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Contract | Formation

Exemption Clauses: Construction

Revision Note | Degree

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  • valid exemption clauses must satisfy common law rules: incorporation (clause must be part of contract) & construction (clause covers breach)
  • statutory regulation of exemption clauses under Unfair Contract Terms Act 1977 (UCTA 1977) means courts no longer need to take very restrictive approach to construction

Contra proferentem rule

  • if any clause is ambiguous or unclear it will be construed against (contra) person seeking to rely upon it (proferens)

    Houghton v Trafalgar Insurance [1954] 1 QB 247


    • plaintiff (P) had car accident & defendant (D) sought to rely on exemption clause to avoid paying insurance
    • exemption clause: D not liable to pay insurance if there was excess load, at time of accident 6 people were travelling in 5 seater car


    • could the term load be construed as covering too many passengers?


    • exemption clause did apply, load usually does not apply to people


  • exemption clause covering liability for negligence must be precisely worded
  • three stage test to determine whether negligence covered
    • Stage 1: if clause expressly exempts liability for negligence, liability must be excluded
    • Stage 2 : is ordinary meaning of words wide enough to cover negligence? if satisfied consider stage 3
    • Stage 3: could clause cover liability other than negligenc? if so, clause will not cover negligence
  • parties' intention should be considered

    Monarch Airlines Ltd v London Luton Airport Ltd [1997] CLC 698


    • P's aeroplane was damaged by loose paving stone at D's airport
    • exemption clause D's notliable: .. for any damage to aircraft resulting from an omission, neglect or default...


    • did exemption clause cover negligence?


    • exemption clause did cover negligence
    • all facts & circumstances should be considered to establish potential liability parties intenteded clause to cover
    • rather than immediately excluding liability if there is alternative legal liability ( Stage 3 of Canada Steamship Lines test)

Very serious breaches

  • fundamental breach doctrine: courts reluctant to allow exemption clause, where serious or deliberate breach of contract
  • since Unfair Contract Terms Act 1977 approach modified


    • D's employee worked at P's factory, employee started fire to keep warm on night shift & accidentally caused £615 000 damage to factory
    • exemption clause D's: ..under no circumstances be responsible for any injurious act or default by any employee... unless such act or default could have been foreseen and avoided by the exercise of due diligence on the part of [the defendants]...
    • P argued clause not apply due to fundamental breach of contract


    • can exemption clause exclude liability for very serious breach?


    • D could rely upon clause: wording clear & parties equal bargaining power when making contract
    • matter of construction whether exemption clause covers breach , no rule of substantive law to prevent reliance on clause even if very serious or deliberate breach
    • Lord Wilberforce: .. significant that Parliament refrained from legislating over the whole field of contract. After this Act [UCTA 1977], in commercial matters generally, when the parties are not of unequal bargaining power, and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated, but there is everything to be said, and this seems to have been Parliament's intention, for leaving the parties free to apportion the risks as they think fit and for respecting their decisions...
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