Exculpatory Clause

What is an Exculpatory Clause?

An exculpatory clause is a contract provision in a legal contract that relieves a party of liability of any damages that may occur during the execution of the contract. For example, these clauses are often included in contracts when a service provider encounters a customer’s personal property or is responsible for a customer’s wellbeing.

Typically, exculpatory clauses are written and issued by the party seeking to relieve blame. For this reason, courts generally look unfavorably towards exculpatory clauses. This is because it is a way for a party to shirk responsibility for damages.

Some common examples of activities that may use exculpatory clauses include:

• A parking lot receipt. Often, parking receipts will state that they are not responsible for stolen items or damage to a vehicle when parked in a lot.
• Property lease. Landlords use exculpatory clauses to relieve themselves of responsibility if there is a loss, injury, or damage while a renter is on their property.
• The dry cleaners. Suppose you drop clothes off at a dry cleaner. In that case, your receipt will most likely include an exculpatory clause relieving the company of responsibility if your clothes are damaged.
• A gym membership. The membership application most likely includes an exculpatory clause if you belong to a gym. If you are injured while working out, you will not hold the gym responsible.
• A dangerous activity. If you have ever participated in skydiving, ziplining, white water rafting, or any other activity in which you could be injured, you probably signed a contract with an exculpatory clause. This would relieve the company from any responsibility for injuries you may suffer while participating in dangerous activities.

Purpose of an Exculpatory Clause

The primary purpose of an exculpatory clause is to relieve one party of liability in the event of an accident or damage during the execution of a contract.

For example, suppose you are on vacation and scuba diving on a charter boat. In that case, you will probably sign an exculpatory clause. If you are injured while on the boat or while diving, in theory, you will not be able to take legal action against the charter company for damages you suffered.

Difference Between Exculpation and Indemnification

Exculpation and indemnification are very similar. Both clauses in a contract seek to remove liability from one party. However, the main difference is that while an exculpatory clause seeks to deny a party the right to recover damages, an indemnification clause attempts to shift liability to another party.

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Are Exculpatory Clauses Enforceable?

The enforcement of exculpatory clauses is controversial. As a result, it isn’t uncommon for parties to challenge exculpatory clauses in court.

Generally, exculpatory clauses are enforceable if reasonable and meet specific criteria. However, several factors come into play when a court considers an exculpatory clause, including:

• Is the clause conspicuous? Exculpatory clauses need to be separate from the rest of the contract, should be clearly labeled, and need to be eye-catching. Using a different or bold font is one way to make an exculpatory clause stand out.
• Is the clause clear and understandable? An ordinary person without legal training should be able to read and easily read the exculpatory clause and understand what they are agreeing on.
• Is the clause specific? The clause should not be vague and should clearly explain the risks involved in the signing. In addition, it should include particular theories of liability like negligence.
• Is there equal bargaining power? Bargaining power is essential when determining if an exculpatory clause should be upheld. For example, courts will often strike down an exculpatory clause if they believe the signing party was at an unfair disadvantage.
• Is the intent of the parties clear? The exculpatory clause needs to state the intention to relieve a party from liability.

It is important to remember that an exculpatory clause cannot excuse liability from harm when the damages occurred due to intentional or reckless behavior. This includes deliberate acts and gross negligence.

There are several other instances when an exculpatory clause would be deemed unenforceable by a court. These reasons include:

• Ambiguous language. If the agreement is unclear, it cannot be enforced because the signing party may not understand the rights they are waiving.
• Fraud. Suppose the court finds that a party falsified a material fact with the intent to deceive and the other party relied on that fact. In that case, the exculpatory clause will not be upheld.
• Contrary to the public interest. The public policy test is often used by courts to determine the enforceability of an exculpatory clause. This test considers bargaining power between the parties and whether a company is working contrary to the public interest.
• Violates a statute. The terms in an exculpatory clause cannot violate any laws.

Exculpatory Clause in a Mortgage

Mortgage contracts often contain exculpatory clauses to relieve a borrower from personal liability. If the borrower defaults on the mortgage, the lender cannot acquire the borrower’s personal property as collateral, but only the property associated with the mortgage. This is done through a foreclosure proceeding.

Exculpatory Clause in a Construction Contract

It is common to see exculpatory clauses used in a construction contract. The clause would be used to limit the construction company’s risk and liability while completing a project.

For example, suppose a construction company is building a house. In that case, they may include an exculpatory clause in their contract that relieves them from responsibility for any damage while working.

As with all exculpatory clauses, if any damages arise from gross negligence or deliberate acts, the exculpatory clause does not apply.

Exculpatory Clause in a Loan Agreement

Much like a mortgage, other loan agreements can also contain exculpatory clauses. Most loan agreements will include provisions that state:

1. The borrower has no personal liability for the loan
2. The borrower’s liability is limited to the value of the loan

This clause protects a borrower from a lender going after their personal property. Suppose the loan is for property, like a vehicle. The lender can only repossess the vehicle. In that case, the borrower cannot sue for a deficiency judgment.

Exculpatory clauses in loans heavily favor the borrower. For this reason, many lenders do not like to negotiate exculpatory clauses in their agreements.

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