Exemption Clauses

Question 1

What is an exemption clause?

Answer 1

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

Question 2

How do you ascertain if there is a breach of contract and if there is liability for that breach?

Answer 2

1. What type of contract it is (ie sale of goods or supply of services)?
2. Terms (implied, express)/representation/puff?
3. For any express terms setting out performance obligations under the contract - how have they been incorporated into the contract? By signature, notice or course of dealing?
4. Breach?
5. Is the breach term a condition/warranty/innominate term - effect of breach?

Now we add:
6. Incorporation - has an exemption clause been incorporated?
7. Construction: does the clause as drafted cover the alleged breach(es) and resulting loss?
8. What is the effect on the clause of the Unfair Contract Terms 1977/ CRA 2015?

Question 3

How can an exemption clause be incorporated into a contract?

Answer 3

This is governed by the rules of the incorporation of terms.

Note: most case law about incorporations and about ‘giving reasonable’ notice of clauses was created in the context of exemption clauses.

Question 4

How are exemption clauses constructed?

Answer 4

Exemption clauses can be drafted in a variety of ways, and generally have two or more of the following elements:

1) A statement of whether liability is entirely excluded or only limited to a stated amount

2) A statement of which types of claim/duties the exemption relates to

3) A statement of which types of loss the exemption relates to

Question 5

What is contra proferentem?

Answer 5

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 seeking to rely on it.

Clear words must be used if they are to excuse one party from its liability. It should be noted the courts apply contra proferentem with less rigour where the clause in question merely limits (rather than excludes) liability or where the contract is between parties of equal bargaining power.

e.g. exclusion clause to limit liability for damage caused where load is in excess for which it was constructed was held not apply to a car which had more passengers in the car than seating (6 instead of 5).

Question 6

Exemption clauses and negligence

Answer 6

Clear words are needed to exclude liability from its own negligence. (most often this is achieved by using the word negligence).

May be satisfied if the words do not expressly refer to negligence but are nevertheless wide enough to extend to negligence. General words effectiveness may depend on

1. Cases where the only basis for liability is negligence
2. Cases where the party will be liable irrespective of negligence

Clauses under 1 would be effective, under 2 wouldn’t be effective (Canada Steamship Rules - although this is rarely used in commercial situations now where there is equal bargaining power.

Question 7

Canada Steamship Rules

Answer 7

The principles applying to the interpretation of exclusion clauses were laid down in Canada Steamship Lines Ltd v The King. In summary, they are as follows:

Words seeking to exclude liability for negligence must be express and clear.

Any ambiguity in wording must be resolved against the party seeking to rely on the exclusion.

Where negligence is the only basis of liability, even general wording can exclude liability for negligence. However, such general wording will not exclude negligence if there is another basis of liability provided that such other basis is not “fanciful or remote”. If another basis does exist, a widely drawn clause will not exclude liability for negligence.

In short, parties wishing to exclude liability for negligence under a contract must state their intention to do so clearly. If there is any doubt about the scope of an exclusion clause, the court will usually tend to interpret it more narrowly to protect the injured party.

Question 8

Can an exemption clause exclude liability for a third party?

Answer 8

No they cannot. A party outside the contract cannot benefit from its terms nor can that party have an obligation imposed upon it by the contract.

Question 9

What is the meaning of the word ‘construction’ when considering whether a party can rely on an exemption clause?

Answer 9

Construction means interpreting the exemption clause to determine whether the clause as drafted covers the breach and loss that has occurred

Question 10

If a party wants to exclude their liability in negligence, the most certain way to achieve this is by:

Answer 10

Using the word negligence or a close synonym for negligence.

Question 11

UCTA: liability for death or personal injury resulting from negligence

Answer 11

Under the UCTA (business to business rels): any attempt to exclude or restrict liability for death or personal injury resulting from negligence will be void.

Question 12

UCTA: liability for other loss resulting from negligence

Answer 12

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 13

UCTA: liability for breach of statutory implied terms about quality of goods

Answer 13

s13-15 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 14

UCTA: breach of contract

Answer 14

Where a term limiting liability is in a negotiated agreement: UCTA does not apply

Where the term limiting liability is in a party’s standard terms: will be valid if reasonable

cannot by reference to any contract term claim to be entitled to:
- render a contractural performance substantially different from that which was reasonably expected; or
- claim to be entitled in respect of the whole or any party of the contractual obligation, to render no performance at all.
Except if term is reasonable.

Question 15

UCTA: reasonableness test

Answer 15

Term shall be ‘fair and reasonable’ - 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

Significantly dependent on the facts of the case and little precedent value in the decisions themselves.

Take into account:
- strength of bargaining positions of the parties
- whether the customer received an inducement to agree to the term or had an opportunity of entering into a similar contract with other persons but without having a similar term
- whether the customer knew or ought reasonably to have known of the existence and the extent of the term
- 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
- whether the goods were manufactured, processed or adapted to the special order of the customer

Question 16

CRA 2015: excluding liability for death or personal injury resulting from negligence

Answer 16

A trader cannot - will not be binding.

Question 17

CRA 2015: exempting liability for breach of statutory implied terms about goods

Answer 17

Goods to be of satisfactory quality, goods to be fit for particular purpose, goods to be as described.

Any term limiting liability for this will not be binding.

Question 18

CRA 2015: exempting liability for breach of statutory implied terms about digital content

Answer 18

digital content to be of satisfactory quality, digital content to be fit for particular purpose, digital content to be as described.

Will not be binding.

Question 19

CRA 2015: exempting liability for reasonable care and skill

Answer 19

Any attempt to entirely exclude liability for the service to be performed with reasonable care and skill will not be binding.

Any attempt to restrict/limit liability will not be binding to the extent that it would prevent the consumer from recovering the paid price. Effectively - liability cannot be limited to less than the price paid.

Question 20

CRA 2015: regulation of terms other than exemption clauses

Answer 20

Any term in a consumer contract is not binding on the consumer if it is unfair.

However, terms specifying the main subject matter of the contract cannot be assessed for fairness.

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.

This is judged at the time the contract is entered into.

Question 21

CRA 2015: anti-avoidance provisions

Answer 21

Any agreement which other party agrees not to pursue claims in relation to the first contract are generally prohibited.

Any conditions which restrict liability claims or make it subject to onerous conditions or limit rights/remedies/evidence/court procedures available are prohibited.

Question 22

Can a seller enforce a payment obligation id a customer (consumer) feels the price is no longer fair (ie delivered and payment is on delivery)?

Answer 22

Yes they can.

Although generally terms are not binding on the consumer if they feel they are not fair - the court cannot assess terms specifying the main subject matter of the contract or assess the fairness of the price of goods and so payment obligations cannot be interfered with.

Question 23

What approach does UCTA take to a clause excluding liability for breach of the implied term that goods will be satisfactory quality?

Answer 23

The clause is subject to the reasonableness test.