Exclusion clauses in contracts

On the basis of terms included in business contracts commonly known as exclusion clauses, a seller can get away from delivering defective products and services. That is why buyers should pay close attention to the clauses embedded in their contractual arrangements as this article highlights.

Exclusion clauses are in common usage although people are ignorant about them. It is easy to see such a clause and not pay attention. Such clauses are usually included in contracts but can also be found at the entrance of buildings, parking lots, supermarkets and such other spaces. They are phrased in different ways. At a parking lot, such a clause would state, “Cars parked at your own risk” or its equivalent. In a supermarket, it would be “Goods once sold not returnable.” Understanding such clauses is important to protect oneself at the point of entering into a contract and in case of breach.

An exclusion clause is a term in a contract that seeks to limit or exclude the liability of a party. A party includes an exclusion clause in a contract to protect themselves in case they default. Anyone seeking to enter into a contract should be keen on identifying such exclusion clauses. They are commonly set out in standard form contracts.

The term exclusion clauses is generally used to refer to all clauses that affect the extent of liability. However, there are two types of clauses that affect liability: exclusion and limitation. Exclusion clauses totally exclude the liability of a party while limitation clauses merely limit the extent of the liability. It is on that basis that courts find limitation clauses more acceptable. Noteworthy is that the two terms are used interchangeably and are sometimes taken to be the same.

An exclusion clause which forms part of a signed contract is usually valid and enforceable. This is premised on the freedom of parties to contract which enables them to agree on the extent of liability. However, there are circumstances where an exclusion clause in a signed contract is not enforceable. One such circumstance is if the signature of a party, who does not seek to benefit from the clause, was not freely obtained.

Generally, an exclusion clause included in an unsigned contract is invalid. However, in certain instances, such a clause may be enforceable. One such instance is where an exclusion clause is brought to the attention of the party who it does not seek to protect. In some situations, how parties have dealt with each other previously suffices to show that a party was aware of an exclusion clause.

While exclusion clauses are easy to include in a contract, they are difficult to enforce. Clauses that seek to exclude the total liability of a party are frowned upon by courts. Courts are often suspicious of such clauses and, unless they are written correctly, can be easily overturned. Exclusion clauses need to be clear and reasonable to be enforced by a court of law.

The legal basis for inclusion of exclusion clauses in contracts flows from freedom of parties to contract. The Contracts Act is the primary law that is applicable to contracts. The freedom to contract enables parties to agree to the extent of the liability of a party in breach. On that basis, courts will usually not interfere if the signature was given freely.

However, in contracts involving sale of goods and supply of services in Uganda, exclusion clauses are not applicable. The Sale of Goods and Supply of Services Act of 2017 negatived the enforceability of exclusion clauses in such contracts. For instance, in a contract for the sale of 500 Kg of beans, a seller is precluded from including a term to the effect that they are not liable if the beans are damaged or with blemish.

In the making of a contract, liability is a serious concern. That is why parties seek to include exclusion clauses. In the event of default, a party who included an exclusion clause may be protected. It is important that a party who seeks to enter into a contract reads the contract before signing to determine whether such a clause is included. 

The author is the managing partner at Cristal Advocates.