What is an exculpatory clause?
Can it be used to release a party from liability?
Can the exculpation provision be used to shift risk from one party to another?
In this article, we will break down the notion of the exculpatory clause and understand what it is, when it is used, what type of liability can be waived, what’s the difference with a limitation of liability clause and more.
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Let’s get started!
What is an exculpatory clause?
An exculpatory clause is a contractual provision that relieves a party from liability toward the other contracting party.
This type of clause cannot be used for all types of damages and all types of risk.
Nonetheless, in certain situations, an exculpatory provision exonerates a party from liability in case of negligence, injury or damages.
According to Investopedia, the exculpatory clause definition is:
“An exculpatory clause is a contract provision that relieves one party of liability if damages are caused during the execution of the contract.”
The important components of this definition an exculpatory clause are the following:
- A party is “relieved”
- Of “liability”
- For “damages”
- During the “execution of contract”
For example, a parachuting company will include an exculpatory clause in the contract to having people parachute off of an airplane.
The parachuting company will want to be relieved from damages or personal injury caused to its client during a parachuting event.
Enforceability of an exculpatory clause
The enforceability clause can be enforced in a court of law.
To successfully enforce an exculpatory clause, the court will restrictively evaluate the wording of the provision, the obligations of the parties in the contract and the circumstances surrounding the execution of the contract.
Parties’ bargaining power
An exculpatory clause is generally unenforceable when the clause is deemed unreasonable.
The bargaining power of the parties can influence a court’s decision when asked to enforce an exculpation clause.
For example, if a company presents a contract of adhesion to a consumer with a broad exoneration of responsibility under the contract, the court may consider that the enforcement of the clause may not be reasonable or equitable due to the disproportion in the bargaining power of the parties.
Negotiation context
Another factor the court will consider is the context of how the clause was negotiated and agreed to.
Did the service provider or merchant present the clause to the client?
Is the clause made known to the client conspicuously?
Is the exculpatory provision clear?
Was the client given an opportunity to see the clause and understand what he or she was agreeing to?
Depending on how the exculpatory clause was presented to the client, the exculpatory provision may or may not be enforced by the court.
If a reasonable and informed person could not have understood the exact meaning of the clause to properly assess the consequences of what responsibility was being given away, the court will be cautious in enforcing the exculpation provision.
Violation of public policy
In most jurisdictions, exculpatory clauses are not seen favourably although they are legal and can be enforceable.
The courts will interpret them restrictively and in light of the overall circumstances of the case.
The courts will scrutinize the facts of the case and the exculpatory agreement to determine whether or not a party’s liability should be limited for damages or injuries caused.
However, no matter if the clause is properly drafted and clearly presented to the client or a contracting party, the courts will not enforce the exculpatory clause if it violates public policy or the public order.
How to draft an enforceable exculpatory provision?
The courts will carefully examine the application and enforceability of an exculpatory provision or any provision in a contract intended to limit a party’s liability towards another.
Nonetheless, a party looking to take advantage or invoke an exculpatory clause should ensure that the clause is properly drafted.
To limit your liability, you must clearly express the intention so that it is unambiguous.
After all, you are asking another person to fully exonerate you from responsibility.
You need to make sure that that’s clearly stated and it’s clear to the person agreeing to it.
In other words, the wording of the exculpatory clause should be express, clear, unequivocal, unambiguous and understandable to a reasonable person.
Assuming that the exculpatory clause does not violate the law or public policy, the courts will uphold the clause if the person freeing the other from liability clearly understood what he or she was giving away.
Drafting the actual exculpatory clause is important but the drafting of the entire contract is as important.
Even though you may clearly draft an exculpatory clause if the clause conflicts with other provisions of the contract or leads to ambiguities, the courts may refuse to enforce the exculpatory provision.
It is a good practice to ensure that the contract, in general, is clear about the limitation of liability.
Exculpatory contract
An exculpatory clause can be entered into as part of a standalone agreement between the contracting parties.
In other words, the essence of the contract is the limitation of liability of one party towards the other.
We call this an exculpatory agreement or exculpatory contract.
The exculpatory agreement will contain the same elements as an exculpatory clause.
A clear statement that one party is freed and relieved from liability towards the other party under what circumstances.
So long as the agreement exempting a party from liability does not violate public policy, public interest or a statutory provision, the courts will enforce the obligation.
Exculpatory clause gross negligence
Generally speaking, the courts in the United States will enforce exculpatory clauses exempting a party from liability due to his or her own negligence provided there are no overriding public policy or statutory obligations.
There is a caveat to this.
If a party causes damages or injury to another due to intentional negligence or wilfully causes an injury to another, the courts may not enforce such a provision.
A party causing intentional harm to another may not easily invoke an exculpation clause to be absolved of liability.
Exculpatory clause vs limitation of liability clause
A limitation of liability clause is a contractual provision where a party intends to limit his or her total amount of liability exposure towards another contractual party.
For example, the most common limitation of liability provision states that a party’s contractual liability for damages caused will be capped to the total value of the contract.
On the other hand, an exculpatory clause is a clause where a party is looking to be totally exonerated from liability or risk for the future.
In this case, should an event of liability occur, the beneficiary of the exculpation provision will take the position that he or she has no responsibility whatsoever.
Exculpatory clause vs hold harmless clause
An exculpatory clause is one where a contracting party demands to be exonerated from responsibility towards the other party.
For example, when you go to a concert, the event organizer will demand that you exonerate them from any damages while at the concert.
If you lose something or get hurt, the exculpation clause fully exonerates the event organizers to pay you any damages or compensation.
On the other hand, a hold harmless clause is a contractual provision where a contractual party demands to be free from contractual risk and should he or she be pursued, the other contracting party will defend and hold him or her harmless.
The hold-harmless provision is generally used along with an indemnification provision.
Exculpatory clause examples in business
Exculpatory provisions are commonly used in business.
We come across exculpatory clauses quite often in a commercial context and have probably accepted such terms knowingly or not.
Let’s look at a few examples.
Exculpatory clause parking lot
Exculpatory clauses are commonly used in business particularly when a company handles someone’s personal property, is in charge of the property or in charge of their safety.
For example, a parking lot will include an exculpatory clause or post signs in the parking area advising clients that they cannot be held liable for loss of property left in the car or theft.
Another example is transportation companies.
Exculpatory clause airlines
An airline company is in charge of the safety of its passengers.
Generally, the airline company will inform its passengers of the proper code of conduct and proper rules to follow in the airplane to be safe.
If a person does not respect the rules and suffers damages, the airline will invoke the exculpatory clause to limit its liability for possible damages or injuries suffered.
Exculpatory clause mortgage
Exculpatory clauses are often used in mortgage agreements.
In this context, the lender will demand that the borrower agree to exclude personal liability under the loan contract.
Exculpatory clause construction contract
Exculpatory clauses are used in construction contracts.
A contractor, renovator or builder will demand an exclusion of responsibility in the event the client does not respect certain contractual terms or fails to follow the guidelines or recommendations of the builder.
Exculpatory clause in corporate bylaws
Companies may find exculpatory provisions directly in their company bylaws.
Generally, company shareholders or other members will demand the exculpation of liability or exculpation clause for their actions or wrongdoing towards the company.
Exculpatory clause in a lease
A landlord will often include an exculpatory clause in a commercial lease to limit their liability due to their interest in the property leased to a tenant.
This type of provision is a common contractual clause in a lease agreement.
Exculpatory clause gym
A good example when an exculpatory provision is used is when you sign up for a gym membership.
Very often, your gym contract will state that the client will release and discharge the fitness club from any and all claims, liabilities, demands, injuries or damages caused when using the gym facilities.
Such provisions are generally enforceable.
There are many cases in different states where the courts have upheld such exculpatory clauses when legally challenged.
Exculpation clause sample
Law Insider provides interesting samples of exculpation clauses to select from.
Here is a sample exculpation clause proposed by Law Insider:
“Notwithstanding any other provisions of this Agreement, whether express or implied, or any obligation or duty at law or in equity, neither the Member, nor any officers, directors, stockholders, partners, members, managers, employees, affiliates, representatives or agents of the Member, nor any officer, employee, representative or agent of the Company (individually, a “Covered Person” and, collectively, the “Covered Persons”) shall be liable to the Company or any other person for any act or omission (in relation to the Company, its property or the conduct of its business or affairs, this Agreement, any related document or any transaction contemplated hereby or thereby) taken or omitted by a Covered Person in good faith reliance on the provisions of this Agreement, provided such act or omission does not constitute willful misconduct, gross negligence, or a knowing violation of law.”
Source: Law Insider
Frequently asked questions
Is exculpatory clause illegal?
An exculpatory clause is not illegal.
In fact, generally speaking, the courts will enforce and uphold an exculpation clause.
However, it may not be as easy.
In fact, the courts will analyze the wording of the clause very carefully, interpret the clause in the context of the entire contract, the circumstances of the contract, the bargaining power of the parties and the overall circumstances of the case.
Provided that the exclusion clause does not violate the law or public policy and the clause is clear, unambiguous and unequivocal, the exculpatory provision will be legal and enforceable.
What is the purpose of an exculpatory clause?
The purpose of an is to fully limit and exonerate a contractual party from liability or damages towards another.
In other words, a contractual party may demand such an exoneration of liability and risk for the performance of the contract.
Take for example a safari tour guide.
The very nature of going on a safari and seeing wild animals is a dangerous venture.
A tour guide will demand an exculpatory clause or a limitation of liability clause from his or her clients should they suffer damages or are injured during the safari.
The purpose is to shift the risk from the tour guide to the client.
Without an exculpatory clause, should a wild animal attack the clients, the tour guide may be held responsible for the attack.
To eliminate such risk, the tour guide will contractually demand to be released from liability thereby shifting the risk of injury or liability to the client.
