1. Limitation Clause
2. Indemnity Clause
3. Exclusion Clause
4. Exemption Clause Enforcement

An exemption clause is a stipulation in a contractual agreement between two parties that limits the liability of one party in the case of breach of contract or contract default. There are a few different types of exemption clauses, but the three most common are:

  • Limitation clauses
  • Indemnity clauses
  • Exclusion clauses

Exemption clauses can be more in favor of one party than the other, so it's always important to be aware of these clauses, review them carefully, and negotiate if necessary.

Limitation Clause

Courts tend to be more accepting of limitation clauses, also called limited liability clauses. These can be less drastic than other exemption clause types, which is why courts seem to be more comfortable enforcing them. Limitation clauses don't completely exclude one party from any kind of liability, but they ease the blow a bit.

If a company includes a limitation clause in a contract, for example, it might state that if an individual is injured under contract, they will pay as much as $500 to cover damages. The clause will likely be worded negatively, so it would probably say that the company will not pay any more than $500 to cover damages.

Limitation clauses or limited liability clauses limit what an individual or company can be held responsible for, while still requiring a bit of liability so that the other party is afforded some damages.

Indemnity Clause

Of the three different types of exemption clauses, indemnity clauses are the most complicated. If two parties enter into a contract with an indemnity clause, one party is held liable for all losses that the other party might cause. This is called indemnification, one party protects or defends the other if they are sued.

Indemnity clauses work well in sales agreements. For instance, if one company sells a software design to another, they might include an indemnity clause in the contract in case an outside party tries to sue on grounds of intellectual property piracy. All costs of the lawsuit, including damages, would be completely covered by the company that originally created and sold the software design, even though the other company owned it.

Exclusion Clause

Exclusion clauses are frequently found under the terms and conditions part of a contract. Pick up the owner's manual for just about any product and you'll find a terms and conditions section. Most companies include an exclusion clause that says something like, "(company name) is not liable for any damages if our products are used unlawfully or outside of their intended use."

Because companies cannot control exactly how their products will be use by consumers, exclusion clauses protect them from being sued for things they couldn't help. For example, a company that makes rat poison cannot be sued if a person ingests it and dies because the product is not meant to be ingested.

In such cases, exclusion clauses keep the company protected from liability for any and all damages in a certain type of breach of contract. Other times, exclusion clauses can simply limit how much a party is held liable for to help lower the amount of risk they take on in forming a contract.

One party may draft a contract with an exclusion clause that states that they may only be held liable for as much as $10,000 in a specific event. This way, if something goes wrong, one party can't take the other for everything they're worth, but the defaulting party is still held responsible for their actions.

Exemption Clause Enforcement

Exemption clauses can be fairly simple to draft into a contract, but they are sometimes difficult to enforce with the court.

In order to be enforceable, the drafting party must be sure that the exemption clause:

  • Is obvious and clearly stated in the contract
  • Doesn't exploit a weakness in the other party (like a massive company taking advantage of a smaller company's lack of resources)
  • Allows for opportunity to negotiate the clause and is not adhesive

Courts tend to be skeptical of exclusion clauses that totally exclude one party from any liability at all, especially if these total exclusion clauses aren't written properly. Taking a party to court over an exclusion clause is still very expensive and time consuming, even if the case goes in your favor, so be careful what you sign and read terms and conditions carefully.

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