CONTRACT LAW

LARGE GROUP 6
Student Guide

Exemption clauses

Context

The aim of this large group is to consider the law governing clauses that parties
sometimes include in contracts to limit, or exclude, their liability for loss or damage in
the event of failure to perform the contract properly (e.g. if goods are delivered late,
or a service is performed badly).

One of the main problems with these clauses is that they are often hidden away in
the supplier’s written standard terms often referred to as the ‘small print’. Many
buyers do not bother to read the small print before entering a contract. It’s a tedious
task. When you buy items on the internet, do you ever bother to read the seller’s
terms and conditions before ‘accepting’ them? Buyers only tend to turn their attention
to the small print if, and when, there is a problem with performance; so it’s only then
that they discover it contains exclusion clauses or other onerous terms.

Consequently, common law rules and statute have evolved to protect buyers from
unfair contract terms, such as exclusion clauses. Practitioners need to know and
understand the legal provisions that govern exclusion clauses so that they can advise
clients on whether a clause is effective to exclude, or otherwise limit, a party’s liability
in the event of the breach and loss that has occurred.

Outcomes

By the end of this large group you should be able to:

1. Explain the common law principles governing the construction of exemption

clauses.

2. Explain how, and when, the Unfair Contract Terms Act (UCTA) 1977 applies
to exemption clauses.

3. Explain the reasonableness test under UCTA and the guidelines that the
courts use to determine whether, or not, the test is satisfied.

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1. Introduction

1.1 What are exemption clauses?

Contract terms which seek to cut down by limit and can go further than that
and exclude the remedies otherwise be available if a contract term is breached.

They can make enforcement of legal rights under the contract subject to
conditions
-In other words, certain conditions needs to be satisfied before you can
enforce your rights against party who would be in a breach of contract
-E.g. a supplier who supplies goods to a buyer and those goods are defective
-The terms of the contract between the party could contain a clause which says
if you want to make a claim in relation to defective goods you have to justify
that claim to the supplier within 7 days of the goods being delivered that is an
example of an exemption clause because it makes the enforcement of legal
rights subject to conditions
-If you are parked in the car park you have probably seen an exemption clause
for e.ga. sign on the wall saying cars are parked at the owners risk (type of
exemption clause)- indicates that the persons wo owns the car park is not
responsible for any damage that has been caused to the persons car

-Exemption clause- is a generic term

-More specific terms-exclusion clauses or limitation clauses
-Clauses that exclude or limit liability for breach of contract
-Exclusion clause-completely excludes certain remedies whereas limitation
clause does not completely exclude them ,but limits the scope of the liability

Activity 1 - Commercial reasons for including exemption clauses in contracts

Consider the following three exemption clauses. Do you think that the relevant
party has a commercial reason for including the relevant exemption clause(s); and,
if so, what is it?
-disagree that the customer is not responsible
-Supplier’s responsibility
-Suppliers excluding liability because they want to avoid that responsibility
-Avoiding responsibility
-Floodgates are not open
-Bankrupt those businesses
-They want to protect their own profits and commercial business
-Trying to protect the financial position and profit
-they would have to charge more money to reflect that
-The suppliers can get insurance so they can cover any risk that happen
-insurance is not free
-They will charge more for the goods that they sell because they are accepting the
liability
-Preserve their own financial position
-commercially justifiable
-Parties can use exemption clauses legitimately to allow them to allocate the risks
between them
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 -The law is in the look out that the exemption clauses are not being used in an
unacceptable or unjustifiable way.

We will not be legally responsible to you for:

• loss of income or profits.
• loss of use of the services.
• lost business or missed opportunities……

(Vodafone Pay Monthly Airtime Conditions)

If you are a business, we are not liable to you (whether in contract or tort
(including without limitation negligence)) or otherwise responsible for any loss of
profit, business contracts, revenues, anticipated savings nor for any indirect or
consequential damage of any kind.

(Sixt Kenning General Terms and Conditions of Rental (Car Hire))

10.2 Neither party shall be liable for:

10.2.1 special, indirect or consequential loss or damages;

10.2.2 loss of profit, income or revenue;
10.2.3 loss of use of Customer’s system(s) or networks;
10.2.4 loss of goodwill or reputation;
10.2.5 loss of, corruption of or damage to data or software; or
10.2.6 recovery of data or programs.

10.3 Dell’s total liability to Customer howsoever arising out of or in connection

with the Agreement whether for negligence or breach of contract or otherwise
shall not exceed 125% of the Price payable by Customer under the Agreement
for Products, Software, Deliverables and/or Service.

(Dell - Terms & Conditions for the Sale of Products & Services to Business
Customers in the United Kingdom)

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1.2 The three ‘hurdles’ in business-to- business contracts

 incorporation (common law test)-whether the exemption clause has

been incorporated into the contract

 Construction

 UCTA

1. The common law rules

2.1 Incorporation

Activity 2

Set out below are the three different ways in which exemption clauses (like other
standard terms of business) may be incorporated into contracts. You considered
incorporation in Unit 5a. In your groups select from the list of cases below relevant
authorities for each legal principle and insert where appropriate.

Cases:

Spurling v Bradshaw Parker v SE Railway L’Estrange v Graucob

Chapelton v Barry UDC……Curtis v Chemical Cleaning & Dyeing

Thornton v Shoe Lane Parking

Signature (in the absence of misrepresentation)

 L estrange v Graucob

 Curtis v Chemical cleaning and Dyeing

Reasonable notice before or at the time of the contract

 Parker v SE Railway. [Thompson]

Factors include:

Contractual document?

 Chapelton v Barry UDC

Timing

 Thornton v Shoe Lane Parking [Olley v Marlborough Ct]

Whether the clause is onerous

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  Spurling v Bradshaw/Thornton

Previous consistent course of dealing

 Spurling v Bradshaw

2.2 Construction

As a matter of construction is the clause purporting to exclude liability for the

particular breach and the loss/ damage it has caused?

-if it covers the loss has been suffered

-If the exemption clause does not cover the loss that has been suffered than it is
useless

2.2.1 Contra proferentem rule (if there is any ambiguity in the meaning of the
words used in the clause that would be construed against the person trying to
rely on the clause)
-The clause will not cover what the person relying on it wants to cover.
-You have to be very clear with what you want the clause to cover and then it
will reflect badly for you

Activity 3 – Construction

So let’s look at some situations where the courts have had to consider whether an
exemption clause was, on its true construction, effective to cover the liability in
question.

Clause. Facts Yes or No?

1. Claimant’s car was being No-the court felt that

‘The Company is not repaired at the particular clause was
responsible for damage defendants’ garage when merely just a warning
caused by fire to it was damaged by fire that the defendant would
customers’ cars on the caused by the not be liable for
premises.’ defendants’ negligence. accidental fire
-It is not really an
exclusion clause
-They are not liable
-They were not clear
enough to exclude their

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2.
Car insurance policy
excluded liability for
damage ‘caused or
arising whilst the car is
conveying any load in
excess of that which it
was constructed for.’
liability
No-The court felt that the
At the time of the word load only covered
accident there were six cases where there was a
people in a car with Specified weight that
seating accommodation should not be exceeded
for only five. like in the case of Lorries
and Vans
-You can’t exceed certain
weights
-Any ambiguity would
count against you

2.2.2 Very clear words must be used to exclude negligence liability.

-You have to be super clear about doing it

There’s a variety in different words courts have looked ta and whether or not
they clearly exclude liability for negligence
-Negligence
-Lack of care-deemed to cover negligence
-Neglect
-Liability howsoever caused (to be sufficient to cover negligence)
-Clear enough to cover it
-Fundamentally unlikely that the innocent party be happy to let the party of the
consequences of their own negligence
-You have to be very clear

2.2.3 There is no rule of law that liability cannot be excluded for an

exceptionally serious breach.

Photo Production Ltd v Securicor Transport Ltd (1980)

Activity 4: Case analysis: Photo Production v Securicor Transport

Watch the Photo Production v Securicor Transport media clip in accordance with
the directions of your tutor.

Photo Production Ltd v Securicor Transport Ltd (1980)

Stage 1: Identify contract and terms

-Photo production engaged Securicor to provide a security guard for them
-He would do a night patrol security service
-Patrolling several times and the weekends a swell
-This was a business-to-business contract
-Although there is an express term to provide a security guard there was an implied
term under the contract to provide the security services with reasonable care and
skill
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 -Section 13 suppliers’ goods and services act 1982
-The security guard who was there started a fire and that led to the whole factory
burning down completely destroyed

Stage 2: Identify breach of contract

-he did it deliberately because his hands were cold and he wanted ot keep his
hands warm-this held to be a breach of contract
-Failure to provide the service with reasonable skill and acre
-Security caused breach
-They were the contracting party

Stage 3: Identify remedy

-After a remedy and they were seeking damages because the whole factory was
about 400,00 pounds and lost business
-Damage was caused by directly by the breach

Stage 4: Identify exemption clause, and apply tests of incorporation and

construction

‘Under no circumstances shall the company [Securicor] be responsible for any

injurious act or default by any employee of the company unless such act or default
could have been foreseen and avoided by the exercise of due diligence on the part
of the company as his employer….’

-No dispute on incorporation

-It was incorporated
-How it can be construed
-Photo production argued that the key words here injurious act or default that the
wording covered negligent and not deliberate acts
-Did not cover the situation
-Securicor wanted to rely on this clause

Stage 5: Identify decision

-The courts decision was that the clause was clearer enough to cover deliberate
acts and that meant that Securicor could rely on the exemption clause to protect
them from liability
-Even though this was an exceptionally serious breach of contract
-The wording of the exemption clause was wide enough to cover that
-You can exclude a breach of liability even if it a serious contract
-The court felt that the wording of the clause has been covered

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 4. Unfair Contract Terms Act (UCTA) 1977
-It does not cover unfair terms generally but only the exemption clauses
in business to business contracts

3.1 Effect of UCTA

 No effect (clause in a negotiated contract which excludes liability for breach

of an express term)

 Exclusion is ineffective (clause which excludes negligence liability causing

death/personal injury -s2(1) UCTA)

 Subjects’ clause to “requirement of reasonableness”

Reasonable test-UCTA

S2-exempting liability for negligence causing loss/damage

S3-Clauses exempting liability for breach of an express term in a written

standard form contract

S6 and 7- apply to clauses exempting liability for the statutory implied terms
relating to goods

See Document A attached which sets out the Process to determine the validity
of exemption clauses under UCTA.

3.2 Reasonableness test – s11 UCTA

‘the requirement of reasonableness…is that the term shall have been a fair and
reasonable one to be included having regard to the circumstances which were, or
ought reasonably to have been known to or in the contemplation of the parties when
the contract was made.’

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 Activity 5 – Reasonableness test

Do you think the facts given make it more likely, or less likely, that the clause will
pass the reasonableness test?

FACTS REASONABLE?
Yes or No?

The seller is a large company which insists on selling Yes it more likely to
goods on its own standard terms and conditions which be reasonable
contain exemption clauses similar to those of other -The buyer is in a
suppliers. weaker bargaining
position
-We can’t asses
the buyers relative
a bargaining
strength
-Less likely the
clause will pass the
reasonable test
-Not the only thing
mentioned in the
facts
-Terms and
conditions similar
to other clients
- to make the
clause more
reasonable
-Sellers’s exclusion
clauses seemingly
more reasonable to
be relied upon

Yes it is more likely

The seller agreed to reduce the price of goods if the buyer to be reasonable
was prepared to accept the exemption clause. -The second fact is
that the clause is
more likely to be
reasonable

No, more likely to

The exemption clause is set out in the small print at clause be reasonable
76(3)(i)(d). Clause 76 is headed ‘Other matters’ The clause is more
likely to not be
reasonable
because if you got
the exemption
clause buried in the
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 small print
Doesn’t draw the.
Attention to the
exemption clause
at all this would
make it difficult for
the customer
because it is buried
away in the small
print
Harder for the
innocent party to
know about the
exemption clause
-Hidden away in
the clause

3.2.1 Schedule 2 Guidelines

(a)

‘Experienced businessmen representing substantial companies of equal

bargaining power should be taken to be the best judge of the commercial
fairness of the agreement which they have made, including the fairness of each of
the terms in that agreement.’

- per Lord Justice Chadwick in Watford Electronics v Sanderson (2001)

Relative bargaining positions of the parties – if there is a big discrepancy in the

bargaining length of the parties the exemption clause is more likely to be
unreasonable
-Conversely, where this is little or any difference in bargaining positions the
exemption clauses will likely require satisfying the requirements of reasonableness
-Relative bargaining strength
-Size can be relevant
-disparity in bargaining strength

(b)

Inducement to agree to the exemption clause -If a customer pays a lower price in
return for accepting the exemption clauses then they have had an inducement
-Not that the clause has been imposed upon them but they got something in return
for agreeing to the exemption clause
-Get a lower price in return for taking the exemption clause that tis more likely to be
reasonable
-If there was no inducement if they got nothing in return for agreeing to the exemption
clause then it is more likely to be unreasonable
-In accepting the exemption clause did the customer have the opportunity to enter
into a contract with somebody else but without having to accept. A similar exemption
clause.
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 For. e.g. if the customer could have gone elsewhere and to a different supplier and
could have avoided a particular exemption clause, but they chose not to do that
-The court would say that the exemption clause is more likely to be reasonable

(c)

The extent to which the customer knew, or ought reasonably to have known of
the clause

-If the clause is clearly worded and set out in the document and perhaps the attention
has been drawn to it then the customer should really have known about it and should
have been able to read it
-More likely that the clause is reasonable

(d)

Where the exemption clause will apply if a condition is not complied with,
whether it was reasonable to expect compliance with the condition

-E.g. you got an exemption clause which excludes liability for defective goods
-If the defects are not reported to the supplier within the 7 days of the delivery
-is it reasonable in the circumstances to expect defects to eb noticed and reported
within that time
-It is not reasonable to expect defects to be noticed and reported within 7 days
meaning it is mor likely that the exemption clause is unreasonable

(e)
Bespoke goods
-Goods that are manufactured or adapted to the special order of the customer
-Not mass manufactured goods
-To a specific customer
-If you have agreed in this contract that you made a specific goods fo one customer it
is considered less reasonable to try and exclude liability for failing to meet the
customers requirements
-If you agreed to manufacture goods to a special order of a customer. And you try to
in your contract to exclude liability for not doing that for not meeting the customers
specification then that is less likely to be reasonable

3.2.2 Section 11(4) UCTA – limitation clauses

(a) The resources which the defendant could expect to be available to him for the
purpose of meeting the liability should it arise.

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 (b) How far it was open to the defendant to cover himself by insurance.

-if it was easy and relatively cheap

-then they don’t really need to limit their liability in the contract

3.2.3 Smith v Eric Bush (1990) guidelines

 Negligent liability

 The difficulty of the task

3.2.4 Reasonableness of the whole clause

Stewart Gill v Horatio Myer (1992)

Lord Donaldson MR said that, in the face of the wording of s 11 of the 1977 Act:
The issue is whether the term [the whole term and nothing but the term] shall have
been a fair and reasonable one to be included.

Watford Electronics v Sanderson (2001)

-the exemption clause could be slitted into two distinct parts
-considered separately
-if you are drafting exemption clause- better to have a series of several exemption
clauses

5. Third party liability (e.g., in negligence)

To what extent (if any) can a third party to the contract rely on an exemption clause?
See Contracts (Rights of Third Parties) Act 1999 (LG 3)

• A third party can acquire rights under a contract if:

• the contract expressly provides that he may acquire a benefit(s1(1)(a);
or
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 • the term purports to confer a benefit on him(s1(1)(b).
• The third party must be expressly identified in the contract by name or as a
member of a class (e.g. ‘employees’) or answering a particular description.

‘Neither the Company nor its employees shall be liable to the Customer for loss or
damage to goods caused by negligence.’

6. Suggested structure

-Talk about what the liability is, and the party of breach wants to avoid
-Work what liability it is exempting first

-what is the breach of contract

-What are the remedies for the breach of contract
-Looking for the enforceability of nay exemption clauses:
Common law rules:
Incorporation
-Construction
UCTA 1977
-Third party liability

7. Engage 6

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DOCUMENT A

s 3 Unfair Contract Terms Act 1977

only applies if party dealing on
other’s written standard terms

Exemption
clause valid if
reasonable

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