Exemption Clause Law and Legal Definition

A party to a contract may include a term in a contract to exclude or limit his/her liability in the event of a breach of contract or in any specified circumstances. Exemption clause seeks to restrict the liabilities that may arise from the legal relation. For example an exemption clause can be included as “Party A will only accept liability up to the amount of 60 dollars.” Exemption clause is generally included in a contract to protect the party drafting the contract from being sued by the other party for damages, negligence or other losses. Exemption clauses can be used by the parties to allocate risk between them. Exemption clauses can be split into exclusion clause and limitation clause. Exclusion clauses excludes liability completely for specified outcomes. Limitation clauses limits a maximum on the amount of damages the party may have to pay if there is a failure of some part of the contract.

Courts generally interpret exemption clauses narrowly adjusting it to reasonable circumstances. If the court thinks that the exemption clause used in the contract is unreasonable, court can declare it as void. As a contract cannot be made unilaterally, only reasonable restrictions can be brought by exemption clause.