Exemption Clauses

Question 1

What is the purpose of an exemption clause?

Answer 1

To limit or exclude liability for loss or damage in the event of failure to perform the contract properly

Question 2

What needs to be satisfied for an exemption clause to be upheld?

Answer 2

It must clear three hurdles:

The first two hurdles are the common law rules of incorporation and construction.

The last hurdle is the relevant statutory control whether that be UCTA 1977 or CRA 2015

Question 3

Explain the common law test of incorporation and how would it suffice in a contract.

Answer 3

This test determines, whether an exemption clause truly is part of the contract between the parties.

An exemption clause may be incorporated into a contract by

1. Signature
2. Reasonable notice, before or at the time of the contract
3. Previous consistent course of dealing (i.e a lot of dealings on exactly the same terms)

Question 4

What would need to be considered when an exemption clause is incorporated via reasonable notice, before or at the time of the contract

Answer 4

• The contractural nature of the document
• How onerous the term is ( the more onerous a term, the more steps that need to be taken to bring it to the other party’s attention)
• Legibility
• Position of the clause eg hidden way in the small print)
• Timing ( notice must be given before, or at the time of, the contract.

Question 5

Explain the common law test of construction and how would it suffice in a contract.

Answer 5

This test looks at whether the clause was intended to exclude or otherwise limit liability for the particular breach and loss that has occurred.

For example a notice in a supermarket car park that reads ‘cars parked at owners risk’ is only purporting to exclude liability for damage caused to cars.

It will not exempt the supermarket from being liable for personal injury or other loss or damage cause by negligence of one of its employees.

Question 6

What is the ‘contra proferentem rule’

Answer 6

It is a test under the construction rule, which is used when there is ambiguity or uncertainty about the meaning of a clause.

The idea is that the defendant has contractually undertaken an obligation, and it is only fair that they should be liable for the performance of that obligation unless the contract clearly and unambiguously states otherwise.

Question 7

What must a party do if they wish to exclude liability for negligence or lack of care?

Answer 7

The language of their exemption clause must make it very clear that they are not to be liable even in the event of their negligence or carelessness.

Question 8

What are the two main statutes that govern limitation and exclusion clauses?

Answer 8

Unfair contract terms(UCTA) 1977 and the CRA 2015

The UCTA governs exemption classes in business to business contracts and the CRA 2015 governs exemption clauses in business to consumer contracts.

Question 9

What does the Unfair Contract Terms Act 1977 seek to do

Answer 9

Restrict the effectiveness of certain types of exemption clauses.

(a) It prevents the defendant from excluding or restricting liability by reference to the term in relation to death/personal injury caused by negligence UCTA s2. And the seller’s implied undertaking as to title ownership of goods sold or transferred UTCA s6 and s7

(b) It allows the defendant to be exempt from liability for a breach of an express term in a freely negotiated contract which contains an exemption clause. UTCA s3. Only applies if party dealing on other’s written standard terms of business.

(C) It subjects the exclusion term to a ‘requirement of reasonableness’, if it does not satisfy this requirement then UTCA will prevent the defendant from excluding or restricting their liability by reference to it.

Question 10

What should you look for when assessing whether an exemption clause will exclude or limit liability?

Answer 10

STEP 1- IDENTIFIY THE BREACH, IS IT A NEGLIGENT BREACH OF A TERM IMPLIED BY S13 SGSA 1982? OR IS IT A BREACH OF TERMS IMPLIED E.G S13 & S14 SGA 1979? OR IS IT A BREACH OF AN EXPRESS TERM?

STEP 2- WHICH SECTION OF UCTA APPLIES, IF IT IS NEGLIGENT BREACH THEN S2 UCTA?, IF IT IS IMPLIED TERMS THEN S6 OR S7 UCTA? IF IT IS BREACH OF EXPRESS TERM THEN S3 UCTA BUT ONLY APPLIES IF PARTY DEALING ON OTHER’S WRITTEN STANDARD TERMS OF BUSINESS.

STEP 3- EFFECT OF THAT SECTION OF UCTA ON EXEMPTION CLAUSE, IF S2 (NEGILENT BREACH) THEN DEATH OR SERIOUS INJURY RENDERS EXEMPTION CLAUSE AS VOID? IF IT IS LOSS AND DAMAGE EXEMPTION CLAUSE WILL BE VALID IF REASONABLE

IF BREACH OF TERMS IMPLIED- EXEMPTION CLAUSE VALID IF REASONABLE.

IF BREACH OF AN EXPRESS TERM- EXEMPTION CALUSE VALID IF REAOSNABLE.

Question 11

What is the reasonable test

Answer 11

The reasonableness test applies to most exemption clauses in business to business contracts and in particular to clauses exempting liability for:

• Loss or damage (other than death and personal injury) caused by negligence (including breach of the term implied by SGSA 1982 s13- UTCA 1997 s2(2)
• Breach of a statuary implied terms relating to good- description, quality and fitness for purpose- UTCA s6 applies to sale of goods contracts and s7 applies to goods supplied under a work and material contract
• Breach of an express term contained in the standard written terms of the person seeking to exempt liability UCTA 1977 S3.

Question 12

How is the reasonable test satisfied?

Answer 12

The clause must have been a fair and reasonable one to be included in the contract and we judge that by taking into account all the circumstances including what the parties knew or ought to have known at that point in time?

Question 13

What are some scenarios of when the reasonable test would NOT be satisfied.

Answer 13

1. The buyer is in a weaker bargaining position than the seller, and the seller may be taking advantage of the buyers position
2. If the clause is buried in the small print and overall is less likely to be reasonable.

Question 14

What are some scenarios of when the reasonable test would BE satisfied.

Answer 14

1. The buyer has chosen to get the lower price in exchange for the exemption clause. It would be a touch harsh on the seller to deny them the benefit of the exemption clause, when in effect the seller has paid for the protection of the exemption clause by reducing the price.
2. The courts have shown a marked reluctance to find classes unreasonable where they have been agreed between substantial business.

Question 15

What is the significance of schedule 2 of UCTA 1977?

Answer 15

Guidelines that say the court should have regard to in deciding whether the clause was a fair and reasonable one.

UCTA makes it mandatory for the court to consider the guidelines in specified cases, eg the court must have regard to the guidelines in SCH 2 in cases involving the sale or supply of goods.

Question 16

What are the schedule 2 UTCA 1977 guidelines

Answer 16

(a) the relative strength of the bargaining positions of the parties? for example if the bargaining position of the parties are equal, it will be easier to show that exemption clause is reasonable.

(b) Did the customer receive an inducement to agree the exemption clause, or in accepting it did the customer have an opportunity to enter a similar contract with someone else but without having to accept a similar exemption clause.

For example- if the customer could have gone elsewhere and avoided an exemption clause but chose not to do so, the court might feel that they had some good reason for accepting the contract with the clause and be reluctant to interfere with the agreement the parties had reached.

(c) Whether the customer knew or ought reasonably to have known, of the existence and extent of the clause, taking into account any trade custom or previous dealing between the parties.

For example if the clause is clearly worded and clearly set out in the document, the court might be encouraged to say that the clause is reasonable as the customer should have been aware of the existence and extent of the clause.

(D) Where the exemption clause will apply if a condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with the condition would be practicable.

for example, a clause that excludes liability for defects in goods unless the defects are notified to the supplier within seven days of delivery would no doubt be unreasonable.

Question 17

What is the impact of CRA 2015 on sale contracts.

Answer 17

S31 of the CRA 2015 provides that liability for breach of s9 (goods to be of satisfactory quality) s10 (goods to be fit for particular purpose) and s11 (goods to be as described) cannot be excluded or restricted.

these are non excludable statutory right that the consumer should be able to enforce without restriction ti attain the apporitate remedy

Question 18

Other than the effect S31 of CRA on exemption clauses, in what other circumstances would an exemption clause or a limitation clause not be binding on a consumer in sale contracts?

Answer 18

(a) To the extent that It would make such a right or remedy or its enforcement subject to a restrictive or onerous condition.

(b) Allow a trader to put a person at a disadvantage as a result of pursing such a right or remedy

(c) exclude or restrict rules of evidence or procedure

Question 19

What is the impact of s57 CRA 2015 on service contracts.

Answer 19

A trader cannot exclude or restrict liability for a breach of the implied term to perform a service with reasonable care and skill.

A trader cannot exclude or restrict liability of the breach of the implied term of reasonable price and reasonable time, if it would prevent the consumer in a appropriate case from getting a refund.

Question 20

Aside from s57 CRA 2015, what else can’t a trader do when it comes to service contracts?

Answer 20

Make such a right or remedy or its enforcement subject to a restrictive or onerous condition: or

put a person at a disadvantage as result of pursuing such a right or remedy, or exclude or restrict rules of evidence or procedure.

Question 21

Can exemption clause protect Third parties?

Answer 21

The general rule is that an exemption clause in a contract cannot protect a third party, as the privity rule provides that only a party can rely on a clause in contract.

Question 22

Is there an exemption to the rule that exemption clauses do not protect third parties?

Answer 22

Yes, Contracts (Rights of Third Parties) Act 1999 provides that a third party is named in an exemption clause or is identified as a member of a class entitled to benefit from it, the third party can rely on the exemption to the same extent as the relevant contracting party.