The Use of Exemption Clauses

An exemption clause is a specific kind of clause employed in a contract to exclude or limit the liability for breach of contract.

The clause may be employed to rely on, if it has been incorporated into the contract and, with reference to the interpretation, if it is extended to the breach in question; if both the previous matters are corroborated, the clause validity is tested under the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulation 1999.

In our specific scenario the following clause is mentioned: “Electric Motors Ltd limits its liability for any breach of the terms implied by ss. 13-14 of the Sale of Goods Act 1979 to £500.”

Ethical Co and Electric Motors Ltd have already made in the past other deals but, in this particular purchase, the former ascertains a serious defect in the car bought, which would have severely cost to the company.

Incorporation

To proceed in order, firstly incorporation should be considered; the party wishing to rely on the exclusion clause must demonstrate that it is a term of the contract.

Problems in this regards arise normally because often there isn't a proper knowledge of all terms; it often happens that a contract is signed without a real cognition of its content.

Considering the specific kind of clauses here debated, they can be incorporated by signature, by notice or by a course of dealing.

To be incorporated, terms must be introduced before a contract is made and the leading case on this matter is Olley ; moreover, generally, terms on an unsigned document are incorporated if there is a sufficient notice, in Parker arises this specific issue: the term is valid if there has been reasonably sufficient notice of it.

In the Ethical Co case, there's no ...

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...g power as stated by the House of Lords in Photo Production Ltd . In Mitchell Ltd it was made clear that exemption clauses can be employed to avoid the need to pay for insurance against the risk of paying damages.

The fairness test is defined, in turn, in the UTCCR 1999, at Reg. 5 (1) , “A contractual term which has not been individually negotiated, shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.”

In my opinion Ethical Co, as a business under s.6 of UCTA 1977 , wouldn't be able to obtain a compensation; if instead relies on the Reg. 3 of UTCCR 1999 and therefore on Reg. 5 (1) might be able to prove is status as consumer in the dealing and so obtain a compensation in excess of the £500 limitation.