What Makes an Exculpatory Clause Unenforceable?

by Jeffrey Joyner; Updated September 26, 2017
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Business contracts often include exculpatory clauses that a company hopes will shield it from liability in a lawsuit should its clients incur damages or be injured. Companies offering activities that pose a significant risk of injury, such as skydiving clubs, riding stables, gyms and ski resorts, routinely include these clauses. However, exculpatory clauses are not necessarily a bar to litigation. Although state laws vary, five basic situations may make an exculpatory clause unenforceable.

Ambiguity

An exculpatory clause must clearly state what rights the person agreeing to the contract is waiving. The language must be unambiguous. Furthermore, when the contract is viewed as a whole, the form must be formatted in such a way that the person signing the document can clearly understand the significance of the clause. For example, a Wisconsin court declared an exculpatory clause invalid in part because the clause was included on the same form as the registration for a fitness center, a 5.5-inch square card.

Deliberate Acts

A simple mistake may be insufficient to invalidate an exculpatory clause. Gross negligence, intentional actions or a wanton disregard of the other party's well-being may be sufficient, however. The courts typically define such actions as showing "reckless indifference to the rights of others."

Fraud

Fraud requires the four elements of falsifying a material fact, intent to deceive through the falsification, reliance of a reasonable person on the falsification, and damages suffered by the party because of his reliance on the falsification. If the company enters into a contract with no intention of fulfilling the contract, it may be guilty of breaching the contract, but such acts do not necessarily constitute fraud for invalidating an exculpatory clause.

Contrary to Public Interest

The courts may apply a "public policy" test when deciding whether an exculpatory clause is enforceable. The test determines whether one party held all or most of the bargaining power and whether the service offered under the contract is essential or a public service. If the person agreeing to the company's terms could not obtain the services elsewhere and could not obtain the company's services without agreeing to the exculpatory clause, there is a disparity between the bargaining powers of the two parties. Companies providing essential or public services, such as utility companies or hospitals, may have unenforceable exculpatory clauses.

Complete Absolution of Liability

A clause that states that a company cannot be held liable for any damages or injuries without limitation may be unenforceable. State courts vary in their interpretation of such clauses. Even the federal courts cannot agree. Courts in the Fifth and Ninth Circuits allow such clauses if they are not ambiguous, but the courts in the First and 11th Circuits have repeatedly ruled that clauses offering one party complete absolution are invalid.

About the Author

Jeffrey Joyner has had numerous articles published on the Internet covering a wide range of topics. He studied electrical engineering after a tour of duty in the military, then became a freelance computer programmer for several years before settling on a career as a writer.

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