The Common Law of Contract - Interpreting Exemption Clauses

Sep 15, 2011
Gary Lilienthal

The rules are for interpreting exemption clauses. - Wikimedia Commons

An exemption clause in a contract seeks to exempt, limit or restrict the right of the parties to sue on breach of the obligations contained in the contract.

Parties to a contract are generally free to exclude, limit or restrict the consequences of breaching any of their agreed contractual obligations, or in other words, the contents of the contract. They do this by including an exemption clause in the contract. The courts usually try to determine whether the exemption clause is really part of the contract, and if so, what it means.

Rules for Interpreting Exemption Clauses

Although the court usually tries to interpret an exemption clause according to the natural meaning of the words, they also use the following guidelines for interpretation.

Ambiguity rule.
Negligence rule.
A presumption that the exemption clause does not apply in the event of a fundamental breach.
The four corners rule.
The deviation rule.

The Ambiguity Rule

This is also known as the contra proferentem rule. It states that in the event of an ambiguity, the clause with be interpreted against the party seeking to rely on the ambiguous provision. See the dictum of Lord Wilberforce in Photo Production Limited v Securicor Transport Ltd (1980) 1 All ER 556, in which his Lordship stated that clear words are necessary.

The Negligence Rule

This rule states that if a party wishes to exclude liability for negligence, the exclusion clause must clearly state that it is negligence which is to be excluded. See White v John Warwick & Co. Ltd. (1952) 2 All ER 1021, in which the court said that when there are two clear claims for damages and one is in negligence, the negligence claim will not apply unless it is the clear intention of the parties.

The Presumption Against Fundamental Breach

There is a presumption that the exemption clause does not apply in the event of a fundamental breach. Because this rule is a presumption, it may be rebutted with evidence. See Photo Production Limited v Securicor Transport Ltd (1980) 1 All ER 556, in which the court held that liability would still be found for unforeseen consequences of the contract.

The Four Corners Rule

This rule provides that, unless stated in the contract to the contrary, the exemption clause will only be interpreted as applying to those matters within the scope of the contract. See Sydney Corporation v West (1965) 114 CLR 481, when the court stated the rule in the context of bailment.

The Deviation Rule

Although the four corners rule was formulated in the specific context of bailment, the deviation rule was formulated for carriers who deviated from the agreed route of carriage. See Thomas National Transport (Melbourne) v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353.