the ticket which was delivered a moment later by the machine therefore came too
late.
• Form on notice
• Court of law claims that documents used to incorporate exemption
clause is also very important. If exemption clause is incorporated
through receipt the it is usually considered as void, as court considers
that receipt is not a reasonable document to incorporate exemption
clause. On the other side court considers ticket as reasonable
document, However, if exemption clause is not validly highlighted on
ticket also then it will be considered as invalid on ticket also.
• Case: Chapelton V Bary UDC
• A person was handed over receipts when he paid for the hire of
chairs. On the back of those receipts, it was stated that the defendant
was not liable for loss arising from those chairs. Court held that
exemption clause incorporated through receipt was invalid as receipt
itself is not a reasonable document to incorporate exemption clause
and defendant did not give any notice. A reasonable person would
not have expected it to contain contractual terms.
• Case: Thomson V LMS Railway
• Ticket handed over to the claimant contained a clause in front to look
back for terms.
• On the back of the ticket, it was stated that ticket was issued subject
to terms given timetable. Exemption clause stated that railway liability
is excluded in case of loss.
• Court of law held that exemption clause was validly incorporated as
company gave notice by writing in front of ticket about the terms
printed at the back.
• Case: Parker V South
• Terms were written on back of ticket. Court of law held that
exemption clause was not valid as there was no clause stated on front
to refer backside.
• Exemption clause limited liability till $10, whereas actual bag lost due
to defendant luggage station was more than that.
• Court of law held that as exemption clause was not validly known
therefore defendant has to pay entire loss.
• Case: Sugar V LMS Railway
• Exemption clause was stated on front of the ticket but was still invalid
as it got hidden under the stamp.
• Court of law held that defendant will be liable for entire loss as
exemption clause was not reasonably known by other party because
it got hidden under the stamp.
• Course of dealing
• If two parties have previously made a series of contracts between them, and those contracts
contained an exemption clause, that clause may also apply to a subsequent transaction, even if
the usual steps to incorporate the clause have not been taken.
• Case: Spurling V Bradshaw
• Claimant has dealt with the defendant previously and each time a document containing
exemption clause was handed over.
• Defendant managed a warehouse and excludes their liability for losses.
• In a particular transaction claimant was handed over document late and therefore he argued
that as exemption clause was notified after the formation of the contract therefore it should
not be valid for that transaction.
• Court of law held that as consistent course of dealing existed therefore exemption clause was
valid despite that fact that it was notified late in that particular transaction.
• Case: Hoiler V Rambler Motors
• Court of law held that past practice is not a valid basis of incorporating exemption clause if it is not consistent.
• In this case exemption clause was incorporated in past for 3 times in last 5 years.
• Court of law claimed that it was not a sufficient past practice.
• The court requires that if exemption clause is unusual or onerous (involving heavy obligations) then this clause must be
incorporated in an unusual or abnormal way so that it comes in specific notice of other party.
• Case: Inferfoto picture Library V Stiletto Visual
• Claimant filed a claim for penalty that were agreed in delivery note sent to defendant along with photographic
transparencies.
• Defendant argued that he never read those terms but court disregarded his claim because he should have read them while
signing the delivery note.
• Another claim filed by defendant was a fact that penalty imposed on him was onerous as it was $5/ day on delay in
returning the pictures.
• Market price was $3 per week.
• Court of law ordered reduction in penalty on the basis that they were 47 photographic transparencies and delay was one
month.
• Interpretation control
• Another control under common law is interpretation control. If it is
established that an exemption clause has been incorporated into a
contract, the courts will then check to see whether the clause actually
covers the breach that has occurred. Three factors are considered
during interpretation of clause:
• 1.Contra proferentem rule
• 2.Negligence claim
• 3.Seriousness of breach
• Contra proferentem rule
• It is applied where the words of the contract are ambiguous, they will be interpreted in
the way least favorable to the party relying on them. Since parties seeking to exempt
themselves from liability will frequently use unclear and ambiguous language in order to
conceal their purpose. The contra proferentem rule can be useful tool.
• Case: Houghton V Trafalgar Insurance Co
• Defendants excluded their liability for loss if it was caused when car was overloaded.
• Accident happened when car was over occupied. Instead of five passengers, six were
travelling.
• Court of law held that word load was too vague to limit liability in case of an over
occupied car.
• The word load can be used for goods and not individuals.
• Contra proferentem rule requires that liability for negligence must be excluded
specifically. This rule also applies for excluding liability for intentional acts. If only a
clause is stated which exclude general liability then as per court that particular clause
holds no validity for excluding liability for negligence or intentional act.
• Case: Hoiler V Rambler Motors
• Claimant took his car for repairs at a garage where due to negligence of garage
workers car got fire.
• Defendant argued that they were not liable on the basis of exemption clause written
that garage will not be liable for loss caused to customer car due to fire.
• Court of law held that exemption clause written was ambiguous to exclude liability
for negligence as it must have stated specifically that defendant will not be liable for
negligence.
• Case: Curtis V Chemical cleaning & Dyeing
• Claimant filed a claim for stains on cloth but defendant argued that
they excluded liability for any loss.
• Exemption clause written excluded general liability and specific
liability for beads and sequins.
• Court of law held that general exemption clause was not sufficient to
exclude liability for negligence.
• Further, specific liability excluded was for beads and sequins and not
for stains.
• Case: Middleton V Wiggins
• The claimant owned a landfill site, where waste was disposed of.
• The rotting of the waste produced gases which caused an explosion and destroyed a
house nearby.
• They had to pay damages to the home owner and claimed this expense from their
insurers.
• The insurance company refused to pay, relying on exemption clause in the insurance
policy which excluded liability for loss arising from the disposal of waste material.
• The court of appeal is rejected this argument as the accident had not occurred from
the disposal of waste, but from the unforeseen escape of gas resulting from the
processes of decomposition.
• Special application of contra proferentem rule
• This rule is applied particularly strictly where a party relies on an exemption clause to
protect them from liability in negligence.
• Case: White V John Warrick
• Claimant took a bicycle on hire from defendant.
• An exemption clause was stated in agreement that defendant will not be liable for any loss.
• Later bicycle saddle tipped forward and as a result claimant got injured.
• By supplying the defective cycle, the defendants could have been liable both for the breach
of contract and for tort of negligence.
• Court of law held that exemption clause written was general and was therefore not
sufficient to exclude liability for negligence.
• Case: Alderslade V Hendon Laundry
• Defendant wrote an exemption clause within contract that they will be liable to
pay maximum 20 times the cost of laundry if any item is lost during laundry.
• Later claimant handkerchiefs were lost and they filed a claim.
• Defendant agreed to pay 20 times the cost of laundry but it was far less than cost
of lost items.
• Issue arose that whether exemption clause was valid if it does not contain
reference of negligence.
• However, court of law held that exemption clause was sufficient enough as it
defined a value for any lost items.
• Exemption clause was held valid.
• Fundamental breach
• Another point which court considers while interpreting an exemption
clause is that if it excludes liability for fundamental breach of contract
then whether that clause was clear and certain and represented the
intentions of parties. If exemption clause was vague and did not
represent true representations of parties then it will be considered as
void if it excludes liability for fundamental breach.
• Case: Photo Production V Securicor Transport
• Defendant security guard burnt down the property of claimant when
he tried to start fire for warming himself.
• Defendant argued an exemption clause that excluded liability for any
negligent OR injurious acts of their employees in all circumstances.
• Claimant filed a claim that it was a fundamental breach of contract
therefore exemption clause should be treated as void.
• However, Court held that exemption clause was clear and certain that
defendant will not be liable for negligent acts of employees and
therefore he owes no liability.
 • Statutory control
• These control on exemption clause is designed by parliament through
an Act OR statute. There are two Acts on exemption clauses:
• Unfair Contractual Terms Act (UCTA)
• Unfair terms in Consumer contract Regulation (UTCCR)
• Unfair Contractual Terms Act
• All exemption clauses are void unless and until they are reasonable. Meaning of reasonable was
• defined through a test of reasonableness. Test of reasonableness considers following factors:
• Whether exemption clause was known to both parties or not. If exemption clause was known to both parties
then a greater possibility exist that it will be considered as valid. However, if exemption clause was not
known to both parties then it will be regarded as void.
• Whether other party was given incentive due to exemption clause. This means that if any benefit was given
against the clause then the exemption clause will be regarded as valid otherwise void.
• Whether exemption clause became applicable due to act of other party OR it was applicable in all
circumstances. If exemption clause became applicable due to act of other party then it will be considered
valid.
• Whether exemption clause was on normal goods or special-order goods. If exemption clause was on special
order goods then it will be considered as valid as there are greater chances of error in special order goods.
However, in general and routine goods there are low chances of error therefore usually court will disregard
exemption clause.
• Court also considers that whether clause was introduced by strong
bargaining position party or by weak bargaining position party. If
clause was introduced by party which has strong bargaining position
then a greater chance exist that it will be cancelled. Whereas if a
clause is introduced by weak party then a greater chance exist that it
will be valid.
• As per UCTA responsibility to prove a fact that exemption clause was
reasonable lies on person who is seeking to rely on exemption clause
i.e., he has to prove that test of reasonableness is satisfied.
• Case: Smith V Eric Bush
• Surveyors of property provided wrong valuations to building society. Claimant
purchased property and he relied on those valuation while purchasing property.
• Later it was discovered that surveyor was negligent in his work.
• Surveyor attempted to rely on exemption clause which exclude liability if report
was not accurate.
• As per UCTA exemption clause was void as in case of negligence exemption
clause needs to be reasonable, rather than simply written.
• It was not reasonable in court opinion to commit negligence when a person is
paid for an act which is his business activity.
• Instances of UCTA
• UCTA discussed following Instances when exemption clauses may be considered
as void or valid.
• . Liability for Negligence: According to UCTA any exemption clause which limits
liability for negligent acts which lead to serious harm OR death will be considered
as void. However, if exemption clause limits liability for negligence which leads to
minor injury or loss which is not physical, then it may be valid if reasonable.
• Clause excluding Liability for Non-performance OR varied Performance: Court of
law claims that if a person excludes liability for not giving performance or giving
performance which is other than agreed, then that clause will be treated as void
unless proved to be reasonable.
• Case: Timeload V British Telecommunication
• British Telecom was relying on an exemption clause which was
cancelled by court as it was excluding liability for non-performance
without any reasonable ground.
• Case: George V Finney Lock Seeds Ltd
• In the decided case defendant supplied wrong seeds as a result of
which claimant suffered loss of crops and efforts spent on those
seeds. Defendant attempted to rely on exclusion clause which
excluded liability for varied performance. Court of law held that under
UCTA all such clauses are void.
• 3. Any Exemption clause which limits statutory rights of a person will
be void if a contract is consumer contract. If a contract is non-
consumer contract then it may be valid if reasonable.
• 4. Any Exemption clause which excludes liability for misrepresentation
OR fraud will be considered as void.
• According to UCTA if a person is consumer then he gets extra rights i.e. extra protection
against Exemption clauses. Consumer is defined as a person who do not perform an act in
course of business.
• Case: Stevenson V Rogers
• Fisherman sold his boat and claimed that his business was to sell fishes, not boats therefore
he should be treated as consumer in contract.
• Court of law held that despite that his business was to sell fishes but his course of business
includes dealing in fishing boats, therefore he was not regarded as consumer for that
contract.
• Extra protections to consumer include that non-performance exclusion clauses rule only
exist in case of consumer contract. Further statutory rights cannot be excluded if a person is
consumer. Exemption clauses which limit liability in case of guarantee clauses are also
considered as void in case of consumer contracts.
• Unfair terms in Consumer contract regulation (UTCCR)
• Another law introduced in UK relating to unfair terms was UTCCR. However,
it governs all unfair terms rather than just exemption clauses. It only covers
consume contracts. UTCCR was introduced in 1999 and UCTA was
introduced in 1994.
• Aim of UTCCR was to bring UK law near to European laws to avoid
discrepancies after joining EU. UCTA and UTCCR has following major
differences
• UTCA covered consumer contracts along with business contracts. UCTA
focused on clauses which were standard terms in business contracts, also. In
comparison UTCCR only focused on consumer contracts.
• Definition of Consumer defined in UCTA was that anyone who is not doing business of that particular product and he has
not purchased that product in auction. Definition of UCTA was broad and it covered both human beings and companies.
UTCCR restricted this definition to humans only under UTCCR companies will not be regarded as consumer.
• UCTA majorly covered exemption clauses and clauses which aimed to mislead the person. UTCCR has a broader scope in
comparison and it covers all unfair terms.
• However, UTCCR has made it clear that it will not interfere in pricing of contracts. This means that if a party claims that it
has been charged unfair price then UTCCR will not interfere in such a clause as pricing of goods is an agreed matter of
parties which has no relation with Law. Further core terms of contract which are agreed by parties and individually
negotiated will not be restricted by UTCCR.
• UCTA regarded that all unreasonable clauses will be void, and defined list of factors which will be used while considering
reasonableness. In comparison UTCCR adopted a broader approach and targeted unfair clauses along with list of
reasonableness factors.
• Unfair clauses are those which are Not negotiated individually i.e., introduced through standard form contract. Moreover,
they are controlled by one party i.e., one of the parties to contract holds right to decide. Lastly, unfair clause is one which
creates a significant imbalance between parties i.e., which is against normal fairness rules.
• Major difference in UCTA and UTCCR approach was that UCTA requires the party relying on Exemption clause to prove
that clause is reasonable, whereas UTCCR requires that party claiming that clause is unfair must prove the fact also.
• Consumer Rights Act 2015
• This Act was introduced in 2015 with the aim of consolidating the laws relating to consumer
• transactions with business entities. It only apples to transactions where consumer is involved. Before CRA
15 it was difficult to determine that whether unfair clauses will be dealt under UCTA OR UTCCR.
• Further consumers have choice to select either of the law. CRA 15 has repealed UTCCR and has defined a
new framework for dealing with unfair terms. However, it is similar to approach of UCTA. This has
benefited to consumers as they now need to refer one source of law which is simple to understand.
• Trust of consumers on business transactions will increase as a result.
• Under CRA business transactions are not dealt as business entities are regarded as best judges of what
they are doing. As per CRA any clause which is against good faith and creates significant imbalance
among parties will be regarded as unfair. In case of consumer contracts such clauses as void unless they
pass test of reasonableness. Further as per CRA exemption clause must be written in plain language.
• 
• The law relating to unfair terms in contracts is confusing and thus
inaccessible to consumers who require protection. Discuss whether
the UCTA AND UTCCR EFFECTIVELY REGULATE THE USE OF TERMS IN
CONTRACTS.
• The use of exemption clauses needs to be controlled. Evaluate the
common law rules available to judges for this purpose.