Chapter 8: Exemption Clauses

Question 1

Introduction to Exemption Clauses

Answer 1

An exemption clause is a contractual term that purports to limit or exclude a liability that would
otherwise attach to one of the contracting parties. The obligations affected by an exemption clause may be contractual, tortious, or both.

A contractual term that purports to limit or exclude a liability that would
otherwise attach to one of the contracting parties.

Question 2

Exclusion Clause

Answer 2

You will sometimes encounter the expression ‘exclusion clause’. This suggests the type of
exemption clause which excludes (rather than only limits) liability, although sometimes the
expression is used in the same way as we will use the expression ‘exemption clause’ – to refer to clauses which limit or exclude liability.

Question 3

Whether a party can rely on an exemption clause is based on three factors

Answer 3

1) Incorporation: Is the exemption clause part of the contract? This depends on the ordinary principles governing the incorporation terms. Much of case law is about reasonable notice of clauses that were created in the context of exemption clauses.

2) Construction: Does the clause as drafted cover the alleged breaches and the resulting loss?

3) Statutory Controls: What is the effect of the clause of the Unfair Contract Terms Act 1977 and the Consumer Rights Act 2015?

Question 4

Drafting Exemption Clauses

Answer 4

Exemption clauses can be drafted in a variety of ways. They will generally have two or more of the following elements:

(a) A statement of whether liability is entirely excluded or only limited to a stated amount.
(b) A statement of which types of claim/duties the exemption relates to.
(c) A statement of which types of loss the exemption relates to.

Question 5

Overall Effects of Clause

Answer 5

(a) Any express or implied condition, statement, or warranty, statutory or otherwise not stated
herein is hereby excluded.
(b) We will not be liable for any personal injuries to the riders of the machines hired.
(c) The relevant clauses stated that the defendant’s liability for pollution and contamination would be limited to £5 million in the aggregate. The exclusion stated that:
(d) Liability for any claim in relation to asbestos is excluded.
(e) All liability for loss or damage arising to property or goods directly or indirectly resulting from negligence or malfunction of the systems or components is excluded.

Question 6

2.2 Contra proferentem (Ailsa Craig Fishing Co Ltd v Malvern Fishing Co [1983] 1 WLR 964)

Answer 6

The general rule is that exemption clauses will be construed contra proferentem. This means that if there is any doubt as to the meaning and scope of the exemption clause, the ambiguity will be resolved against the party (the ‘proferens’) seeking to rely upon it. Clear words must be used if they are to excuse one party from its liability. It should be noted that the courts apply the contra proferentem rule with less rigour where the clause in question merely limits (rather than excludes) liability

Question 7

Houghton v Trafalgar Insurance [1954] 1 QB 247

Answer 7

A car carrying six passengers was involved in an accident. The car was designed to hold a maximum of five passengers. The defendant
insurance company sought to rely on the clause within the insurance contract which excluded liability, ‘for damage caused or arising whilst the car is conveying any load in excess of that for which it was constructed’. The question for the court was whether ‘load’ could refer to passengers.

Question 8

Lord Somervell on Equal Bargaining Power

Answer 8

I think that it would need the plainest possible words if it were desired to exclude the insurance
cover by reason of the fact that there was at the back one passenger more than the seating
accommodation.

The ambiguous clause was construed against the proferens. The claimant in this case was a
consumer. The court is less likely to read a clause contra-proferentum in a contract between commercial parties of equal bargaining power.

Question 9

Victoria Street v House of Fraser [2011] EWCA Civ 904

Answer 9

The words used, commercial sense, and the documentary and factual context are, and should be, normally enough to determine the meaning of a contractual provision. The contra-proferentum rule should therefore be applied with sensitivity to the particular
circumstances of the case.

Question 10

2.2.1 Exemption clauses and negligence.

Negligence should explicitly be mentioned

Answer 10

Clear words must be used if a party is seeking to exclude liability resulting from its own negligence. The requirement is most obviously met where the word ‘negligence’ itself is used and, in practice, most drafters will avoid ambiguity by using the word negligence.

Question 11

The Canada Steamship Rules

Answer 11

However, if general words are used their effectiveness may depend on the following distinction:
(a) Cases where the only basis for liability is negligence
(b) Cases where the party will be liable irrespective of negligence

Traditionally, a clause falling in the first category would be effective to cover negligence and the
second would not. The requirements referred to above are sometimes called the ‘Canada
Steamship rules’ after the case Canada Steamship Lines v R [1952] AC 192. T

Question 12

Persimmon Homes Ltd v Ove Arup & Partners Ltd [2017] EWCA Civ 373

Answer 12

Has cast doubt on the
extent to which the Canada Steamship rules apply to commercial contracts. In recent years, the courts have favoured a more commercial, and less mechanistic, approach to interpreting exemption clauses and to the application of the Canada Steamship rules. Lord Justice Jackson commented in Persimmon Homes that the contra proferentum rule now has a very limited role about commercial contracts negotiated between parties of equal bargaining power.

Question 13

2.3 Third parties and exemption clauses

Answer 13

Even if the excluding or limiting term is incorporated into the contract and sufficiently clear and
unambiguous, the question may still arise as to whether the clause can operate to protect a person who is not party to the contract.

Question 14

Doctrine of Privity

Answer 14

The doctrine of privity of contract establishes that, at common law, a party outside the contract cannot benefit from its terms. Nor can that party have an obligation imposed upon it by the contract. The doctrine applies to an exemption clause in just the same way it would to any other kind of clause. The effect of this common law rule has been reduced, in certain circumstances, by the Contracts
(Rights of Third Parties) Act 1999.

Question 15

2.4 Summary

Answer 15

• Generally, if there is any doubt as to the meaning and scope of an exemption clause, the
  ambiguity will be resolved against the party (known as the ‘proferens’) seeking to rely upon it.
• The court is less likely to read a clause contra-proferentum in a contract between commercial
  parties of equal bargaining power.
• Clear words must be used if a party is seeking to exclude liability resulting from its own negligence. The requirement is most obviously met where the word ‘negligence’ itself is used.

Question 16

3. Unfair Contract Terms Act 1977

Answer 16

3.1 Introduction: If the clause has been incorporated into the contract and, properly construed, excludes/limits the liability being considered, then you must move on to consider:

(a) In the case of contracts between businesses, the Unfair Contract Terms Act 1977 (UCTA); and

(b) In the case of contracts between a business and a consumer, the Consumer Rights Act 2015
(CRA).

Question 17

Reliance on Exemption Clauses

Answer 17

When you are considering whether a party can rely on an exemption clause, you need to consider
the following three points:
(a) incorporation
(b) construction and
(c) statutory controls (see ‘controls on exemption clauses’ diagram above)

Question 18

3.2 Purpose of UCTA

Answer 18

The preamble to UCTA clearly sets out its purpose: An Act to impose further limits on the extent to which […] liability for breach of contract, of for negligence or other breach of duty, can be avoided by means of contract terms and otherwise

This purpose is achieved by provisions that ensure:
(a) Certain types of exemption clause have no effect; and

(b) Other types of exemption clause are effective only so far as they satisfy the requirements of
reasonableness.

Question 19

3.3 Scope of UCTA

Answer 19

There are three matters fundamental to the scope of UCTA:

First, the provisions we are exploring in this section do not apply to ‘consumer contracts’, which,
as stated above, are governed by the different statutory regime in the Consumer Rights Act 2015.
A consumer contract is one where one party is acting in the course of his trade, business, craft or
profession, and the other party is not.

Secondly, s 1(3) of UCTA states that the operative provisions of UCTA (sections 2 to 7) apply only to ‘business liability’. Accordingly, unless you are dealing with this type of liability, UCTA will generally not apply.

Question 20

Business Liability

Answer 20

Section 1(3) sets out a definition of ‘business liability’ as follows:
[…] liability for breach of obligations or duties arising:
(a) from things done or to be done by a person in the course of a business (whether his own
business or another’s); or
(b) from the occupation of premises used for business purposes of the occupier; and
references to liability are to be read accordingly […]

Question 21

Combined Effects of Considerations

Answer 21

The combined effect of these two considerations is (broadly) that:
(a) Where both parties are acting in the course of a business, UCTA applies;

(b) Where one parties is acting in the course of a business and the other party is not, the CRA
2015 applies;

(c) Where neither party is acting in the course of a business, neither statutory regime applies.

Question 22

UCTA Application

Answer 22

Thirdly, given its name, it might be assumed that UCTA applies to all ‘unfair’ terms. In fact, that is
not the case. Instead, UCTA only regulates exemption clauses, ie those clauses which limit or
exclude liability (whether directly or indirectly).

As previously mentioned, UCTA provides that certain types of exemption clause have no effect,
but that other types of exemption clause are effective only so far as they satisfy the requirements
of reasonableness.

Question 23

3.4 Negligence liability

Answer 23

Negligence for the purposes of UCTA is defined in s 1(1), and includes breach of:
(a) Any obligation, arising from the express or implied terms of a contract, to take reasonable
care or exercise reasonable skill in the performance of the contract;
(b) Any common law duty to take reasonable care or exercise reasonable skill

Question 24

Tort of Negligence

Answer 24

The tort of negligence is covered by UCTA’s definition of negligence (s 1(1)(b)). Duties of care imposed by contract are also caught (s 1(1)(a)), for example a breach of s 13 of the Supply of Goods and Services Act 1982 (SGSA) to carry out a service in the course of a business with
reasonable care and skill, constitutes negligence (s 1(1)(a)).

Question 25

3.4.1 Exempting liability for death or personal injury resulting from negligence

Answer 25

Section 2(1) of UCTA provides that:
A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence Accordingly, any attempt to exclude or restrict liability for death or personal injury resulting from
negligence will be void.

Question 26

3.4.2 Exempting liability for other loss resulting from negligence

Answer 26

In relation to other loss or damage (for example, damage to personal property) resulting from
negligence, s 2(2) of UCTA provides: A person cannot so exclude or restrict his liability for negligence except in so far as the term or
notice satisfies the requirement of reasonableness

Question 27

Death or personal injury resulting from negligence (eg through breach of a term implied by s 13 SGSA)

Answer 27

Void (s 2(1))

Question 28

Loss (other than death or personal injury) resulting from negligence (eg through breach of a term implied by s13 SGSA)

Answer 28

Valid if reasonable (s 2(2))

Question 29

3.4.3 Exempting liability for breach of statutory implied terms about quality of goods

Answer 29

Section 6(1A) of UCTA provides that liability for breach of s 13-15 of the Sale of Goods Act 1979 (seller’s implied undertakings as to conformity of goods with description or sample, quality or
fitness for a particular purpose) […] cannot be excluded or restricted by reference to a contract term except in so far as the
term satisfies the requirement of reasonableness.

Question 30

Breach of statutory implied terms under s 13- 15 SGA

Answer 30

Valid if reasonable (s 6(1A))

Question 31

3.5 Exempting liability arising in contract

Answer 31

Pursuant to s 3, where any party deals on its own written standard terms of business (s 3(1)), that
party cannot rely on a contract term to exclude or limit its liability in the event it commits any breach of contract, except so far as the term passes the reasonableness test (s 3(2)(a).

Question 32

Similarly, under 3(2)(b)(i & ii) a party cannot by reference any contract term claim to be entitled
to:

Answer 32

• Render a contractual performance substantially different from that which was reasonably
  expected (s 3(2)(b)(i)); or
• Claim to be entitled in respect of the whole or any part of the contractual obligation, to render
  no performance at all (s 3(2)(b)(ii)).

Question 33

Breach of contract (eg breach
of an express term of the
contract)

Answer 33

UCTA does not apply, Valid if reasonable (s 3)

Question 34

Relatively Common Sense Approach

Answer 34

In St Albans City Council v. International Computers
Ltd [1995] FSR 686 the court considered that even where a party’s general terms had been the
subject of negotiation, they were still dealing on ‘standard terms’ for the purposes of UCTA as the
terms remained effectively untouched

Question 35

Commercial Management
(Investments) Ltd v Mitchell Design and Construct Ltd [2016] EWHC 76 (TCC).

Answer 35

More recently, there has been support for the proposition
that, if the exemption clauses are from one party’s standard terms, then even if other clauses are
negotiated or come from the other party, UCTA will apply:

Question 36

Requirement of Section 3(1)

Answer 36

Dealing on ‘written standard terms’, any business-to-business
contract which is concluded other than on ‘written standard terms’ is outside the ambit of s 3.
Accordingly, exclusions/limitations of liability for breach of contract in individually negotiated
business to business contracts are not regulated by UCTA unless they relate to areas which are
regulated by other areas of UCTA, such as attempts to limit liability for death or personal injury
caused by negligence.

Question 37

3.6 Reasonableness test (s 11 & schedule 2)

Answer 37

The UCTA reasonableness test is set out in s 11(1). In order to pass the UCTA reasonableness test,
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. Note. The requirement of reasonableness is judged at the time the contract was made.

Question 38

Applying the ‘fair and reasonable’ test

Answer 38

In the abstract, ‘fair and reasonable’ is clearly a difficult test to apply. Fortunately, UCTA gives some guidance as to the factors to be taken into account when applying the test. Section 11(2) provides that, when considering the reasonableness test, ‘regard shall be had in particular to the matters specified in Schedule 2 to this Act’.

Question 39

Schedule 2 Guidelines when applying the Reasonableness Test Stewart Gill Ltd v Horatio Myer & Co. Ltd [1992] 1 QB 600

Answer 39

(a) The strength of the bargaining positions of the parties relative to each other, taking into
account (among other things) alternative means by which the customer’s requirements could
have been met;
(b) Whether the customer received an inducement to agree to the term, or in accepting it had an
opportunity of entering into a similar contract with other persons, but without having a
similar term;
(c) Whether the customer knew or ought reasonably to have known of the existence and the
extent of the term (having regard, among other things, to any custom of the trade and any
previous course of dealing between the parties);
(d) Where the term excludes or restricts any relevant liability if some condition was not complied
with, whether it was reasonable at the time of the contract to expect that compliance with
that condition would be practicable;
(e) Whether the goods were manufactured, processed or adapted to the special order of the
customer.

Question 40

Judicial Approaches to Reasonableness (Scarce Precedence)

Answer 40

George Mitchell (Chester Hall) Ltd v Finney Lock Seeds Ltd (1983) 2 AC 803. Lord Bridge warned that:
the appellate court should treat the original decision [of the trial judge] with the utmost respect
and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong.
This approach suggests that, as the deliberations regarding reasonableness are significantly
dependent upon the facts of the case, there will be little precedent value in the decisions
themselves.

Question 41

4. Consumer Rights Act 2015 (exemption clauses) Part II: Unfair Terms

Answer 41

The CRA regulates unfair terms in two areas:
(a) It regulates attempts to exclude or limit liability for breach of contract (or occasionally other
duties): this is similar terrain to that regulated by the Unfair Contract Terms Act 1977 in relation to business contracts.

(b) It regulates unfair terms more generally – the regulation of a large class of terms in consumer
contracts is quite different to the situation in relation to business-to-business contracts,
where the majority of terms cannot be considered for fairness.

Question 42

4.1 Introduction

Answer 42

If the clause has been incorporated into the contract and (properly construed) excludes/limits the
liability being considered, then you must move on to consider:

(a) In the case of contracts between businesses, the Unfair Contract Terms Act 1977 (UCTA); and
(b) In the case of contracts between a business and a consumer, the Consumer Rights Act 2015
(CRA).
This section considers the CRA. UCTA is not considered in this section.

Question 43

4.2 Attempts to exclude or limit liability for breach of contract (or
occasionally other duties)

Answer 43

We will look first at clauses which attempt to exclude liability. In relation to exemption clauses, it is
worth considering the following structure: i) incorporation, ii) construction and iii) statutory
controls (see ‘controls on exemption clauses’ diagram above)

Question 44

4.2.1 Exempting liability for death or personal injury resulting from negligence

Answer 44

Section 65(1) of CRA provides that:
A trader cannot by a term of a consumer contract or by a consumer notice exclude or restrict
liability for death or personal injury resulting from negligence
Accordingly, any attempt to exclude or restrict liability for death or personal injury resulting from
negligence will not be binding on the consumer.

Question 45

Negligence for the purposes of this section is defined in s 65(4), and includes breach of:

Answer 45

(a) Any obligation, arising from the express or implied terms of a contract, to take reasonable
care or exercise reasonable skill in the performance of the contract;
(b) Any common law duty to take reasonable care or exercise reasonable skill; and
(c) The common duty of care imposed by the Occupiers’ Liability Act 1957.

Question 46

The tort of negligence

Answer 46

The tort of negligence is unsurprisingly covered by CRA’s definition of negligence (by s 65(4)(b)). Duties of care imposed by contract are also caught (by s 65(4)(a)). In this regard, remember that
s 49 CRA itself implies a term into a contract for the supply of a service that the supplier will carry
out the service with reasonable care and skill

Question 47

Death or personal injury resulting from negligence

Answer 47

Not binding on consumer (s 65)

Question 48

4.2.2 Exempting liability for breach of statutory implied terms about goods

Answer 48

Section 31 of CRA provides that any attempt to exclude or restrict liability for the following terms
implied by the CRA will not be binding on the consumer:
(a) Section 9 – goods to be of satisfactory quality
(b) Section 10 – goods to be fit for particular purpose
(c) Section 11 – goods to be as described.

Question 49

Breach of CRA implied terms under ss 9, 10 & 11 about goods

Answer 49

Not binding (s 31)

Question 50

4.2.3 Exempting liability for breach of statutory implied terms about digital content

Answer 50

Section 47 of CRA provides that any attempt to exclude or restrict liability for the following terms
implied by the CRA will not be binding on the consumer:
(a) Section 34 – digital content to be of satisfactory quality
(b) Section 35 – digital content to be fit for particular purpose
(c) Section 36 – digital content to be as described.

Question 51

Breach of CRA implied terms under ss 34, 35 & 36 about digital content

Answer 51

Not binding (s 47)

Question 52

4.2.4 Exempting liability for breach of statutory implied terms about services

Answer 52

Section 57 of CRA provides that any attempt to entirely exclude the following term implied by the
CRA will not be binding on the consumer:
(a) Section 49 – service to be performed with reasonable care and skill.
Any attempt to restrict/limit liability under s 49 will not be binding to the extent that it would prevent the consumer from recovering the price paid – so effectively, liability cannot be limited to less than the price paid.

Question 53

Breach of CRA implied term under s 49 about
services

Answer 53

Exclusions - not binding (s 57)
Restrictions/limitations – not binding if preventing recovery of price paid.

Question 54

4.3 Regulation of terms other than exemption clauses

Answer 54

As well as the specific regulation of exemption clauses as set out above, the CRA provides that any term in a consumer contract is not binding on the consumer if it is unfair (s 62).
However, terms specifying the main subject matter of the contract cannot be assessed for fairness, nor can the court assess the fairness of the price for the goods, digital content or services concerned
provided that the terms are transparent and prominent (s 64).

Question 55

Unfair terms

Answer 55

A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in
the parties’ rights and obligations under the contract to the detriment of the consumer (s 62(4)). In addition, the CRA in Part 1 of Schedule 2 contains a list of terms which ‘may be regarded as
unfair’.

Question 56

4.4 Anti-avoidance provisions

Answer 56

(a) A party might decide that rather than trying to limit or exclude certain claims in Contract A
(which CRA might prevent) it will enter into a separate contract (Contract B) by which the
other party will agree not to pursue any such claims in relation to Contract A. Such use of parallel or secondary contracts to attempt to avoid the mechanisms in CRA are generally prohibited (eg see s 72).

Question 57

4.4 Anti-avoidance provisions

Answer 57

(b) A party might decide that rather than trying to limit or exclude liability in a way that CRA
would interfere with, it will make the liability or its enforcement subject to certain onerous conditions, or limit the rights/remedies/evidence/court procedures available in relation to such a liability. Such mechanisms are also generally prohibited (eg see s 31(2)).

Question 58

4.5 Summary

Answer 58

Limitation of liability in relation to:
* Death or personal injury resulting from negligence
* Breach of statutory implied terms under ss 9, 10 and 11 about goods, under ss 34, 35 and 36 about digital content or under s 49 about services = Not binding on the consumer (save for limitations in relation to s 49, which are not binding if preventing recovery of price paid).

Transparent and prominent terms specifying the main subject matter of the contract/price = Cannot be assessed for fairness

Any other term (including, but not limited to, exemption clauses not specifically addressed above).= Not binding if contrary to the requirement of good faith it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.