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What is an Exculpatory Clause?

Foram Mehta Aug 24, 2020
Exculpatory clause is an important legal term used by most of the organizations and individual service providers today. Read more to find out about its varied applications, enforcement and un-enforcement.
Exculpatory clause is a legal note in which the writing authority limits its liability by transferring the risk on someone else. This is in the form of a disclaimer and is usually used as a shield against an indemnity.
This is usually used as a way of maneuvering the risk associated in business transactions. The associated risk could be in the form of a personal injury or real estate, or construction and commercial disputes.
The exculpatory clause is a common feature in most of the contractual agreements. By adding an exculpatory clause in the form of a disclaimer, an individual or an organization tries to let the other party know about the pitfalls or the risks he can face while transacting.
Lawyers Example: The exculpatory clause is most commonly used by lawyers when he makes a written agreement to represent a client in the court. He does this as the outcome of the case could be anything depending on what the other party presents to the court.
In case the attorney loses the case, the exculpatory clause helps him in still receiving fees for his service. The client who lost the case, now cannot challenge the lawyer's advice and claim his fees back.
Banking Example: Another common example where exculpatory clause is used is in case of a loan agreement. When an individual has given a collateral against the loan taken by him as a security, the bank maintains a clause in the agreement which states that if the borrower defaults in repaying the loan after a particular period, then his property (collateral) will be executed to make up for the losses.
There are many cases based on the exculpatory clauses that the court receives for settlement. In all the cases the court will look at the following points.
  • The relationship between both the parties.
  • Which party's attorney drafted the trust.
  • How did the trustee come up with adding the exculpatory clause in the agreement.
  • Rationality of the exculpatory clause.
  • After figuring out the above points the court can invalidate the exculpatory clause on the following grounds.

The Exculpatory Clause can be Invalidated if...

Unjust Clause

If the clause is not fair and just.

Prejudiced Clause

If the parties involved in the clause are not equally negotiable.
Example: If an employer has made an exculpatory clause when in a contract with an illiterate individual.

Gross Negligence

If the clause rules out the liability of negligence in the clause.

Fraud or Dishonesty

If the exculpatory clause was incorporated and agreed to by using wrong means (fraud).

Willful Default

If the third party after being protected by the exculpatory clause, intentionally damages or harms the term mentioned in the clause.
Let's look at an example where in the exculpatory clause will be unenforceable.

Example of Unenforceable Exculpatory Clause

A man gives his car for repairs to a garage. After the repairs were done and when the owner had paid for the repairs and had taken off from the garage, suddenly his car stopped working in the middle of the highway and ended up in an accident. The owner of the vehicle goes to the garage asking him for the reason and claiming for the losses.
However, the garage refutes the claim by showing him the 'Exculpatory Clause' mentioned in their repair agreement. The owner later figures out that the oil used by the garage was wrong, which led to choking the engine making the car dysfunctional.
This mistake occurred because the guy who repaired his car was not a qualified technician. This case went to the court and they found out that the damage to the car was not because of the owner's negligence but because of the negligence from the garage side. The court then unenforced the 'Exculpatory Clause' and the garage was made liable to pay for the damage to the car.
Organizations and individuals both face the risk of receiving a claim for the losses that have been incurred without really being at fault. In order to indemnify individuals and organizations from fraudulent and unjust claims made by the third parties, they can use the exculpatory clause in their contracts and agreements.
In case where the risk is equal to both the parties, the hold harmless clause could be adapted. However, one should understand his and others' liability in case of breach of the agreement. And great care should be taken while drafting a contract or an agreement.