1. Exemption Clause in a Contract
2. Requirements of Exemption Clauses

What is an exemption clause? Exemption clauses are terms that can be included in a contract to limit the contractual duties of one party or to restrict the damages available for a breach of contract.

Exemption Clause in a Contract

There can be a variety of terms included in a contract, including exemption clauses. Exemption clauses can serve several different purposes:

  • Limiting damages available to the parties.
  • Controlling the scope of contractual responsibilities.
  • Restricting remedies available for breach of contract.

Essentially, an exemption clause, also called an exclusion clause, is a term that can be used to limit the contracted parties in some way. For instance, in a contract with two people, an exemption clause can be used to state that one party will not be held liable if there is a problem with the contract. If one party wants to include an exclusion clause in a contract, certain statutory contracts must be met. The party must also prove that the exclusion clause is actually a part of the contract.

If an exclusion clause is included in a contract and you sign the contract, you will be bound by the clause. The fact that you did not understand the clause or did not fully read the contract will not prevent the clause from being legally binding . When an unsigned document, such as a ticket, includes an exemption clause, it can result in a variety of complications. In these situations, parties must be notified of the exemption clause ahead of time.

A good way to think of an exclusion clause is as a disclaimer warning you of your risks. Exemption clauses are not viewed very favorably by the law because they abdicate people of responsibility. Even so, these clauses are legally allowed if both parties understand the terms and the clause has been written the right way.

Requirements of Exemption Clauses

For an exemption clause to be valid, there are multiple requirements:

  1. The clause must be found in the actual contract.
  2. When entering the contract, the other party should be alerted to the presence of the clause.
  3. Notice of the clause's existence should be given in a reasonable amount of time.
  4. Reasonableness will depend on the situation surrounding the individual contract.

Because one party usually is forced to accept an exclusion clause, these clauses are usually considered to be very unfair. One example of an exclusion clause would be the terms and conditions of a product, which will usually state that the manufacturer of the product is not responsible for any harm caused by an incorrect use of the product.

The main purpose of an exemption clause is to protect the party who is writing the contract from a lawsuit filed by the other party. These clauses can also be used to distribute risk between both parties of the contract. Exemption clauses are generally separated into two categories: exclusion clauses and limitation clauses.

An exclusion clause can eliminate liability for specific circumstances that are described in the clause. A bank, for instance, could include an exemption clause in contracts related to foreign trade absolving the bank of any liability for injuries unless the other party can prove negligence. Exemption clauses can be included in a contract in one of three ways:

  • Incorporation by signature.
  • Incorporation by notice.
  • Incorporation by previous course of dealings.

Incorporation by signature means that the clause is written into the contract and that both parties have signed the contract. With incorporation by notice, an exclusion clause is included if the party requesting the clause has made an effort to notify the other party of the clause's existence. Incorporation by previous dealings is based on the terms that have already been incorporated into the contract.

The clear benefit of an exemption clause is that it can completely remove liability from one party. The problem with these clauses, however, is that they can be extremely difficult to enforce. Courts will be very quick to overturn exemption clauses if they aren't written the right way, and they often view these clauses with an extreme level of suspicion. Unless an exemption clause is reasonable and clearly written, it will usually not be accepted by the courts.

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