Exculpatory Clause

A statement in a contract that relieves a party of blame or liability for damages

What is an Exculpatory Clause?

An exculpatory clause refers to a statement in a contract that relieves a party of blame or liability for damages. It is written in a contract as a way for the party who issues the clause to avoid legal problems arising from negligence.

 

Exculpatory Clause

 

Often, exculpatory clauses are used when a service provider needs to enter into a service agreement with a customer that puts the customer’s personal belongings or physical well-being at risk.

 

Examples of Exculpatory Clauses

  • A skier who signs an agreement before skiing will agree to a clause that prevents the skiing business from any liability if the skier gets injured.
  • Before riding a zipline, an individual would sign a waiver that relieves the company from liability if an accident were to occur.
  • An individual decides to use the valet parking service and signs a waiver that relieves the valet driver from any liability if the valet driver damages the vehicle.
  • A landlord adds a clause that shifts the liability away from them if there is loss or damage that occurs on the leased property.

 

Exculpatory Clauses in a Mortgage Contract

When signing a mortgage contract, an exculpatory clause can relieve the borrower of the mortgage from personal liability. Therefore, if the borrower defaults on a mortgage, the lender cannot acquire the borrower’s personal possessions as collateral for the mortgage.

The clause restricts the lender to only acquiring the borrower’s property as collateral. The most that the lender can do is to foreclose the property in order to cover the debt.

 

Exculpatory Clauses in a Trust

It is also common for an exculpatory clause to be written in a trust as well. A trust is defined as an agreement between a trustor and a trustee. A trustee is someone that the trustor designates the right to hold the title to assets or property on behalf of a third party, the beneficiary, who will receive the assets/property in the future.

An exculpatory clause in a trust protects the trustee by minimizing their liability if there are losses incurred from the way the trust is handled or if there was a breach of contract. The trustee will not incur liability as long as the damage was not intentional.

 

Exceptions to Exculpatory Clauses

Exculpatory clauses are usually honored and upheld by both parties; however, not all are legally enforceable. The court can determine it is unenforceable by both parties of the contract if the clause is found to be unreasonable. It can be unreasonable if:

  • There is fraud involved in the contract. It must be proven that one party purposefully misleads or deceives the other party about a material fact. The other party believes in the false statement and suffers damages.
  • The clause violates a statute and/or goes against public policy.
  • The clause comprises unclear and ambiguous wording, which leads to issues in interpretation.
  • There is evidence of undue influence, which is when one party has mental domination over another party and robs him/her of free will when signing the contract.
  • There is evidence of duress, which is physical dominance that the stronger party exerts over the weaker party.
  • There is evidence of unconscionability, which is when there is an imbalance of bargaining powers between both parties. The stronger party takes advantage of the weaker party and threatens him/her to enter into the contract.

 

Important Points to Consider

  • Before adding an exculpatory clause into a contract, you should seek legal advice and understand the law in your jurisdiction first.
  • Once you decide to add the clause into a contract, you should make sure that the other party fully understands the clause and its implications before both parties sign the contract.
  • Ensure that the clause includes clear, unambiguous wording that all parties can understand.

 

Related Readings

CFI is the official provider of the global Financial Modeling and Valuation Analyst (FMVA)® certification program, designed to help anyone become a world-class financial analyst. To keep developing your career and building new skills, the additional CFI resources below will be useful for your learning:

  • Habendum Clause
  • Small Business Legal Issues
  • Hammer Clause
  • Legal Counsel

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!