In general, an exculpatory clause (i.e., a limitation of liability clause) that eliminates a party’s liability for damages caused by a breach of contract is valid and enforceable. For example, in a construction contract, it may be provided that the contractor will not be liable for damage caused by delays of third parties (subcontractors, for example).
There is a trend in the law to invalidate an exculpatory clause if:
- The parties have unequal bargaining power and the clause is unfair;
- The clause eliminates liability for negligence, particularly if a negligent party is a public utility or the contract involves a fundamental good or service; or
- The exculpatory clause was obtained by fraud or other wrongful conduct.
Exculpatory clauses are typically upheld if agreed to by businesses with equal bargaining power.
A common type of exculpatory clause involves limiting liability on a loan to the collateral. In other words, if there is a default, the contract says that the damages will be limited to execution on the collateral (i.e., foreclosure on the property covered by the mortgage or deed of trust).
What happens if a limitation of remedies clause or a limitation of liability clause is not valid? In this situation, the plaintiff may sue pursuant to any other valid remedy, such as actual damages.