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When is an exemption clause incorporated into a contract?

Situated opposite the Royal Courts of Justice and a stone’s throw from many central London courts, Saunders Law is well placed to deal with all aspects of commercial litigation. The article below provides an overview of exemption clauses and when they may become incorporated into a contract you have entered into.

What is an exemption clause?

An exemption clause is a contractual term that forms part of a contract which attempts to either limit or exclude a party’s liability to the other. This occurs when one party attempts to cut down the scope of their contractual duties or regulate the other party’s right to remedies for a possible breach of contract.

There are two types of exemption clause which have different degrees to exclusion.

  1. Exclusion clause

If there is an exclusion clause within a contract, then liability of a party may be completely excluded.

  1. Limitation clause

If there is a limitation clause within a contract, then the liability of a party may be limited, but not completely excluded.

An exclusion clause is binding upon the parties when:

  1. The clause is incorporated in the contract as a term;
  2. The clause passes the test of construction; and
  3. The clause is not rendered to be unenforceable by the Unfair Contract Terms Act 1977 or the Consumer Rights Act 2015.

There are three ways in which an exemption clause can be incorporated within two party’s contractual liability to one another. 

  1. Incorporation by signature

In this instance, a clause will be included in a written document that all parties have signed.

It is possible that a signed contract can be challenged based upon an argument that the disadvantaged party was induced into entering into such a contract with this term, due to a misrepresentation.

  1. Incorporation by notice

The party that is attempting to limit or exclude their liability made reasonable steps to ensure that the other party knew that the exemption clause existed and their notice was drawn to the same.

This notice must be given to the contracting party before or at the time of making the contract, and not after it has already been signed.

If the exclusion clause is particularly unusual then more notice will be required.

  1. Incorporation by course of dealings

A term may be incorporated into a contract by a previous consistent court of dealing between the parties and a familiarity with the other’s terms and trade.

In reality, the Judge will need to consider the contract, exemption clause and the above requirements to determine whether or a not such term has been incorporated into the contract and whether or not it can therefore be relied upon.

However, exemption and limitation clauses can be used unfairly when parties enter into a contract and so they are not always enforceable, even if found to be incorporated into a contract.

The Unfair Contract Terms Act 1977 is a piece of legislation which prevents certain exemption clauses from being enforceable in certain contracts, meaning that a party’s contractual liability will not be excluded or limited.

If such a clause is found to be unenforceable then the party seeking to rely upon it will be unable to limit or exclude their liability in contract law.

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