In order for exemption clauses to be valid two common law rules apply: incorporation and construction. Incorporation means that the clause must be part of the contract and construction refers to the necessity for the clause to cover the breach in question.
The introduction of statutory regulation of exemption clauses, namely the Unfair Contract Terms Act 1977 (UCTA 1977), which provides protection for the innocent party. Prior to UCTA 1977 being introduced the courts tended to take a more restrictive approach to exemption clauses in order to protect weaker parties (the consumer). The courts no longer need to take such a restrictive as Act voids some clauses which attempt widely to exempt liability and also provide the courts the power to declare clauses unreasonable.
Contra proferentem rule
If the clause is ambiguous or unclear, it will be construed against (
contra) the person seeking to rely upon it (
proferens). This applies to all clauses including exemption clauses.
Houghton v Trafalgar Insurance  1 QB 247
The plaintiff had a car accident and the defendant sought to rely on an exemption clause in to avoid-paying insurance. The plaintiff had a five seater car but at the time of the accident there were six people travelling in the vehicle. The contract had a clause exempting the defendant from liability to pay insurance if there was an excess
Could the term
load be construed as covering too many passengers?
The exemption clause did not cover a situation where the car was carrying too many people. The word load usually does not apply to people, and therefore the defendant could not rely on the exemption clause.
An exemption clause intended to cover liability for negligence must be very precisely worded in order to be effective.
Three stage test to determine whether a clause covers negligence:
Stage 1: If the clause expressly exempts liability for negligence, liability for negligence must be excluded. Otherwise the court must proceed to Stage 2.
Stage 2 : Is the ordinary meaning of the words wide enough to cover negligence? If so, the court must proceed to Stage 3.
Stage 3: Could the clause cover liability other than negligence, such as strict liability? If so, the clause will not cover negligence but will be restricted to covering the other liability.
Monarch Airlines Ltd v London Luton Airport Ltd  CLC 698
The plaintiff's aeroplane was damaged by loose paving stone at the defendant's airport. There was an exemption clause in the contract between the parties, which stated that the defendant's would not be liable: .
. for any damage to aircraft resulting from an omission, neglect or default....
Was the exemption clause sufficiently clear to be construed as covering negligence?
The wording of the exemption clause did cover negligence. The court found that all the facts and circumstances of the situation should be considered to establish what potential liability the parties had in mind when agreeing to the exemption clause. This approach should be adopted rather than immediately excluding liability if there is an alternative legal liability ( Stage 3 of the Canada Steamship Lines test).
Very serious breaches
The fundamental breach doctrine, generally meant that the courts have been reluctant to allow an exemption clause to be relied upon, where there has been a serious or deliberate breach of contract. However, since the Unfair Contract Terms Act 1977 has been introduced this approach has been modified.
An employee of the defendant, worked at the plaintiff's factory. The employee started a fire at the factory to keep himself warm on a night shift. The fire accidentally got out of hand and caused £615 000 damage to the factory. There was an exemption clause stating that the defendants were:
..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].... The plaintiff argued that the clause could not apply as there was such a fundamental breach of the contract.
Can an exemption clause exclude liability for a very serious breach?
The defendants could rely upon the clause, for a number of reasons including the fact that the wording of the clause was clear and the parties had equal bargaining power when making the contract.
It is a matter of construction whether an exemption clause covers the breach. There is no rule of substantive law to prevent reliance on the clause even if it is a very serious or deliberate breach.
.. It is 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....
Essentially, Parliament has chosen to legislate to protect consumers from exemption clauses (UCTA 1977) but has not done so in commercial context. Therefore the courts should not readily interfere with the terms agreed in business transactions.