What Makes an Exculpatory Clause Unenforceable?

Sometimes, a contract will include a clause that purports to shield a business from legal liability in the event a client or customer suffers damages or injuries. These exculpatory clauses are often included in agreements drafted by businesses that offer potentially dangerous activities, such as skydiving clubs, riding stables, gyms and ski resorts. However, exculpatory provisions are not always enforced uniformly, exactly as they are written. Although state laws vary, four basic situations may make an exculpatory agreement unenforceable.

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Exculpatory clauses may be found unenforceable due to a number of reasons, including ambiguity, fraud, willful or deliberate conduct, or public policy.

An exculpatory clause is a portion of a contract that states one party will not be held liable for any damages or losses incurred by the other party. Typically, these clauses are contained in form agreements that consumers or clients sign before doing business with a particular company. Commonly encountered in recreational or activity-based businesses, such as riding stables, ski resorts, zipline and whitewater rafting facilities, exculpatory agreements are generally contained in registration or waiver forms. Clients or customers must sign these forms before the business will allow them to participate in the activity.

Historically, exculpatory provisions were frowned upon in court. Since such clauses go against the traditional rules of common law, where each person or entity is responsible for the consequences of their own actions or inaction, some courts were reluctant to enforce these clauses and to allow parties to escape liability for their wrongful conduct.

This trend has somewhat reversed in American courts. While each state has its own laws and rules about enforceability of exculpatory provisions, courts tend to uphold them in most cases unless a specific exception applies in a particular case. Those exceptions tend to fall into four major categories: ambiguity, deliberate acts, fraud and violation of public policy.

An exculpatory clause must precisely state what rights the person agreeing to the contract is waiving. The language in the exculpatory clause must be clear and unambiguous. Courts will examine the format of the contract as well as the language used in it.

Viewing the contract as a whole, the document must also be formatted in such a way that the client or customer – the person signing the document – can clearly understand its significance, as well as the meaning of the clause. In other words, the clause cannot be hidden in fine print that is easily scanned over or missed by the human eye.

Courts may also hold an exculpatory clause unenforceable based on the nature of the action that caused the injury. For example, if a business employee makes a simple mistake, the court may be more willing to uphold and apply the exculpatory clause. In that case, the business would not be held liable for any damages or losses resulting from that mistake.

On the other hand, acts that qualify as gross negligence, deliberate or willful acts, or that result from a wanton disregard of the other party's well-being may persuade the court to invalidate the exculpatory clause. The courts typically define such actions as showing reckless indifference to the rights of others.

When a business or its employees set out to commit fraud, a court will most likely invalidate any exculpatory clause. However, a finding of fraud requires four factors, all of which must be present in the case:

1. The business or employee must have falsified a fact that’s material to the transaction in question. 
   
2. The business must have intended to deceive the client or customer by stating that false fact. 
   
3. The client must have reasonably relied on that false statement. 
   
4. The client must have suffered a loss or damages as a result of that reliance.
   

Not all acts of deception qualify as fraudulent acts sufficient to invalidate the exculpatory clause. For example, if the company enters into a contract with no intention of fulfilling the contract, it may be guilty of breaching the contract, but not necessarily guilty of a fraudulent act that would invalidate an exculpatory clause.

Some courts analyze contractual provisions under a public policy framework. In other words, if the court determines that a specific clause is against public policy, the court can decline to enforce that clause. In such a case, judges usually consider the clause to be invisible; it is simply excised from the document, and the case proceeds as if the clause never existed.

A public policy analysis of an exculpatory clause looks at whether, and to what extent, a party to the contract had all or most of the power to negotiate or dictate contractual terms to the other party. In most consumer activity agreements, the client or customer is expected to sign an agreement prepared by the business. The person signing the contract is not usually given an opportunity to change or alter the agreement through negotiation. Their choices are simple: Sign and participate, or don’t sign and leave.

When this is the case, and the person in question could not obtain similar services by some other company, the pressure to sign the contract with the exculpatory clause is even greater. In such circumstances, there is a significant disparity in the bargaining powers of the parties. As a result, the court may deem the clause to be unenforceable. This is especially true where the services being provided are considered essential, such as public utilities and medical care.