Consider Exculpatory Clauses

The civil litigation system itself represents a significant risk factor and exposure to liability. Therefore, it is important that small business owners employ the various strategies that allow them to control the risk factors in litigation.

For example, an exculpatory clause is a waiver of a right to sue. Clearly, if a small business owner uses such a clause, and, if challenged later, the court deems the clause enforceable, then the small business owner will have completely avoided liability.

Unfortunately, the law is not quite that simple. The courts tend to disfavor exculpatory clauses and, in fact, frequently deem these clauses invalid, as against public policy, especially when consumer contracts are involved. Further, when intentional, reckless or criminal conduct is involved, the clause is almost assuredly invalid.

Nevertheless, in the right context, the courts will enforce the clause. An exculpatory clause is much more likely to be enforced if some combination of the following conditions apply in the case:

• The contract is between two business parties, especially if the parties have approximately equal bargaining power.
• The clause is limited in scope (e.g., to negligent acts) and, by its own terms, does not apply when intentional, reckless or criminal conduct is involved.
• The clause is prominently disclosed in the contract.
• The contract language is negotiated, and not merely a form or "adhesion" contract, which was offered by the party with superior bargaining power (e.g., the commercial party in a consumer contract) on a "take it or leave it" basis.
• The party that agrees to the waiver was not vulnerable due to advanced age, illness, inability to understand the English language, etc.
• The waiver does not involve release of the right to sue for negligence in the rendering of professional services (e.g., a physician, accountant, etc.)
• The context of the waiver makes the waiver fair and reasonable. For example, courts have upheld waivers in consumer contracts that involved diving, skiing and parachuting instruction, and that met the other conditions described above. Similarly, a waiver of a right to sue for injuries that an employee sustains while using a company's fitness equipment probably would be upheld.

While limited in scope, exculpatory clauses are at least worth considering, because, when valid, they do result in a complete elimination of liability. In practice, the validity of an exculpatory clause will depend on the unique circumstances of the particular business. Legal guidance should be sought in determining the extent to which exculpatory clauses can be used in the particular business, and in drafting the language for these clauses.