3 Things You Need to Know About Exclusion Clauses

Why do contracts have exclusion clauses? In Australia, a contract, particularly one that involves a business transaction, may or may not have an exclusion clause. 

In this article, we will discuss three important things that you need to know about exclusion clauses. 

As a general definition, an exclusion clause is a part of a contract where the parties would establish the limitation or the exclusion of a party’s liability in case there’s a breach of contract or negligence. 

But why do businesses include an exclusion clause in their contracts? The simple answer is to shield itself from possible financial loss or damage.

What You Must Know about Exclusion Clauses

Businesses protect themselves from financial dilemmas by incorporating an exclusion clause in their business contracts. 

But how do exclusion clauses work? In this section, we will point out three reasons why businesses use this type of clause:

1. Risk apportionment. 

Incorporating an exclusion clause in the contract will help allocate risks that may be encountered for the duration of the contract. What it does is that it shifts the burden of the risk of loss from one party to the other.  

This function limits or excludes the liability of one party in case unforeseen or unavoidable events or damage take place. What happens during the drafting of the contract is that the parties would assess and identify the potential risks that relate to the agreement. 

After identification, the party limiting their liability will specify in the exclusion clause the type of event or damage for which they will not be responsible. Afterwards, the other party might try to negotiate. When both parties agree upon such clause, it will become part of the contract.

2. Cost management. 

Since an exclusion clause serves as a shield from liability, the business will be able to control its financial liability when there’s a contract breach or negligence. 

A usual mechanism when it comes to cost management is the setting of a maximum amount that a party will be liable. In simpler terms, the ceiling amount for a financial liability will be set and specified in the contract. 

Consumer contracts. 

In terms of consumer contracts, although exclusion clauses are generally perceived as unfair, there are also instances when they are allowed by the law. For instance, if the provision is qualified in a manner that the consumers understand its effects on them and if they are given a reasonable notice of its effect.

Australian contract law can be tricky and requires expert knowledge. Therefore, if you’re planning to enter a business contract and you want to make sure that the contract will not impair your rights and interests, talk to commercial lawyers.

They can assist you with contract review, drafting, research, and interpretation. Also, expert lawyers will provide guidance on the meaning and interpretation of contract terms such as exclusion clauses.