Contracts contain provisions that shift liability from one party to the other, or limit liability, or try to eliminate it completely. One way to assign liability from one party to another is through an exculpatory clause. The legal definition of an exculpatory clause is “part of a contract that prevents one party from holding the other party liable for damages related to the contract.”[1] Typically, the party that drafted and inserted the exculpatory clause is seeking to insulate itself from liability for actions or omissions, and the associated damages.
Exculpatory clauses are most common in contracts, especially property or real estate, such as a commercial lease. They are also very common in locations where customers make purchases, either virtually or in person, such as on store signs, admission tickets, or websites where purchases are made, such as for a software license or an airplane ticket.
Key points about exculpatory clauses
- An exculpatory clause is meant primarily to relieve a party in a contract from liability.
- Exculpatory agreements may not be enforceable if they are not fair or limit liability for gross negligence.
- Exculpatory clauses are between the parties to a contract; third parties are covered by indemnity agreements.
Examples of exculpatory clauses
Exculpatory clause on receipts
Example: “”Daisy Fresh Laundry will not be liable for any damage caused to the customer’s clothes during dry cleaning.”[2]
The above is exculpatory language that is printed on a receipt from a dry cleaning store. If the customer signed a contract, it’s likely this language is enforceable, but since it’s printed on a receipt, which is not a true contract, the enforceability of the language is less certain.
Exculpatory clause on signage
Example: “The mall and shop owners will not be responsible for any lost or stolen items.”[3]
Exculpatory language can also appear on signage outside of a store or restaurant. In the above example, a shopping mall displayed such language in front of each store within the shopping center. Again, the signs are not a contract between the store and the patron, so the enforceability is less certain for the store. If the patron does not want to take a chance that this is enforceable, the best solution is not to shop there. If the patron does bring a claim, they are at least on notice that this sign and the disclaimer will be brought up as a defense.
Generic Exculpatory clause
Example: “The Company hereby exempts the Indemnitee, to the fullest extent permitted by law, from any liability for damages caused as a result of the Indemnitee’s breach of the duty of care to the Company while acting in good faith and having reasonable cause to assume that such act or omission would not prejudice the interests of the Company, provided that the Indemnitee shall not be exempt with respect to any action or omission as to which, under applicable law, the Company is not entitled to exculpate the Indemnitee.”
This language is likely enforceable when found in a contract negotiated at arms length between two parties. The formality of the language and the exculpatory clause, in conjunction with the indemnification language, indicates that this isn’t a take-it-or-leave it situation, where the enforceability could be called into question. Rather, the language is thought out and specific to the transaction, and if both parties agreed to it, it has a higher likelihood of being enforced by the courts.
Exculpatory clause in real estate
Example: “In the event of an interruption in or failure or inability to provide any services or utilities to the Premises or Building for any reason (a “Service Failure”), such Service Failure shall not, except as set forth below, impose upon Landlord any liability whatsoever, constitute an eviction of Tenant, constructive or otherwise, entitle Tenant to an abatement of rent or to terminate this Lease or otherwise release Tenant from any of Tenant’s obligations under this Lease.”
The above is language in a commercial lease that uses exculpatory language to limit the landlord’s liability if utilities are interrupted.
Exculpatory clause in a mortgage agreement
Example: “Subject to the qualifications below, Lender shall not enforce the liability and obligation of Borrower to perform and observe the obligations contained in the Note, this Agreement, the Mortgage or the other Loan Documents by any action or proceeding wherein a money judgment shall be sought against Borrower, except that Lender may bring a foreclosure action, an action for specific performance or any other appropriate action or proceeding to enable Lender to enforce and realize upon its interest under the Note, this Agreement, the Mortgage and the other Loan Documents, or in the Property, the Rents following an Event of Default, or any other collateral given to Lender pursuant to the Loan Documents; provided, however, that, except as specifically provided herein, any judgment in any such action or proceeding shall be enforceable against Borrower only to the extent of Borrower's interest in the Property, in the Rents following an Event of Default and in any other collateral given to Lender, and Lender, by accepting the Note, this Agreement, the Mortgage and the other Loan Documents, agrees that it shall not xxx for, seek or demand any deficiency judgment against Borrower in any such action or proceeding under or by reason of or under or in connection with the Note, this Agreement, the Mortgage or the other Loan Documents.”
An exculpatory clause in a mortgage agreement will typically provide that a borrower has no personal liability for the loan or that the borrower’s liability is limited to the value of the collateral for the loan. Like most contract clauses, the exculpatory clause in the above example can be tailored to the parties. For example, in addition to not seeking or demanding deficiency judgment against the borrower, the above example leaves the “xxx” placeholder to also allow the parties to write in additional terms.
Exculpation vs. Indemnification
While indemnification clauses and exculpatory clauses are both risk allotment tools, they serve different purposes. Exculpatory clauses deny a party the possibility of recovering damages, while indemnification clauses shift liability from one party to the other.
An indemnification clause dictates that one party in the contract will compensate the other for costs and expenses that arise from claims, either between the parties (direct claim) or between a party to the contract and another party outside of the contract (third-party claim).
An exculpatory clause prevents a party to the contract from making the other party liable for damages, under the contract. Thus, the exculpatory clause is narrower in scope and addresses liability between the parties to a contract, not parties outside of the contract who may be harmed.
For example, a commercial lease may have an exculpatory clause that the landlord is not liable for injuries resulting from utility interruptions, as well as an indemnification clause that shifts liability to the tenant regarding any injuries the tenant’s invitees may suffer due to that utility outage. Here, if a tenant is injured during a utility outage,the tenant would be unable to bring a claim against the landlord due to the exculpatory clause. The tenant’s invitees are also unable to bring a claim against the landlord due to the indemnity clause. However, tenant invitees would be able to bring a claim against the tenant, as the tenant has taken on the liability vis a vie the indemnity clause.
When exculpatory clauses may be unenforceable
Though seemingly ubiquitous and often the first line of defense for liability cases, exculpatory clauses are not impenetrable.
Because of the limitation of a party’s liability in an exculpatory clause, courts are typically skeptical of their enforcement.[9] An exculpatory clause is generally unenforceable when it is found to be unfair or if one party was found to be at a significant disadvantage in agreeing to the clause. Generally, an exculpatory clause cannot relieve liability when it is due to intentional or reckless behavior, and there is often a carve out for gross negligence in contracts.
Courts typically consider the following factors when evaluating the enforceability of an exculpatory clause[4]:
- Is the clause obvious? For example, is it separate from the rest of the document, clearly labeled, and very obvious?
- Is it clear and understandable, even to non-lawyers?
- Is it specific? Does it clearly explain the risks in agreeing?
- Is there equal bargaining power between the parties to this agreement?
- Is the intent of the parties obvious?
[1] Cornell Legal Information Institute. Exculpatory clause.
[2] Wall Street Mojo. Exculpatory Clause.
[3] Id.
[4] Cornell Legal Information Institute. Exculpatory clause.
