Types of Exemption Clauses Found in a Contract for Contract Management

3-28-16 | by Ben Fleshman

Liability is can be one of the main concerns for those who wish to make an agreement in our modern business world. Some questions need to be answered in order for sound deals to proceed. Who is responsible for what? How do we determine what they are responsible for? These questions are often answered in the exemption clauses of a contract.

Contracts of any kind should always include a “what-if” clause—a clause which explains the consequences for breaching the contract, or for unsafe behavior, or a whole host of other things. Such clauses are known by the umbrella term “exemption clauses,” though there are a few specific types of exemption clauses that you should be familiar with in the world of contract lifecycle management.

Exclusion Clauses

The typical purpose of an exclusion clause is to exclude a party entirely from responsibility in the case of a breached contract. This may not exclude them from all responsibility, but it will protect them from any responsibility regarding a specific event.

If you read the terms and conditions for just about any product, there is a section which states “We are not responsible for the use of this product in such and such a way.” This is an example of an exclusion clause, or at the very least a limitation clause, more on this type of clause to follow.

The benefits of an exclusion clause are obvious: total exclusion of liability. The difficulty isn’t in the drafting, it’s in the enforcing. Courts are more suspicious of total exclusion clauses, and they are often overturned if written incorrectly. Exclusion clauses must be clear and reasonable, or else the court will not accept them.

Limitation Clauses

A more acceptable clause, in the realm of the court at least, is the limited liability clause, or limitation clause. This does essentially the same thing as the exclusion clause, merely not to the same extent. A party is not totally excluded from liability in a certain event, but their liability is limited, which cushions the blow in some small way.

For example, a liability clause might state that, in the event of an injury, the company will pay up to $300 in damages. It will often be phrased in the negative, however, to state that “The company will not be liable for more than $300 in damages.” This effectively limits the amount of damage that the company can take, while still granting some liability to its partners. This is generally seen as more acceptable in court.

Indemnity Clauses

Indemnity clauses are the most complex of the three exemption clauses. In an indemnity clause, one party agrees to “indemnify,” or to absorb the losses caused by that party, hold harmless, and/or defend, the other party. This means that, rather than seeking to sue for damages, the one party agrees to protect the other party in the case of a lawsuit.

Suppose, for example, that your company develops some technology and sells it with an indemnity clause. A client purchases your technology, and is the sued by another company claiming that the technology is a copy of theirs. You are then liable to cover the cost of the lawsuit for your client, provided that an indemnity clause was included in the contract.

Managing and negotiating all of these contract clauses can be frustrating and tricky, especially for a company who might just be starting out. It’s easier on you, however, if you manage your contracts in the cloud.

Using a cloud based contract management system brings the benefits of security, collaboration, organization, templates, contract drafts and negotiations to your company. All of these benefits might not simplify the content of the contract, but they will make it much easier to draft negotiate, and manage the proper exemption clauses into any contract.