Exculpatory Clause

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.

Inside Exculpatory Clause