Contract - Exemption Clauses & Unfair Terms

Contract: exemption clauses and unfair terms

Sometimes a party to a contract will include a term designed to exclude or limit his liability in the event of a breach of contract. Such a term might read “X plc is not liable for any property damage however caused”, or “X plc will only accept liability up to the amount of £50”.

This might be a problem if one party is, for example, a big company, and the other is an ordinary customer: the parties have unequal bargaining power, so the stronger party might be able to take advantage of the weaker party. The ordinary customer is in no position to start negotiating with the sales assistant at the till!

The law does its best to level the playing field here. If a party is trying to rely on an exemption clause, they have to show that the other party specifically agreed to it at the time the agreement was reached.

We also have the Unfair Contract Terms Act 1977, the main provisions of which are:

• You can’t exclude liability for personal injury or death which results from your negligence.

• Exemption clauses have to be reasonable. If the court thinks the term in question is unreasonable, that term will be void.

• You can’t exclude liability for defective goods supplied to a consumer (that is, a non-business user).

• Contracts can’t be altered unilaterally, i.e. without the agreement of the other party.

In case you’re wondering what “reasonable” means here, the Act actually tells us in section 11: the term must be “a fair and reasonable one to be included 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”. Clear as mud? Again, it comes down to making a judgement on the specific facts of each case.

Standard form contracts
Businesses often use pre-printed contracts that specify the terms of the business issuing it. For example, order forms might have the standard contract terms printed on the back. If you buy a book from Amazon, the company’s terms are available for you to read, but they’re not open to negotiation.

This does make commercial sense: a business can’t be expected to conduct negotiations with each of its customers and draw up a special contract for each of them. But these standard documents are often difficult for customers to understand. They might end up being bound by terms they didn’t know existed.

So, what happens if a company puts an exclusion clause in its standard contract? Can the customer really be said to have agreed to the term?

Thankfully, we have the Unfair Terms in Consumer Contracts Regulations 1999, which protect consumers from unfair standard terms in contracts. If the courts think a term is unfair, then it’s not binding on the consumer.

In this context, an “unfair” term is essentially one that puts undue burdens on the consumer, or seeks to reduce his or her statutory rights. The Regulations put it like this:

Again, it’s not that clear, but don’t worry about the detail – it’s the general principle that’s important!