Question

"Business Law"

Exculpatory Clause Discussion

Exculpatory clauses are provisions in contracts which appear to relieve one or more parties from tort liability. These clauses are also commonly referred to as "waivers or releases of liability".

1. Do you think that exculpatory clauses should be routinely enforced regardless of the situation? Why or why not?
2. What limitations should be placed on the enforcement of exculpatory clauses, if any?

Answer 1

An exculpatory clause is part of an agreement that relieves one party from liability. It is a provision in a contract that is intended to protect one party from being sued for their wrongdoing or negligence.

An exculpatory clause is a contract provision that relieves one party of liability if damages are caused during the execution of the contract. The party that issues the exculpatory clause is typically the one seeking to be relieved of the potential liability.

exculpatory clause. (1) A clause in a mortgage that allows the borrower to surrender the property to a lender without any further personal liability for a deficiency. (2) A clause in a trust instrument or a will excusing the trustee or executor from liability when powers are exercised in error but good faith.

There is a trend in the law to invalidate an exculpatory clause if:

• The parties have unequal bargaining power and the clause is unfair;
• The clause eliminates liability for negligence, particularly if a negligent party is a public utility or the contract involves a fundamental good or service; or
• The exculpatory clause was obtained by fraud or other wrongful conduct.

Exculpatory clauses are typically upheld if agreed to by businesses with equal bargaining power.

A common type of exculpatory clause involves limiting liability on a loan to the collateral. In other words, if there is a default, the contract says that the damages will be limited to execution on the collateral (i.e., foreclosure on the property covered by the mortgage or deed of trust).

What happens if a limitation of remedies clause or a limita­tion of liability clause is not valid? In this situation, the plaintiff may sue under any other valid remedy, such as actual damages.