Key Takeaways

  • Contract exclusions limit or eliminate a party’s liability in defined situations, often used in insurance, construction, and product terms.
  • These clauses must be clearly written, reasonable in scope, and located in expected areas of a contract to be enforceable.
  • Courts are cautious about upholding total exclusions, especially if language is vague or hidden in fine print.
  • Limitation clauses, a related tool, place a monetary or temporal cap on liability rather than removing it entirely.
  • Best practices include signposting exclusions, placing them prominently, and ensuring all parties acknowledge them.

Contract exclusions are specific conditions, situations, and circumstances that may or may not be explained in the terms of the contract. Both insurance policies and construction contracts tend to contain exclusions.

In monetary terms, an exclusion could be an asset or a source of income that one does not have to compute as gross income.

Where Are Exclusion Clauses Found?

An exclusion clause can be found in a contract. It is sometimes used as a term in a notice. When it is used in either of these documents, it will prevent or limit a liability or legal obligation in certain circumstances that may surface. The exact exclusion needs to be extensively detailed so the parties involved can understand how it impacts them.

What Is the Purpose of Contract Exclusions?

Exclusions are terms within the contract that intentionally limit or eliminate altogether the degree of coverage provided by the agreement.

In the event that a contract is breached, an exclusion clause may not always exclude parties from all responsibility, but it will help to protect them in specific situations as set forth in the agreement.

Most products have an exclusion or limitation clause when stating the terms and conditions for using the product. It will normally state that the company is not responsible for the use of their product if the product is used in ways it was not intended to be used.

Total exclusion of liability is the benefits reaped from an exclusion clause.

Judicial Interpretation of Exclusion Clauses

Courts scrutinize exclusion clauses carefully, especially when one party alleges unfair surprise or ambiguity. A few guiding doctrines include:

  • Contra Proferentem Rule: Any ambiguity in a contract term is interpreted against the drafter.
  • Main Purpose Rule: An exclusion clause cannot defeat the primary purpose of the agreement.
  • Unconscionability: Courts may strike down clauses deemed excessively one-sided or hidden in fine print.

How Should Contract Exclusions Be Conveyed?

In order for an exclusion clause to carry out its purpose, it must be clear and practical. Total exclusion clauses are more difficult to enforce, and if not written correctly, courts will not enforce them.

A limitation clause, or a limited liability clause, is much more likely to be enforced in court if it is accurately put forth in the written agreement. In the event of a lawsuit or claim, the clause will limit the amount of damages to which a company can be subjected to.

One example of a liability clause would be a statement in a contract that specifies the company will be liable to pay up to a specific amount of money in the event of an injury. The clause would limit the amount of liability damages, and it can place liability on the other party as well.

Tips for Drafting Enforceable Exclusion Clauses

To increase the enforceability of a contract exclusion, follow these best practices:

  1. Be Clear and Specific: Avoid vague or overly broad language.
  2. Use Reasonable Limits: Courts are more likely to enforce clauses that are balanced and fair.
  3. Properly Structure the Clause: Include the exclusion in its own section with an appropriate heading, such as "Exclusions and Limitations."
  4. Signpost Clearly: Use visible font size and formatting, especially for harsh or unusual exclusions.
  5. Ensure Acknowledgment: Incorporate the clause into the agreement and have parties confirm receipt and understanding.

What Are Indemnity Clauses?

Indemnity clauses are somewhat complex due to the complex language in them. The purpose of the indemnity clause is to transfer risk between two parties to prevent or compensate for the loss in specified circumstances. Unlike exclusion clauses, an indemnity clause allows a party to protect and defend the other party in the case of a lawsuit.

For example, let's pretend company A develops and sells a product to company B. In time, company C comes along and says company B copied their product. Company A would then be liable for any fees, damages, or court costs if an indemnity clause was included in the original contract between company A and B.

What Are Different Types of Contract Exclusion Clauses?

The term catastrophic refers to risk, such as war, that are uninsurable due to the fact that a large number of policyholders would be affected at a particular time if the risk were to occur. If you want to be covered in this type of instance, you will need a contract that provides catastrophic coverage.

It is not uncommon for policies to exclude certain risks that are covered elsewhere. One example of this would be auto liability claims. Such claims are covered by commercial auto policies, so they are excluded under general liability policies.

Damages that can be easily prevented or easily controlled are often excluded from coverage. These are considered to be preventable and controllable by the policyholder. For example, commercial property policies often exclude such damages that are a result of the following:

  • Snow,
  • Rain,
  • Sleet,
  • Ice.

Wear and tear is a naturally occurring event and is considered a maintenance issue. Damages from wear and tear are excluded in the majority of insurance policies. In most instances, proper maintenance can reduce the risk of damages. For example, if the owner of a vehicle rotates the tires as recommended, it will reduce the wear and tear and extend the life of the tire. Maintenance issues are another common exclusion in insurance policies.

Limitation of Liability vs. Contract Exclusions

While contract exclusions remove responsibility entirely for certain issues, limitation of liability clauses set boundaries on the extent of responsibility. The differences include:

  • Exclusion Clause: States that one party will not be liable at all for specific damages or events.
  • Limitation Clause: Sets a monetary or procedural limit on what the party may be liable for (e.g., damages not exceeding $500 or only claims made within 12 months).

Limitation clauses are often more enforceable in court as they represent a compromise rather than a full shield from liability.

Common Legal Examples of Contract Exclusions

Contract exclusions frequently appear in commercial contracts, service agreements, and software licenses. Common examples include:

  • Product Misuse: A supplier may exclude liability for damages resulting from the customer's failure to follow usage instructions or for attempts to reverse engineer software.
  • Environmental Events: Clauses often exclude damages caused by natural disasters like floods or earthquakes.
  • Wear and Tear: Insurance and leasing agreements frequently exclude liability for damage from normal use.
  • Indirect or Consequential Loss: These exclusions bar claims for losses that are not a direct result of a breach, such as lost profits or reputational damage.
  • Time-Limited Claims: Some contracts exclude liability unless claims are made within a set timeframe, often 12 to 24 months post-performance.

Frequently Asked Questions

  1. What makes a contract exclusion clause legally valid?
    It must be clearly written, reasonable in scope, properly located in the agreement, and acknowledged by both parties.
  2. Can a contract exclude all liability?
    While possible, total exclusions are scrutinized by courts and often unenforceable if considered unfair or ambiguous.
  3. Is a limitation clause the same as an exclusion clause?
    No. A limitation clause restricts liability to a set amount or timeframe, while an exclusion clause removes liability entirely for certain scenarios.
  4. Where should exclusion clauses be placed in a contract?
    In a clearly labeled section, often titled “Limitation of Liability” or “Exclusions,” where parties would logically look for risk-related terms.
  5. How can I improve the enforceability of my exclusion clauses?
    Use plain language, highlight the clause clearly, and ensure the counterparty acknowledges the terms during contract execution.

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