What Is an Exculpatory Clause in a Business Contract?
An exculpatory clause is specific language included in contracts and agreements stating that one of the parties is to be relieved of blame or liability. The word exculpatory come from the same root as the word "culpable," meaning "to blame," and the phrase mea culpa (literally, my fault), but in this case, it means "not my fault." A common name for this clause is a hold harmless clause or agreement.
Exculpatory clauses come in two different types:
A contract that states 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 made by the tenant.
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 this 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 to a
Examples of Exculpatory Clauses
Exculpatory clauses are often found in agreements between a business and consumer when the activity has some danger, as in a fitness center or ski resort. The business wants the consumer to understand the risk involved, and to avoid lawsuits, so it includes a hold harmless clause in its agreement.
In service and repair business there may be the possibility of damage, as 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 dry cleaner may agree to clean a leather skirt but it will probably ask the customer to sign a hold harmless agreement to emphasize the higher risk of damage to the leather. 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 actions of the various subcontractors.
Exculpatory Clauses in Court
Most exculpatory clauses are written in situations between businesses and consumers or 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 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 may not be reasonable. A business can't use a hold harmless clause to avoid all liability for its own actions.
California law states it this way:
all contracts which have for their object, either directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against public policy.
Exculpatory Clauses and State Laws
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.
Including Exculpatory Clauses in Business Contracts
Before you include a hold harmless clause in an agreement, first check with an attorney in your state. Make sure you understand the law in your state and what could make the agreement unenforceable. In the agreement itself make sure the wording of the clause is clear to the reader. That includes making sure it's not in fine print, but that it's clearly visible to the person signing the agreement.
This issue is complicated and every situation is unique. This article is not intended to be tax or legal advice. Talk to an attorney before you attempt to put exculpatory language into a business contract or agreement.