An exculpatory clause is specific language included in contracts and agreements that aims to release one party of blame or liability. Exculpatory clauses don't always hold up in court.
Learn more about these agreements, why they're often included in contracts, and what prevents them from being upheld when conflicts arise.
What Is an Exculpatory Clause?
Exculpatory clauses are portions of a contract that are written so that one party will hold the other party harmless if things go wrong.
One type of exculpatory clause may declare that one party has no liability for the wrongdoing of the other party. A common example of this type of exculpatory clause would be a lease in which the landlord says it will not be responsible for damages caused by the tenant.
Another type of exculpatory clause would be a contract in which one party (usually the one writing the contract) has no liability for its own actions. In other words, the other party must take the risk of signing the contract, because the contract holder claims it cannot be sued. These clauses are found most often in retail situations. For example, the receipt given by a dry cleaner might claim it cannot be held liable for damage caused to a shirt that a customer dropped off to be cleaned. The customer would assume the risk by signing the contract.
- Alternate name: hold harmless clause
How Does an Exculpatory Clause Work?
Exculpatory clauses are often found in agreements between a business and a consumer when the activity has some danger, such as in a fitness center or ski resort. The business wants the consumer to understand the risk involved, and it also wants to avoid lawsuits, so it includes a hold harmless clause in its agreement.
In service and repair businesses, there may be the possibility of damage, for example with a dry cleaner or auto repair business. Having an exculpatory clause in the agreement between the two parties makes the customer aware that some damage may be possible.
For example, a computer repair shop may agree to try to repair a damaged motherboard, but it will probably ask the customer to sign a hold harmless agreement to emphasize the risk of damage to the computer. The customer then has to decide if the risk of damage is worth it.
When there are multiple businesses involved in a project, as in construction, hold harmless agreements protect the contractor from the actions of the various subcontractors.
Most exculpatory clauses are written in situations between businesses and consumers or between landlords and tenants. These clauses are, for the most part, legal, but the more important point is whether they are enforceable. That is, can the concept of not being held liable for something be upheld in court if there is a dispute?
In general, a court may decide that a specific exculpatory clause is "unreasonable." Being unreasonable might include:
- Not being specific enough, not stating exactly what types of actions are free from liability. For example, some states such as New York require that a specific statement of what constitutes negligence be included in the agreement.
- Not being clear and conspicuous (in other words, no fine print) so the signer can see the wording clearly and understand it.
- The bargaining power of each party should be relatively equal. Neither party should be coerced into signing the agreement.
Actions outside what is reasonable can also make a hold harmless clause unenforceable. For example, if a skier falls on a ski run, that's a reasonable risk to take. If a ski lift isn't repaired properly, that probably isn't a reasonable risk.
A business can't use a hold harmless clause to avoid all liability for its own actions.
Requirements for Exculpatory Clauses
Each state has laws and legal decisions that limit the use of hold harmless clauses. Most states hold that exculpatory clauses in rental agreements are unenforceable. In other types of contracts, states have a variety of stances on this issue.
In Louisiana and Montana, for instance, state law says that exculpatory clauses are simply unenforceable.
In general, if you're going to include an exculpatory clause in a business agreement, it must contain very specific language, no matter which state you're in.
To be sure the hold harmless clause is seen by the other party, do not place it in fine print. In fact, consider setting it in extra-large, bold type in a conspicuous location.
Before you include a hold harmless clause in an agreement, first check with an attorney in your state. You'll want to make sure you understand the law in your state and what could make the agreement unenforceable.
- An exculpatory clause is language in a contract that attempts to hold one party harmless if something goes wrong.
- Exculpatory clauses do not always hold up in court.
- Laws vary by state as to whether exculpatory clauses are acceptable (and to what degree) in contracts and rental agreements.
- If you'd like to include one, or if you encounter one in a contract, it's best to consult an attorney.