Exculpatory Clause

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What is an Exculpatory Clause?

An exculpatory clause is a contract provision in a legal contract that relieves a party of liability of any damages that may occur during the execution of the contract. For example, these clauses are often included in contracts when a service provider encounters a customer’s personal property or is responsible for a customer’s wellbeing.

Typically, exculpatory clauses are written and issued by the party seeking to relieve blame. For this reason, courts generally look unfavorably towards exculpatory clauses. This is because it is a way for a party to shirk responsibility for damages.

Some common examples of activities that may use exculpatory clauses include:

Purpose of an Exculpatory Clause

The primary purpose of an exculpatory clause is to relieve one party of liability in the event of an accident or damage during the execution of a contract.

For example, suppose you are on vacation and scuba diving on a charter boat. In that case, you will probably sign an exculpatory clause. If you are injured while on the boat or while diving, in theory, you will not be able to take legal action against the charter company for damages you suffered.

Difference Between Exculpation and Indemnification

Exculpation and indemnification are very similar. Both clauses in a contract seek to remove liability from one party. However, the main difference is that while an exculpatory clause seeks to deny a party the right to recover damages, an indemnification clause attempts to shift liability to another party.

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Are Exculpatory Clauses Enforceable?

The enforcement of exculpatory clauses is controversial. As a result, it isn’t uncommon for parties to challenge exculpatory clauses in court.

Generally, exculpatory clauses are enforceable if reasonable and meet specific criteria. However, several factors come into play when a court considers an exculpatory clause, including:

It is important to remember that an exculpatory clause cannot excuse liability from harm when the damages occurred due to intentional or reckless behavior. This includes deliberate acts and gross negligence.

There are several other instances when an exculpatory clause would be deemed unenforceable by a court. These reasons include:

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Exculpatory Clause in a Mortgage

Mortgage contracts often contain exculpatory clauses to relieve a borrower from personal liability. If the borrower defaults on the mortgage, the lender cannot acquire the borrower’s personal property as collateral, but only the property associated with the mortgage. This is done through a foreclosure proceeding.

Exculpatory Clause in a Construction Contract

It is common to see exculpatory clauses used in a construction contract. The clause would be used to limit the construction company’s risk and liability while completing a project.

For example, suppose a construction company is building a house. In that case, they may include an exculpatory clause in their contract that relieves them from responsibility for any damage while working.

As with all exculpatory clauses, if any damages arise from gross negligence or deliberate acts, the exculpatory clause does not apply.

Exculpatory Clause in a Loan Agreement

Much like a mortgage, other loan agreements can also contain exculpatory clauses. Most loan agreements will include provisions that state:

  1. The borrower has no personal liability for the loan
  2. The borrower’s liability is limited to the value of the loan

This clause protects a borrower from a lender going after their personal property. Suppose the loan is for property, like a vehicle. The lender can only repossess the vehicle. In that case, the borrower cannot sue for a deficiency judgment.

Exculpatory clauses in loans heavily favor the borrower. For this reason, many lenders do not like to negotiate exculpatory clauses in their agreements.

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