Types of Exemption Clauses: Everything You Need to Know
Types of exemption clauses include exclusion clauses, indemnity clauses and limitation clauses. They're used to protect one from injury or breach of contract.3 min read
Types of exemption clauses include exclusion clauses, indemnity clauses, and limitation clauses. Each of these clauses is used in contracts to help protect one of the parties from liabilities either for injury or breach of contract.
Contract Law Basics
In order for a contract to be enforceable by law, it must contain some basic elements. First and foremost, every contract must have a clear offer and acceptance of that offer, which forms the agreement. This foundational piece of a contract can be written, verbal, or even through an action. When a parking lot has a sign that says, "Park at your own risk" and you perform the action of parking there, you have entered into a contract with the owners of that lot and have accepted their terms.
The party accepting an offer of the agreement must be aware of the contract. If a $350 television is accidentally advertised for $150 and an individual makes a bid on that offer, they have entered into a contract with the seller, or offeror. Mistakes in the actual bid do not void the contract. Once an offer is made and then accepted, the two parties involved have formed a legally-binding contract.
The two main categories of contracts are:
- Joint -- based on contractual assurance on the parts of either party
- Independent -- based on the contractual assurance of one party exchanged for a promised action of the other
Joint contracts must have assurances exchanged in order to be enforced. For instance, when a seller and consumer enter into a contract, one assures delivery of a product as the other assures payment of an amount agreed upon.
Independent contracts only have assurance given by one of the two parties, so only one side is required to do something. A good example of this type of contract is the case of lost and found rewards.
If a person has lost their dog and puts signs up throughout a neighborhood promising payment of $100 to anyone who finds their dog, they are assuring payment for a particular action. Everyone who reads the sign is not obligated to find or even look for the dog, but if someone does find the dog, the person who made the signs is legally obligated to make that payment.
Most contracts use clauses in addition to their basic agreement including these types:
- Integration clauses
- Exclusion clauses (also called exemption clauses)
- Acceleration clauses
- Power of sale clauses
Specific aspects of an agreement include contract clauses which define their terms and conditions. Contract clauses are typically favoring toward one of the two parties involved. The party that drafts a written contract or verbally gives an offer will likely add contract clauses to help manage their risk and get what they want.
Certain clauses are more enforceable by law than others depending on the state in which the contract is formed.
Integration clauses, also called merger clauses, stipulate that the contract that includes this clause is the finalized contract between the parties. Usually, integration clauses will sit at the end of contracts and either reference previous contracts stating that this final one trumps the others or includes the others.
Exclusion clauses, or exemption clauses, are put into a contract to limit the liability of one of the parties involved. Certain types of contracts come with inherent risks. Anytime a party making an offer to another sees a potential for liability, they will likely include an exemption clause to protect their assets.
Some exclusion clauses state that the party offering the contract holds no responsibility. Very often, exclusion clauses stipulate that the offeror may only be held liable for a certain amount. For instance, a software company may sell a new software to another company and include an exclusion clause in the agreement stating that the seller may only be held liable for the worth of the software.
Mortgage contracts frequently use acceleration clauses to speed up the process of the agreement, especially if there's a contract breach. In the case that a borrower is defaulting on mortgage payments, the lender can use an acceleration clause to require the borrower to accelerate their payments remaining on the mortgage in order to pay off their debt.
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