Exculpatory Clause

Updated on May 14, 2024
Article byPriya Choubey
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Exculpatory Clause?

An exculpatory clause or disclaimer of warranties clause refers to a standard waiver provision of a contract where one party agrees not to hold the other party liable for any future negligence. Thus, during the fulfillment of the contract, if the latter unintentionally causes any damage or loss, they hold no responsibility.

Exculpatory Clause Meaning

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Such a clause is often put forth in the service contracts by the party or provider, which is at risk of being liable for any damage caused to the health, valuable possessions, or personal property of the customer while rendering the services. However, the exculpatory clause stands invalid if the issuer or the service provider deliberately harms the customer.

Key Takeaways

  • An exculpatory or disclaimer of warranties clause releases a party from the liability for damage that may occur to the other party due to the former’s future negligence.
  • Such a provision is stated by the party seeking a waiver from paying off the other party’s damage or loss while the execution of a contract.
  • The court declares an exculpatory clause void if it finds it excessive or unreasonable.
  • It is different from the indemnity clause that secures a party from the waiver of loss incurred by the other party due to the actions of a third party.

Exculpatory Clause Explained

An exculpatory clause always favors the issuer as it shields them from legal consequences in case of future damage. However, the court doesn’t permit the drawer to waive off all the liabilities of a contract since it will make such a dealing ineffective and harmful to the other party or drawee.

A court deems an exculpatory clause to be enforceable if it has the following traits:

  • Unambiguous with clear and specific terms used for stating the liabilities of the parties.
  • Highlighted with capital letters, bold language, and different or catchy colors.
  • Doesn’t confuse the reader and is written in understandable and simple language.

An exculpatory clause stands void or declared unenforceable by the court in the following conditions:

  1. Fraud: When a party deceives the other party with false material facts, the latter faces loss or damage.
  2. Ambiguity: When the parties’ rights are not stated clearly in the clause, have more than one interpretation or the language used is deceptive.
  3. Contrary to Public Interest: When the clause in the public service contract fails the public policy test and doesn’t serve the public interest.
  4. Deliberate Acts: If the issuer makes a mistake in declaring the exculpatory clause intentionally or because of gross negligence.
  5. Total Absolution of Liability: When the court declares a definite clause whereby the company cannot be held liable for any loss or damage, there is no need for an exculpatory provision.

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Examples

Knowingly or unknowingly, we agree to various exculpatory clauses every day. Some of its common examples are:

Example #1

Suppose Adrian gave his suit for dry cleaning in Daisy Fresh Laundry; the receipt clearly states, “Daisy Fresh Laundry will not be liable for any damage caused to the customer’s clothes during dry cleaning.” Thus, Adrian has given his suit for dry cleaning at his own risk.

Example #2

Aella went to the mall to shop. Inside the mall were boarded in every shop, reading the exculpatory clause “Take care of your belongings. The mall and shop owners will not be responsible for any lost or stolen item”. Aella forgot her wallet in a shop while shopping. When she realized and rushed back to the mall, she got her wallet, but no money was inside it. Now, she cannot claim her loss from the mall or shop owner.

Example #3

Aron gave their laptop for repair at RST Systems and received a receipt that read, “RST Systems is not responsible for any data loss.” The laptop needed to be formatted during the repair process, but the repair shop didn’t intimate or take permission from Aron before taking such a step. Due to this, Aron lost his data and credentials. Although the exculpatory clause was clear, Aron can challenge this clause in court and claim damage from RST Systems.

Example #4

When we book flight tickets, the airline states that it won’t be responsible for losing valuable items in the checked-in baggage. However, it can be held liable for lost, damaged, or delayed baggage.

Exculpatory Clause vs Indemnity Clause

Both exculpation and indemnification are the provisions for releasing one party from liability. However, some of the major differences between the two are discussed below:

BasisExculpatory ClauseIndemnity Clause
MeaningIt is a provision that waives the issuer from the liability of future negligence.It is a provision where one party reimburses the other party for the damages and recovers the same from a third party.
PurposeProtects the issuer from the liability of loss or damage caused to the other party during the execution of a contractSaves a party from the liability arising from the loss or damage caused to the other party due to the third-party actions
Letter of IndemnityNo such guarantee of abiding by the contractual termsSome indemnity clauses are supported through the letter of indemnity, guaranteeing the parties’ fulfillment of the contract terms.
NegotiationThe issuer generally prepares it, and both parties accept it.Such an agreement is negotiable by both parties.
EnforceabilityNot all contracts with this clause are legally enforceable.Almost all indemnification contracts are enforceable by law.
ExampleValet parking receiptInsurance contract

Frequently Asked Questions (FAQs)

What does the exculpatory clause mean in real estate?

In real estate, it is a provision in a lease or loan contract or document whereby one party states the limited liability of the other party. For example, in a lease agreement, the landlord limits their liability to their interest in the property.

Is the exculpatory clause valid?

In common practice, the exculpatory provision is valid and usually respected by both parties to the contract. However, it is mostly in favor of the issuer or drawer, I.e., the party who averts from the waiver of the other party’s damage. Therefore, it is termed invalid only by the court under certain conditions.

Why are exculpatory clauses important?

An exculpatory clause protects a party from being held responsible for the loss or damage of something when it is, in fact, the fault of the party who availed the product or service. Thus, the issuer can relieve themselves of problems arising from consumers’ negligence.

This article has been a guide to what is Exculpatory Clause. We explain the topic in detail, including its examples and a comparison with the indemnity clause. You may also find some useful articles here –

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