Exemption Clause: Can A Party Exclude His Liability In A Contract?

Exemption clauses, or often being called as “disclaimers”, are terms in a contract by which a party seeks to exclude, or limit liabilities for the breach of contract or for some torts. There are 2 types of exemption clause, (1) Exclusion Clause; and (2) Limitation Clause.

Here are some common examples:

Exclusion Clause:

“The Company will not be liable for any stains or other damage to any clothing whatsoever.” 

Limitation Clause:

“The Company’s liability arising out of or related to this agreement will not exceed RM50,000.”

Since these clauses seek to exclude a party’s liability, the law has imposed several hurdles on exemption clauses in order to prevent unfair results. In this article, we will examine when these clauses will be valid and enforceable.

Three (3) Requirements For The Exemption Clause To Be Valid

3 requirements must be fulfilled before an exemption clause can take effect:

1. The exemption clause must be incorporated into a contract (i.e. it must be part of the contract)

Generally, there are 3 ways in which an exemption clause can be incorporated into a contract:

• By signature – it is included in a contractual document and signed by both parties;
• By notice – it was brought to the notice, or knowledge of the other party before, or at the time of contracting; and
• By previous course of dealings – if the parties in their previous course of dealings have been consistently and expressly included an exemption clause, and on the last occasion they failed to expressly include it, the Court may imply that there was an exemption clause.

2.The exemption clause must cover the breach complained of.

The Courts are generally very strict in interpreting an exemption clause. The clause must be drafted clearly and unambiguously to cover the particular breach or negligence.

In the case of Premier Hotel Sdn Bhd v Tang Ling Seng [1995] 4 MLJ 229, a hotel receptionist accidentally passed a guest’s keys to another guest. As a result, the guest lost some belongings in his room. The Hotel relied on an exemption clause which read: “The Hotel will not assume responsibility for valuables or money lost from the room”. The Court held that this clause did not save the Hotel from the liability for negligence as it was not expressly stated in the clause. Hence, it is important that your language is clear and precise when you are drafting your exclusion clause.

3.The exemption clause must not be declared unfair by the Court.

If an exemption clause is unfair or unreasonably restrictive, then it may be declared void, or ineffective by the Courts. An “unfair term” refers to a term which causes a significant imbalance in the rights and obligations of the contracting parties. The law on this will be more specifically dealt with in a separate article. 

Tips to Draft Your Exemption Clause

Generally, if you want to mitigate your liabilities by inserting an exemption clause in contracts, you must ensure that the clauses are clear and precise. Here are some tips you may consider when drafting your exemption clauses:  

1. State precisely the liability to be excluded.

For instance, if you seek to limit your liability under contract, statutory and tort of negligence, you must refer each of them expressly in the clause.

2. Treat exclusion of liability clauses separately for different things and services.

If the agreement is to cover the provision of different things and/or services, consider whether the limitation of liability is appropriate or suitable for all the things/services being provided.

3. Be precise about the loss that is to be excluded or limited.

The clause should contain details of the loss to be excluded or limited. You may also want to consider specifying the consequential loss, or other indirect loss.

4. Consider limitation clauses rather than complete exclusions.

Reported cases suggest that limitations of liability are interpreted less strictly by the Court than total exclusions of liability.

Disclaimer: This article is written by ZY Ho. It is intended for general informational and education purposes only and not for the purpose of providing legal and professional advice. Need assistance to draft your contract? Contact members of Chern & Co. at info@chernco.com.my.