Types of Exemption Clause
An contract exemption clause may be added into a contract for many reasons, but one of the most common is to include them as a consequence for either party breaking any of the conditions contained within it. These restrictions could be used to cover implied terms under current legislation, or they could also relate to express terms which are agreed at the time the contract is created.
Consequently, if a breach occurred, the innocent party can treat their obligations as being terminated, depending of course on the specific term or terms that were breached. That being said, it does not extinguish a contract if a breach occurs, the contract will still exist, it’s just you won’t be obliged to fulfil your duties under it.
There are lots of different elements to exemption clauses and they would always need further exploration by a qualified solicitor but in the next sections we will look at how they appear in a contract and the ways in which they can be used.
Exemption Clauses Incorporated into a Contract
The majority of contracts are usually in writing and a single or multiple exemption clauses may appear at various points throughout the document. For an exemption clause to be valid sufficient notice must be provided if a party is to later rely on the clause. This notice will need to be issued either before the contract is formed or at the time the contract is created.
Exemption clauses can also be incorporated as part of general dealings with parties, or because everyone involved in the contract is aware that the inclusion of an exemption clause is standard practice in that particular industry.
Different Types of Contract Exemption Clause
There are three main types of contract exemption clause; exclusion, limitation and indemnity. The type of clause that is used will be determined by the context and nature of the contract as well as the remedies for the injured party in the event of a breach.
Whichever exclusion clause is used, they ultimately aim to either eliminate or minimise the duties of the wrongful party under the contract. The specific duties will be outlined in the terms of the contract. This could be achieved through the exclusion of implied or express terms or reducing liability to a very small number of situations such as wilful neglect or default, or in the case of land or property accepting something subject to defects and/or faults.
When contracts are created, one party may wish to restrict liability in many situations, even when a breach is caused by someone who has defaulted on the contract. In order for this clause to be fully enforced, this term must have been communicated to the injured party before the contract was formed. In addition, the clause must be created in such a way to demonstrate that the parties did fully intend for the exclusion to be valid. Even when this is the case, the contract will need very careful wording and construction to ensure that serious problems do not arise.
A limitation clause can sometimes aim to qualify the rights of an innocent party when a breach occurs. This for example could be restricting or denying the innocent party to rescind the contract or minimise the damages that may be payable. One of the most widely adopted uses of exemption clauses is to limit amounts payable in terms of damages that result from a breach. If a clause is deemed to be valid, the innocent party will only receive a certain amount of damages, irrespective of what they actually lost.
When looking at indemnity clauses, these often stipulate time limits for bringing a claim and the length of this is of utmost importance because once the time has expired, the case will become time barred and the claimant would be unable to pursue any legal action. An indemnity clause would exist when a contract is formed and it is specified that if one party defaults under the contract, the other would indemnify them for the breach. In terms of business and consumer contracts, all exemption clauses are subject to the test of reasonableness and the validity of these clauses will be at the discretion of the court. Proof would need to be provided that the term was reasonable, and it covered the breach.
It is important to clearly distinguish an exemption clause from an arbitration clause. An arbitration clause cannot be treated as an exemption because there are rules surrounding how the clauses are constructed.
Whenever you are drafting a contract or you are entering into a contract, it’s always advised that you look out for an exemption clause because they may offer the other party greater protection and leave you open to problems if a breach occurs. If in doubt, always seek legal advice to clarify anything you are unsure of.
About the Author
This article was written by a member of the Expert Answers team and posted by Lloyd Barrett, Admin & Customer Services Manager for online advice service Expert Answers. Expert Answers provides legal advice to users in the UK who post a question on their secure platform.