A clause which limits or excludes one party's liability for non-performance or which permits one party to render performance substantially different from what the other party reasonably expected may not be invoked if it would be grossly unfair to do so, having regard to the purpose of the contract.
1. The need for a special rule on exemption clauses
The Principles contain no general rule permitting a court to strike down abusive or unconscionable contract terms. Apart from the principle of good faith and fair dealing (see Article 1.7) which may exceptionally be invoked in this respect, there is only one provision permitting the avoidance at any time of the contract as a whole as well as of any of its individual terms when they unjustifiably give one party an excessive advantage (see Article 3.2.7).
The reason for the inclusion of a specific provision on exemption clauses is that they are particularly common in international contract practice and tend to give rise to much controversy between the parties.
Ultimately, this Article has opted in favour of a rule which gives the court a broad discretionary power based on the principle of fairness. Terms regulating the consequences of non-performance are in principle valid but the court may ignore clauses which are grossly unfair.
2. “Exemption clauses” defined
For the purpose of this Article exemption clauses are in the first instance those terms which directly limit or exclude the non-performing party’s liability in the event of non-performance. Such clauses may be expressed in different ways (e.g. fixed sum, ceiling, percentage of the performance in question, deposit retained).
Exemption clauses are further considered to be those which permit a party to render a performance substantially different from what the other party reasonably expected. In practice clauses of this kind are in particular those the purpose or effect of which is to allow the performing party unilaterally to alter the character of the performance promised in such a way as to transform the contract. Such clauses are to be distinguished from those which are limited to defining the performance undertaken by the party in question.
1. A tour operator offers at a high price a tour providing for accommodation in specifically designated luxury hotels. A term of the contract provides that the operator may alter the accommodation if the circumstances so require. If the operator puts up its clients in second class hotels, it will be liable to them notwithstanding the contractual term since the clients expected to be accommodated in hotels of a category similar to that which had been promised.
2. A hotelkeeper exhibits a notice to the effect that the hotel is responsible for cars left in the garage but not for objects contained in the cars. This term is not an exemption clause for the purpose of this Article since its purpose is merely that of defining the scope of the hotelkeeper’s obligation.
3. Exemption clauses to be distinguished from forfeiture clauses
Exemption clauses are to be distinguished from forfeiture clauses which permit a party to withdraw from a contract on payment of an indemnity. In practice, however, there may be forfeiture clauses which are in reality intended by the parties to operate as disguised exemption clauses.
4. Exemption clauses and agreed payment for non-performance
A contract term providing that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance (see Article 7.4.13) may also have the effect of limiting the compensation due to the aggrieved party. In such cases the non-performing party may not be entitled to rely on the term in question if the conditions laid down in this Article are satisfied.
3. A enters into a contract with B for the building of a factory. The contract contains a penalty clause providing for payment of Australian dollars (AUD) 10,000 for each week of delay. The work is not completed within the agreed period because A deliberately suspends the work for another project which was more lucrative for it and in respect of which the penalty for delay was higher. The actual harm suffered by B as a result of the delay amounts to AUD 20,000 per week. A is not entitled to rely on the penalty clause and B may recover full compensation of the actual harm sustained, as the enforcement of that clause would in the circumstances be grossly unfair in view of A’s deliberate non-performance.
5. Cases where exemption clauses may not be relied upon
Following the approach adopted in most national legal systems, this Article starts out from the assumption that in application of the doctrine of freedom of contract (see Article 1.1) exemption clauses are in principle valid. A party may not however invoke such a clause if it would be grossly unfair to do so.
This will above all be the case where the term is inherently unfair and its application would lead to an evident imbalance between the performances of the parties. Moreover, there may be circumstances in which even a term that is not in itself manifestly unfair may not be relied upon: for instance, where the non-performance is the result of grossly negligent conduct or where the aggrieved party could not have obviated the consequences of the limitation or exclusion of liability by taking out appropriate insurance.
In all cases regard must be had to the purpose of the contract and in particular to what a party could legitimately have expected from the performance of the contract.
4. A, an accountant, undertakes to prepare B’s accounts. The contract contains a term excluding any liability of A for the consequences arising from any inaccuracy whatsoever in A’s performance of the contract. As a result of a serious mistake by A, B pays 100% more taxes than were due. A may not rely on the exemption clause which is inherently unfair.
5. A, a warehouse operator, enters into a contract with B for the surveillance of its premises. The contract contains a term limiting B’s liability. Thefts occur in the terminal resulting in loss exceeding the amount of the limitation. Although the term, agreed upon by two professional parties, is not inherently unfair, it may not be relied upon by B if the thefts were committed by B’s servants in the course of their employment.
6. Consequence of inability to rely on exemption clauses
If a party is not entitled to rely on an exemption clause, its liability is unaffected and the aggrieved party may obtain full compensation for the non-performance. Contrary to the rule laid down with respect to agreed payment for non-performance in Article 7.4.13, the court has no power to modify the exemption clause.