31 May 2023
Exemption clauses are contractual provisions applied to apportion risk, categorised into exclusion clauses and limitation clauses. The former clause purports to exclude liability, while the latter clause restricts liability to a certain extent.
Omnium Resolve’s dispute resolution & claims management team explains construction contract law.
Exemption clauses are contractual provisions applied to apportion risk, categorised into exclusion clauses and limitation clauses. The former clause purports to exclude liability, while the latter clause restricts liability to a certain extent.
In the event of a breach of obligation or negligence to a counterparty for a loss that may be incurred, the sole purpose of drafting such clauses is to create certainty and allocate and mitigate the risks of a party who would otherwise be under liability in a contract. The application of these clauses can be a potent tool to protect parties from unforeseeable circumstances. The intention of drafting exemption clauses is to ensure parties involved in a project are not held liable for issues beyond their control or falling outside of their scope of works.
In a construction contract, the contractor or employer may implement exemption clauses to limit/exclude liability for possible delay, defects, breaches of contract and consequential losses, such as loss of profits or loss of use. By way of example, the contractors’ exposure to risk can be very high, and therefore contractors often protect themselves by implementing limitation clauses and restricting their financial liability by agreeing on a financial cap. Regardless of the role of the contractor in a project, contractors may be vulnerable to large claims and liable to pay monies well beyond their abilities. Hence, it is reasonable for a contractor to limit the scope of what the other party would possibly claim for.
Exclusion clauses, on the other hand, are used to exclude or exempt a party from liability altogether for certain types of loss or damage. For example, an exclusion clause may state that a contractor is not liable for damages arising from delays caused by events beyond its control, such as force majeure.
The inclusion of limitation and exclusion clauses in construction contracts can be a contentious issue. Clauses that seek to limit or exclude a party’s liability for breach of contract and/or negligence is a subject of close scrutiny amongst courts to ensure they are not contrary to public policy or otherwise unfair. Such clauses should be heavily negotiated. It is therefore essential to clearly draft exemption clauses to avoid any possible ambiguities and to ensure they are fair, reasonable, and enforceable.
Courts are often hostile to parties who seek to rely on exemption clauses and take a high threshold of measures on the application of the said clauses. When the language of exemption clauses is found ambiguous and can equally be interpreted in more than one way, courts often construe the clauses against the party who seeks to rely upon it. This is known as the contra proferentem principle.
Often, exemption clauses are subject to statutory or regulatory provisions which are enforced under jurisdictions. In the UK for example, exemption clauses are governed by the Unfair Contract Terms Acts 1977 (the “UCTA”), which applies to clauses that are onerous or restrictive, or may exempt a party’s liability in negligence. The provisions are subject to the rigorous “reasonableness” test requirement. The court will consider whether a clause is fair and reasonable by taking into account the relative strengths of the parties’ bargaining position, the nature of the contract, and the circumstances of the breach.
Similarly, under UAE law, exemption clauses are legally enforceable and upheld as long as they are clear and unambiguous. However, the UAE Civil Code also imposes certain limitations on the use of such clauses in construction contracts. The courts in the UAE have shown reluctance to enforce clauses that are seen as oppressive or unconscionable. Parties cannot exclude or limit liability for damages caused by breach of contract, gross negligence, or wilful misconduct. Clauses that are seen to contravene with legal requirements, including the law of contract and tort, will be rendered void and unenforceable.
Furthermore, it is important to note that exemption clauses are subject to the principle of good faith under the UAE law, where bad faith and unjust enrichment are prohibited. This means that parties cannot use such clauses to evade their contractual obligations or to unfairly shift the risks associated with the project to other parties.
Considering this background, there are several risks and pitfalls associated with exemption clauses that may render them as unfair and unenforceable. Therefore, contracting entities must consider the following non-exhaustive key principles in the drafting stages:
1. Statutory and Jurisdiction Controls: ensuring exemption clauses are in compliance with the governing statutory and laws of the contract.
2. Clarity and Conciseness: clear and concise provisions help avoid ambiguity and confusion in interpreting the clause, increasing the chances of enforcing it.
3. Succinct Clauses: courts often postulate the natural and ordinary meaning of the words used in respect to the nature of the contract as a whole. Therefore, it is important to avoid overly broad clauses that attempt to limit or discharge liability for a wide range of events or losses. Drafting specific requirements under the provisions is crucial; for example, when drafting time bar clauses, it is essential to include a clear time frame within which a claim can be made.
4. Bargaining Power: any clauses which may seek to limit liability for breach of contract must consider the relative bargaining positions and their capacity to negotiate terms that best suit their position.
5. Staying up to date with relevant laws and regulations: laws and regulations are constantly changing; therefore, it is important to regularly review the exemption clauses to ensure the laws are applicable and are effectively protecting the parties relying on them.
Limitation and exclusion clauses are essential tools for contracting entities that may be apt to manage risk, discharge or limit their liability and/or scope of requirements.
However, in construction contracts in particular, given the sector’s complexity and multifaceted supply chain, the enforceability of such clauses is subject to statutory controls and jurisdictions depending on several factors.
Contracts are intended to provide parties with certainties in their obligations. It is important for parties to carefully consider and draft exemption clauses, where care must be taken in drafting clauses to ensure they are reasonable, unambiguous, clear and consensual for all parties involved. Failure to do so may result in the clause being unenforceable, and the parties may find themselves exposed to unexpected liabilities.
Parties should therefore seek contractual and legal advice before including such clauses in their contracts and should ensure that they are drafted in a clear and unambiguous manner, considering the parties’ respective bargaining power.
Omnium Resolve delivers a complete range of contract advisory, claims avoidance, claims management and dispute resolution services throughout the GCC and further afield.
For more information on the application of exemption clauses, or for any contractual advice, please contact Omnium Resolve.
Hiba Irshaid
Omnium Resolve
All opinions expressed in this article are solely those of the author's for informational purposes only. The content should not be construed as legal advice.
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