Exculpatory Clause: What it Is and Why Your Business Needs It

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Whether you’re a multi-national corporation or a mom-and-pop shop, you’ll want to have an exculpatory clause in any of your contracts and agreements with clients. At its most basic, an exculpatory clause is a piece of legalese that releases one party (in this case, you and your company) in a contract from blame or liability.

Of course, it doesn’t always hold up in court, and when not written correctly, or displayed properly for that matter, exculpatory clauses can actually cause you more harm than good. However, done correctly, displayed correctly, and written correctly, an exculpatory clause will help your company defend itself from predatory scams and assures your clients that your company holds itself to extremely high standards.

What is Exculpatory Clause?

Also known as a “hold harmless clause”, an exculpatory clause is a portion of a written contract wherein one party will be held blameless (or, be held harmless) should anything regarding the two party’s agreement go awry. It’s a great way to reduce excess costs for small-businesses as well.

There are various types of exculpatory clauses, but the two most common ones include:

  • An exculpatory clause that holds that one party will not be held liable for any wrongdoing by the other party.
  • An exculpatory clause that holds that one party will not be held liable for any wrongdoing by that party itself.

There are two reasons these are the two most common exculpatory clauses: the former is used most commonly when one party seeks to be protected from damage or loss because of the other party. The best example would be property leases, which seek to hold no liability towards the landlord because of damages caused by a tenant.

Meanwhile, the latter type of exculpatory clause allows for companies to be held blameless should something outside of their control happens during the contract’s run. For example, an exculpatory clause might be added in the receipt of a dry cleaner. This clause will attempt to hold the dry cleaner not liable for any damage during the dry-cleaning process.

How Exculpatory Clause Works

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Whatever the type of exculpatory clause, it’s almost always used during an agreement between business and consumer when the product, service, or activity involved between the two involves a level of risk and/or danger. Despite looking and sounding like it’s a piece of legal language designed to protect businesses, it actually also protects customers: a well-written exculpatory clause allows the consumer to realize the full extent of what they’re getting into, and in a way, improving the customer experience in the long run.

Think of it as a warning, of sorts: what you’ll be engaging in can be dangerous, and while the company has done its best to keep you safe, it can’t account for everything, so you need to watch your back.

Exculpatory clauses can be added to all manner of contracts, but they’re usually used in industries that involve a lot of moving parts, both physically and metaphorically, and a lot of opportunities for accidents to strike. Take, for example, the automotive repair industry: while professional mechanics can do everything humanly possible to minimize the risk of damage to a car they’re working on, they can’t ensure a completely risk-free repair: eventually, something might go wrong, and unfortunately, accidents like that shouldn’t be on the shoulders of the people trying to help.

Having an exculpatory clause is a great way to sustain a short-term rental business, as it allows you to focus on improving services while being protected from costly legal proceedings or replacing customer goods.

It can also be used in projects that require multiple companies to be moving in sync like, for example, the construction industry. An exculpatory clause might be added to protect the main contractor from any accidents or abuses caused or inflicted by a subcontractor.

Exculpatory Clause: Can it be Enforced?

While adding exculpatory clauses are perfectly legal, enforcing them can be a bit tricky and can be highly dependent on local state, and county laws. Yes, companies can say that they should not be held accountable, but will a court in your area actually uphold that should a dispute arise?

As with any other piece of legal language, the question of whether or not an exculpatory clause will be upheld is dependent on how ‘reasonable’ the clause is in the first place. Courts will determine whether or not a clause is unreasonable using a few conditions:

An exculpatory clause can be called unreasonable by a court if it isn’t specific enough

Exculpatory clauses that don’t specify the exact actions that the company should be held free from liability might not be upheld in courts. New York, for example, requires that exculpatory clauses need to be exact about what constitutes negligence.

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An exculpatory clause can be called unreasonable by a court if it is unclear

An exculpatory clause can be held unreasonable if its wording is confusing or if it isn’t printed out in a clear manner. While the term “fine print” exists for a reason, this “fine print” still needs to be legible, still needs to be understandable, and still needs to be as conspicuous as possible. What the parameters are for legibility and conspicuousness will, ultimately, be decided by a court of law.

An exculpatory clause can be called unreasonable by a court if the parties have unequal bargaining power

As with most contracts, neither party should be coerced into signing any kind of legal agreement. This protects relatively “weaker” parties from being taken advantage of or put at a disadvantage by “stronger” parties.

If a court determines that an exculpatory clause is unreasonable, then it will move to make that particular exculpatory clause unenforceable, thus rendering it moot. Remember: exculpatory clauses are used to protect businesses from force majeure or acts-of-god; it is not meant to excuse a company from all liability.

A well-written and conspicuous exculpatory clause, one that clearly explains the risks involved in the agreement between client and company, is a great way to earn customer trust and loyalty, because it shows you actually care about their well-being. Anything short of this, however, and it’ll be seen as a weasly and cowardly act by a predatory business. So, be forewarned.

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