Exclusion or Exemption clauses and Limitation clauses are clauses usually found in contracts, which sometimes constitute a term of the contract.

I will leave out the definition at this point and give examples of Exclusion and Limitation clauses. You must have come across notices at car parks that read “Car Parked at Owner’s risk”, notices at banks that read “Items kept at owner’s risk”. Those are a few examples of the really simple exclusion/exemption clauses.  It could sometimes take on a more complex form.

An example of a limitation clause is this: “The Agency would not be liable to anyone for any damage in excess of #50,000 irrespective of the extent of the damage.” Another example is; “The right to commence any action for recovery of damages or for the enforcement of any duty owed would be deemed forfeited or waived, if not exercised within three months from the day such a right accrued.” This is an example of limitation clause in relation to time.

Having laid that foundation, we would now go on to the meaning of Exclusion and Limitation Clauses.  Again, I will not attempt to define, but I will provide a working explanation that will facilitate understanding.

The law respects a man’s right to negotiate and agree on terms that would bind him in any contractual arrangement. In exercise of this right, a person may decide to exclude or otherwise limit the obligations which should ordinarily be binding on him arising from that contract. So, D a car dealer might say to B, a buyer; though I am supposed to pay you N10,000.00 if it turns out that the engine of the vehicle I sold to you is bad, I will not pay you any such sum even if the engine turns out bad. If B agrees to such an arrangement, then it would be binding on him. What D has done is to exclude his liability.

Exclusion/Exemption and Limitation clauses are clauses inserted in a contract for the benefit of the person who inserted them, in order to totally exclude or limit liability on his part arising from that contract. It seeks to restrict the right of the other party to the contract.

Exclusion and Limitation clauses are usually more common in standard form contracts. A standard form contract is one where the terms and conditions of the contract are stipulated by only one party; the other party has no say whatsoever in determining the terms of the contract. He has the option of accepting the contract on those terms or walking away. Examples of standard form contracts include; contracts signed with banks when you decide to open an account with them, contracts entered into with airlines when you decide to fly with them etc.

An Exclusion or Exemption clause sets a party to a contract totally free from any liability (as contained in the clause) which may ordinarily have arisen from the contract. So if I park my vehicle at a car park where I paid some money for my vehicle to be safeguarded and my vehicle goes missing, the car park may not be liable for the missing vehicle if they had excluded their liability by stating in the contract terms that cars are parked at the owner’s risk.

A Limitation clause on the other hand merely limits the right of the other party to recover damages from the party who defaulted or whose actions resulted in the loss to a certain extent. A Limitation clause acknowledges that the person for whose benefit it was inserted has some liability, but it is essentially saying irrespective of the extent of that liability, I would only compensate you to a certain specified extent.

There could also be a Limitation clause in relation to time. What this type of Limitation clause does is to limit the period within which you can enforce your right against the party relying on the clause. If the right to damages or compensation is not exercised within the stipulated time, such a right is deemed waived and it can no longer be exercised.

The courts would only enforce an Exclusion or Limitation clause if certain conditions are satisfied:

  1. The excluding or limiting clause must be a part of the contract. If the parties signed a contract which contained the excluding or limiting clause as a term, that term would remain binding on the parties because a person is bound by a contractual document signed by him, whether or not he read it.
  • In cases where the contract was concluded without any signing of documents, (examples include when vehicles are boarded and receipts are issued which contain the exclusion or limiting clause after the conclusion of the contract, or where hotel accommodations are paid for and the excluding or limiting terms are written on the receipts which are issued after the contract has been completed) the law requires that the party seeking to rely on it must have brought it to the knowledge of the other party before the contract is concluded in order for it to be effective. The law seeks to avoid a unilateral imposition of a contractual term on a party.

It is also important that the existence of any excluding or limiting clause is brought to the attention of persons who cannot read such as blind persons or illiterates before the contract is completed.

An excluding or limiting clause would however not be enforced if the party seeking to rely on it has failed to perform a primary or fundamental obligation in the contract which has the effect of ‘depriving the other party substantially of the whole benefit of the contract, which it was the intention of the parties that he should obtain from the contract’[1]. In other words, a breach of a fundamental term of the contract could deprive a party of the protection afforded by the excluding or limiting clause.

When it is also established that a party seeking to rely on an excluding or limiting clause was negligent in the discharge of his obligations under the contract, he could be deprived of the protection afforded by the clause.

In entering into contracts, it is essential that the parties clearly stipulate and disclose the terms of the contract and where the contract is reduced into writing, it is important that it is carefully read before the contract is signed.

[1] Photo Production Ltd  Vs Securicor Transport Ltd 1980 A.C. page 827. Reported in the Nigerian Law of Contract by Prof. I. E. Sagay