Contents of a contract - Exemption clauses

Learning Outcomes

This article outlines the legal principles and statutory controls governing exemption clauses in contracts, including:

• Definition and types of exemption clauses, including exclusions, limitations, and indemnities
• Methods of incorporation: signature, reasonable notice, course of previous dealings, and common knowledge/industry practice
• Qualifications to incorporation by signature: misrepresentation, non est factum, and non-contractual documents
• Principles of construction and interpretation: contra proferentem, clarity for negligence, fundamental breach, and “indirect or consequential loss”
• Statutory controls under UCTA: prohibition for death or personal injury and the reasonableness test (including standard terms)
• Consumer protections under the CRA: fairness assessment, transparency, and prohibition of excluding negligence for death or personal injury
• Clauses purporting to exclude negligence in business and consumer contexts
• Distinctions between exclusion clauses and limitation clauses
• Effects of standard terms and previous dealings on incorporation
• Cross-border considerations: governing law, jurisdiction, UK connection, and Rome I implications
• Application of these principles to typical business-to-business and business-to-consumer scenarios
• Application to SQE1-style multiple choice questions

SQE1 Syllabus

For SQE1, you are required to understand the legal rules and practical implications of exemption clauses in contract law, with a focus on the following syllabus points:

• the definition and types of exemption clauses
• the methods by which exemption clauses are incorporated into contracts
• the principles used by courts to interpret exemption clauses
• statutory controls on exemption clauses, especially under the Unfair Contract Terms Act 1977 (UCTA)
• the application of the reasonableness test under UCTA
• practical scenarios involving exemption clauses in both domestic and international contracts
• the Consumer Rights Act 2015 (CRA) fairness controls for consumer contracts
• how clauses purporting to exclude negligence are construed and controlled
• differences between exclusion clauses and limitation clauses
• the effect of standard terms and previous dealings on incorporation

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is NOT a recognised method of incorporating an exemption clause into a contract?
   1. By signature
   2. By reasonable notice
   3. By oral agreement after the contract is made
   4. By a consistent course of previous dealings

2. True or false? An exemption clause that seeks to exclude liability for death or personal injury caused by negligence is always valid if both parties are businesses.

3. What is the effect of the contra proferentem rule when interpreting exemption clauses?

4. Under UCTA, what key factor must be satisfied for an exemption clause (other than for death or personal injury) to be enforceable in a business-to-business contract?

Introduction

Exemption clauses are terms in a contract that seek to exclude or limit a party’s liability for breach or certain events. Their use is common in commercial agreements, but the law imposes strict requirements for their effectiveness. For SQE1, you must understand how exemption clauses are incorporated, interpreted, and regulated by statute.

An exemption clause can take different forms:

• exclusion clauses that attempt to remove liability altogether
• limitation clauses that cap liability to an amount or scope
• indemnity clauses that shift liability or costs from one party to another

These clauses allocate risk and can reduce transaction costs, but they may create a significant imbalance, especially in standard form contracts. English law therefore controls their use through common law rules on incorporation and construction, and statutory regimes (principally UCTA for business contracts and the CRA for consumer contracts).

What is an exemption clause?

An exemption clause is a contractual term that seeks to exclude or restrict liability for breach of contract, negligence, or other specified risks.

Key Term: exemption clause
A term in a contract that excludes or limits a party’s liability for breach, negligence, or other specified events.

Incorporation of exemption clauses

For an exemption clause to be effective, it must be part of the contract. The main methods of incorporation are:

Incorporation by signature

If a party signs a contractual document containing an exemption clause, they are generally bound by it, even if they have not read the clause. This rule is strict, and the signature ordinarily imports all terms in the document.

Key Term: incorporation by signature
The process by which a term becomes part of a contract because a party has signed a document containing it.

Two important qualifications apply:

• misrepresentation: if the clause was described misleadingly (for example, saying it covers only minor risks when it actually excludes all liability), the clause will only have the effect represented or may be ineffective
• non est factum and non-contractual documents: the signature rule does not bind a party who, through no fault of their own, signed a fundamentally different document (rare), nor does it bind a party where the document signed is not one which a reasonable person would expect to have contractual effect (such as a mere receipt)

Key Term: non est factum
A narrow defence where, through no fault of their own, a person signs a document radically different from what they believed they were signing; rare and strictly applied.

Incorporation by reasonable notice

Where there is no signature, an exemption clause may be incorporated if reasonable steps were taken to bring it to the other party’s attention before or at the time of contracting. Courts assess notice by asking:

• whether the notice was timely (before or at contracting)
• whether reasonable steps were taken to draw attention to the term, bearing in mind its nature and onerousness
• whether the document is of a type that a reasonable person would expect to contain contractual terms

Key Term: incorporation by reasonable notice
A term is incorporated if the party relying on it took reasonable steps to give notice of it before or at the time the contract was made.

Timeliness matters: a clause on a hotel bedroom door seen only after check-in is too late. The significance of the term also matters: unusual or onerous terms require more prominent notice (clear headings, bold font, boxes, or an obvious alert directing the reader to the term). Finally, the medium must be apt: a ticket or web page may carry terms; a bare receipt or voucher that merely acknowledges payment often will not.

Incorporation by course of previous dealings

A term may be incorporated if the parties have had a consistent and regular course of dealings in which the term was always used. Consistency is necessary: if terms were sometimes used and sometimes not, incorporation by prior dealings is unlikely.

Key Term: incorporation by course of previous dealings
A term is incorporated if it has been consistently used in previous contracts between the same parties.

Incorporation by common knowledge/industry practice

A term may be incorporated if both parties know, from standard usage in their shared industry, that transactions of the type are routinely governed by specific terms (for example, known crane-hire or trade association conditions). This is applied restrictively and generally only where both parties operate in the same trade.

Key Term: incorporation by common knowledge/industry practice
A term may be implied where both parties share knowledge that standard terms govern transactions in their specific industry.

Worked Example 1.1

A dry cleaner displays a sign behind the counter stating, "All items left at owner's risk." A customer leaves a coat for cleaning without signing any document. The coat is damaged due to staff negligence. Can the dry cleaner rely on the exemption clause?

Answer:
The dry cleaner can rely on the clause only if reasonable steps were taken to bring it to the customer's attention before or at the time of contracting. If the sign was clearly visible and legible at the point of contract, the clause may be incorporated by reasonable notice.

Construction and interpretation of exemption clauses

Once incorporated, courts interpret exemption clauses strictly. The main principles are:

Contra proferentem rule

Any ambiguity in an exemption clause is interpreted against the party seeking to rely on it. Modern courts emphasise ordinary meaning, context, and business common sense. Contra proferentem remains relevant for ambiguous wording, but it has a more limited role where parties of equal bargaining power use professionally drafted terms.

Key Term: contra proferentem
A rule of interpretation where any ambiguity in a contract term is construed against the party who seeks to rely on it.

Exclusion of liability for negligence

To exclude liability for negligence, the clause must use clear and explicit wording. If the wording is unclear, the clause will not cover negligence. Where a clause could cover negligence and also non-negligent liability (e.g., breach of contract), courts are slow to treat general wording as excluding negligence unless “negligence” or equivalent clear expressions (such as “loss howsoever arising”) are used.

A clause that omits reference to negligence but excludes contractual liability on another basis may be read as excluding contract liability only, leaving negligence liability intact where both bases of claim exist.

Fundamental breach

Exemption clauses do not automatically fail because of a serious or fundamental breach, but the clause must clearly cover the breach in question. The more serious the breach, the clearer the words required to exclude liability for it. Courts do not strain language that is clear and fair to read.

Limitation clauses and “indirect or consequential loss”

Limitation clauses are sometimes treated less strictly than exclusion clauses, though clarity is still required. Clauses excluding “indirect or consequential loss” generally target losses beyond the ordinary course (the second limb of remoteness), not all financial losses. If a party wishes to exclude specific heads (such as loss of profits), this should be stated clearly.

Worked Example 1.2

A parking ticket states, "No liability for damage." A car is damaged due to the attendant's careless driving. Does the exemption clause protect the car park operator?

Answer:
Unless the clause specifically refers to negligence or uses clear words covering negligent acts, the court is unlikely to interpret "No liability for damage" as excluding liability for negligence.

Statutory controls: Unfair Contract Terms Act 1977 (UCTA)

UCTA imposes statutory limits on the use of exemption clauses, especially in business contracts.

Prohibition of excluding liability for death or personal injury

Liability for death or personal injury resulting from negligence cannot be excluded or restricted in any contract within UCTA’s scope.

Key Term: Unfair Contract Terms Act 1977 (UCTA)
A statute that restricts the use of exemption clauses in business contracts, notably prohibiting exclusion of negligence liability for death or personal injury and subjecting other restrictions to a reasonableness test.

Key Term: business liability
Liability arising in the course of a party’s business; UCTA principally regulates business liability.

Reasonableness test

For other types of loss or damage, an exemption clause is only effective if it satisfies the requirement of reasonableness. The burden is on the party seeking to rely on the clause to show it is reasonable, and the assessment is made at the time the contract was made.

Key Term: reasonableness test
The requirement that a contract term must be fair and reasonable in all the circumstances at the time the contract was made.

Key considerations typically include:

• relative bargaining power and whether the term was negotiated or imposed
• whether an inducement was given to accept the term
• how clearly the term was drawn to the other party’s attention (transparency)
• availability of alternative suppliers or terms
• how practicable compliance with the term was at the time of contracting
• insurance availability and who is better placed to bear or insure the risk
• whether the limitation figure is justified and proportionate to the risk

UCTA also controls standard terms. If a party deals on the other’s written standard terms of business, clauses excluding or restricting liability for breach, or limiting remedies, must satisfy reasonableness. Separately, UCTA regulates attempts to exclude statutory implied terms under the Sale of Goods Act in business contracts; such exclusions must be reasonable.

Worked Example 1.3

A supplier’s standard terms limit liability for defective goods to the price paid. The buyer is a small business with no chance to negotiate. The goods fail, causing significant loss. Is the limitation clause likely to be enforceable?

Answer:
The court will apply the reasonableness test. If the buyer had no real opportunity to negotiate and the supplier was in a stronger position, the clause may be found unreasonable and unenforceable under UCTA.

Consumer controls: Consumer Rights Act 2015 (CRA)

The CRA regulates exemption clauses and unfair terms in consumer contracts.

Key Term: Consumer Rights Act 2015 (CRA)
A statute that regulates consumer contracts and notices, prohibiting exclusion of core consumer rights and treating unfair terms as not binding on consumers.

Core protections include:

• terms deemed included for goods (satisfactory quality, fitness, description) cannot be excluded
• terms for services to be performed with reasonable care and skill cannot be excluded
• exclusion of liability for death or personal injury resulting from negligence is prohibited
• any term that, contrary to good faith, causes a significant imbalance to the detriment of the consumer is unfair and not binding (assessed in context, considering transparency and prominence)

Onerous charges or limitations must be transparent and prominent. Clear signage or well-drafted terms may support fairness where the trader has a legitimate interest and the consumer is informed of the risk.

Worked Example 1.4

A library lends books and includes a delivery note in small print stating: “Daily fee of £20 is payable for each day beyond the 10-day period.” The note is not highlighted and is not mentioned before the loan. The borrower returns the book 30 days late and receives a large invoice.

Answer:
As a matter of incorporation by notice, this is an onerous term. Without clear, prominent notice before or at the time of contracting, the term is unlikely to be incorporated. In a consumer context, even if incorporated, a disproportionate fee hidden in small print risks being unfair under the CRA and not binding.

Exemption clauses and negligence

Special rules apply to clauses that seek to exclude liability for negligence.

• statutory controls prohibit excluding liability for death or personal injury resulting from negligence (both UCTA and CRA)
• for other negligence claims in business contracts, the clause must be reasonable under UCTA
• common law construction requires clear words to exclude negligence; general exclusion of “liability” or “damage” may be insufficient where breach can arise on a non-negligent basis (e.g., breach of contract)

Where a clause reallocates the burden of loss between defendants (for example, an indemnity between contracting parties) rather than excluding liability to the victim, it may not trigger the statutory prohibition aimed at protecting the claimant; reasonableness may still be engaged depending on the term’s operation.

Worked Example 1.5

A technology supply contract includes “no liability for indirect or consequential loss.” Due to defects, the buyer suffers: (i) costs of rework and (ii) lost profits from a cancelled key contract. The supplier argues both are excluded.

Answer:
“Indirect or consequential loss” generally refers to losses beyond the ordinary course of things. Direct losses (like rework costs) are not usually consequential and are unlikely to be excluded by that phrasing. Lost profits can be direct or consequential depending on the contract context; if they arise from special circumstances not ordinarily in the parties’ contemplation, they may be consequential and excluded. Clear drafting specifying “loss of profits” avoids ambiguity.

Exemption clauses in international contracts

In cross-border contracts, parties often specify the governing law and jurisdiction. English law may apply UCTA to some international contracts, but the effect depends on the choice of law, the nature of the contract, and the level of connection to the UK.

• choice of law: parties can select the governing law; under retained Rome I, choosing a foreign law will not deprive a consumer of mandatory protections where their contract is closely connected with their habitual residence, and UCTA may still apply if there is a close UK connection
• international supply of goods: UCTA contains specific provisions on international supply contracts; some controls on implied terms in international sales are treated differently
• avoiding mandatory rules: parties cannot evade mandatory protections simply by choosing a different law where the contract has a close connection with the UK

In international business contracts, reasonableness and fairness assessments still focus on bargaining power, negotiation, insurance allocation, and clarity. Clear choice-of-law and jurisdiction clauses reduce uncertainty, but mandatory statutory controls can still apply.

Exam Warning

Exemption clauses are subject to strict statutory and common law controls. For SQE1, always consider both incorporation and statutory reasonableness. Do not assume a clause is valid simply because it appears in the contract.

Revision Tip

When answering SQE1 questions, always identify the method of incorporation, check for ambiguity, and apply the UCTA reasonableness test where relevant.

Key Point Checklist

This article has covered the following key knowledge points:

• Exemption clauses are terms excluding or limiting liability in contracts; they include exclusions, limitations, and indemnities.
• Incorporation can occur by signature, reasonable notice, course of previous dealings, or common knowledge of industry practice.
• Signature binds, subject to misrepresentation, non est factum, and the document being of contractual effect.
• Reasonable notice requires timeliness, adequate prominence (especially for onerous terms), and a document that normally contains contractual terms.
• Courts interpret exemption clauses strictly; ambiguity is construed contra proferentem, though modern interpretation emphasises clear wording and context.
• Liability for negligence can only be excluded with clear wording; if both negligence and contractual liability are plausible, general wording may exclude contract liability but not negligence.
• Fundamental breach does not automatically invalidate an exemption clause; clear words are needed to cover serious breaches.
• “Indirect or consequential loss” typically targets losses beyond the ordinary course; specific heads (e.g., loss of profits) should be named for certainty.
• UCTA prohibits exclusion of liability for death or personal injury due to negligence and subjects other restrictions (including standard terms) to the reasonableness test.
• Reasonableness is assessed at the time of contracting; the relying party bears the burden and factors include bargaining power, negotiation, transparency, alternatives, and insurance.
• CRA prohibits exclusion of core consumer rights and negligence for death/personal injury; unfair terms are not binding on consumers.
• The effectiveness of exemption clauses in international contracts depends on governing law, connection to the UK, and statutory rules preventing evasion of mandatory protections.

Key Terms and Concepts

• exemption clause
• incorporation by signature
• incorporation by reasonable notice
• incorporation by course of previous dealings
• incorporation by common knowledge/industry practice
• non est factum
• contra proferentem
• Unfair Contract Terms Act 1977 (UCTA)
• Consumer Rights Act 2015 (CRA)
• reasonableness test
• business liability