Exclusion Clauses in Contracts: What They Are & When They’re Enforceable

Many Australian business owners have seen exclusion clauses in their contracts — those lines that aim to limit or remove liability if something goes wrong. But just because a clause is written into a contract doesn’t mean a court will enforce it. In fact, some exclusion clauses offer far less protection than people assume.

This article breaks down what exclusion clauses actually protect, where Australian law draws hard limits, and when these clauses can fail or even backfire.

Understanding exclusion clauses in contract law

An exclusion clause is a contractual term designed to limit or remove one party’s liability for certain losses or breaches. It comes into play after a breach, damage, or loss has occurred, operating as a shield against claims that would normally arise under common law or statute.

Legally, exclusion clauses don’t prevent a breach; they aim to control what follows it. For example, a service provider might attempt to exclude liability for delays or loss of data. However, the difference between commercial intention and legal effect is crucial: a well-drafted clause may still fail if it overreaches or contravenes the law.

Because exclusion clauses restrict rights that would otherwise exist, courts interpret them narrowly. Judges ask: Is this clause clear, fair, and consistent with public policy? If not, it can be read down or struck out entirely.

What exclusion clauses typically try to exclude

It is very likely that in some way or another, you have come across the term ‘exclusion clause’ before. Many contracts, namely waivers, contain them. They aim to cover any liabilities they may incur by restricting the rights of the other party to the contract. Examples of exclusion clauses include:

• A construction company limits the other parties from claiming for delays due to bad weather.
• A tech company limits consumer warranty claims if products are mishandled.
• A rugby team limits a player’s claim to damages for injuries sustained on the field.

Regardless of whether you are drafting a contract or signing one, it’s important to understand how your rights and obligations may be affected by these clauses.

In commercial contracts, exclusion clauses often attempt to limit responsibility for:

• Loss or damage (including financial or property loss)
• Delay or failure to deliver services
• Consequential or indirect losses
• Claims by third parties

But attempting to exclude something is not the same as successfully excluding it. The law imposes strict limitations on the liabilities that can be waived, particularly when legislation, public policy, or fairness is involved.

Are exemption and exclusion clauses the same?

In day-to-day business, “exclusion clause” and “exemption clause” are often used interchangeably. Legally speaking, both describe terms that reduce or remove a party’s liability, but their effect, not their label, determines enforceability.

Courts focus on how a clause operates in practice. It doesn’t matter what you call it; what matters is whether it unfairly limits rights or contradicts statutory protections.

Term	Common Usage	Legal Focus
Exclusion Clause	Removes or limits liability for specific events (e.g. loss, breach)	Narrowly interpreted by courts
Exemption Clause	A broader label sometimes including indemnity or limitation clauses	Substance over wording
Limitation Clause	Caps the amount of liability rather than excluding it completely	Often more defensible in court

What an exclusion clause cannot legally exclude

Australian law limits the functions of many exclusionary clauses. For example, the Australian Consumer Law prevents manufacturers from limiting or excluding consumer rights over defective products in certain ways.

Many rights are protected from being excluded by various pieces of legislation. Some are specific to a certain contract, and many overlap. As such, whether you are writing or signing a contract, it’s important to consider which of these may apply to you. 

Liability that cannot be excluded under Australian Law

Australian legislation places firm boundaries around what parties can contract out of. A contract cannot exclude:

• Statutory rights under legislation such as the Australian Consumer Law (ACL)
• Consumer guarantees, including those relating to goods being of acceptable quality or services delivered with due care and skill
• Certain regulatory obligations, such as Work Health and Safety duties or privacy law compliance

Simply put, contracts cannot override legislation. Even if both parties agree, any term that attempts to do so is void.

Why “It’s in the Contract” Is not a legal defence

Saying “but it’s written in the contract” carries little weight in court. Judges look at factors such as:

• Legality: Does it comply with relevant legislation?
• Fairness: Would enforcing it create an unreasonable imbalance?
• Reasonableness: Was it properly disclosed and understood before signing?

If a clause is misleading, overly broad, or contrary to statutory consumer protections, a court (or regulator) can ignore it completely.

The legality of exclusion clauses in Australia 

So, sometimes exclusion clauses apply, and on occasion, the court completely ignores them even if they are in the contract. This can be quite confusing and difficult to navigate legislatively. The question arises: Are exclusion clauses legal in Australia? 

The short answer — Yes, but with strict limits

Exclusion clauses are legal and widely used in Australian contracts. However, enforceability isn’t automatic. It’s conditional on meeting several tests of clarity, fairness, and compliance with statutory law. A poorly drafted clause can do more harm than good, offering a false sense of protection.

How Australian Consumer Law affects exclusion clauses

As we already discussed, the ACL places strong limits on how much a business can rely on exclusion clauses. While you can include clauses that try to limit liability, the ACL draws a firm line around what can and cannot be excluded.

1. Some contracts count as “consumer” contracts

Even contracts between two businesses can be treated as consumer contracts under the ACL. A business is considered a consumer when it:

• Buys goods or services under $100,000, or
• Buys goods or services that are ordinarily used for personal, domestic, or household purposes (for example, office furniture or laptops).

So if your business falls into either category, the contract is covered by consumer guarantees.

2. Consumer guarantees can’t be excluded

The law provides automatic guarantees about the quality, purpose, and delivery of goods and services, such as being fit for purpose and supplied with due care and skill. No matter what the contract says, you cannot remove or limit these rights. Any exclusion clause that tries to override them will be void and unenforceable.

3. Unfair contract terms are also covered

Even if a clause doesn’t breach consumer guarantees, it can still be unfair under the ACL. This usually happens in standard form contracts, where one party has all the bargaining power, and the other has little to no ability to negotiate.

A clause may be considered unfair if it:

• Creates a significant imbalance between the parties
• Isn’t reasonably necessary to protect the stronger party’s interests
• Would cause harm if enforced

If a court or regulator finds a clause unfair, it can be struck out, leaving the rest of the contract in place.

When exclusion clauses are enforceable and when they’re not 

An exclusion clause is more likely to be enforceable when it:

• Is clearly worded and specifically identifies what is excluded
• Is brought to the other party’s attention before signing
• Does not conflict with statutory or common law obligations
• Reflects a fair balance of risk between the parties
• Is consistently applied across the contract (not hidden or contradicted elsewhere)

However, exclusion clauses often fail when they:

• Attempt to exclude liability for negligence or statutory breaches
• Are ambiguous, overly broad, or inconsistent with other terms
• Are unfair under the ACL (creating a significant imbalance)
• Were not properly disclosed or explained before the agreement

When you should get legal advice on exclusion clauses

You should obtain legal advice when:

• Drafting or reviewing supplier, service, or contractor agreements
• Signing a contract that seeks to limit your rights or remedies
• Relying on an exclusion clause to protect against customer or partner claims
• Operating in industries regulated by consumer or safety laws
• Unsure whether a clause could be deemed unfair or unenforceable

Expert advice at the drafting stage is far cheaper than litigation after a dispute. A lawyer can ensure your exclusion clauses are lawful, fair, and actually provide the protection you intend.

FAQ

Are exclusion clauses always enforceable?

No. Enforceability depends on clarity, fairness, and compliance with statutory limits. Courts interpret exclusion clauses narrowly and may strike them out if they overreach.

Can exclusion clauses override Australian Consumer Law?

No. ACL consumer guarantees and unfair contract term protections cannot be excluded or limited by private agreement.

Should small businesses use exclusion clauses?

Yes, but carefully. When properly drafted, exclusion clauses can manage risk. However, they must stay within legal limits and never attempt to exclude statutory rights. Professional drafting and review are essential.

Protect yourself with strong exclusion clauses

Exclusion clauses provide companies with the opportunity to avoid unnecessary legal disputes arising from events beyond their control. They are an important tool, but one that can be misused easily. It is therefore essential to be aware of the implications and limitations of these provisions before entering into contracts that contain them.

Lawpath can help draft strong and compliant contracts, covering everything from agreements to limitations and exclusions. Contact our professional legal team today or get started with our free legal document templates.