An exculpatory clause is a provision in a contract that reflects a party intentionally giving up a right, claim, or privilege that he or she may otherwise be entitled to have. Ordinarily, the relinquished right is the ability to sue the other party for damages if a certain event occurs. For instance, if someone is going skydiving, he or she may sign a contract relieving the company hosting the dive from any liability if the trip doesn’t go as planned. To be enforceable, an exculpatory clause usually needs to be in writing and signed by the impacted parties.
As a general rule, a court will enforce an exculpatory clause as long as it is reasonable. Clauses that have unconscionable terms, however, may be struck down. In addition, a court typically won't enforce a clause that relieves a party from intentionally or recklessly causing harm to another. Other factors a court frequently looks at in determining whether a clause is valid include the relative bargaining positions of the parties, whether the clause was clearly disclosed, and the specificity of the clause.
Exculpatory clauses are often inserted into various types of real estate contracts. In a rental agreement, for example, a landlord may include an exculpatory clause that relieves him or her from responsibility for any personal injuries suffered by tenants or their guests while on the property. The clause may also excuse the landlord from any liability for damage to the tenants’ personal property, even if the damage resulted from something like pipes freezing, a fire, or a break-in.
A mortgage borrower may wish to include an exculpatory clause in a mortgage contract. This type of clause ordinarily relieves the borrower from personal liability if the borrower defaults in payment. If the lending company agrees to the clause, a defaulting borrower will be required to surrender the property to the lender as payment for the outstanding balance on the loan. While the lending company is entitled to the property, it generally isn't entitled to take anything else from the borrower.
The creator of a trust sometimes includes an exculpatory clause in a trust agreement. In this context, the clause is generally designed to protect the trustee. If enforced, it will absolve the trustee of liability arising out of any acts the trustee performs in good faith on behalf of the trust beneficiaries. Trustees who act in bad faith or who are grossly negligent may not enjoy protection under the clause.