Types of Exemption Clauses Found in a Contract

By Concord Editorial   Nov 20, 2018
Types of exemption clauses in a contract represented by two people discussing a digital document

In today’s business world, liability is a serious concern when it comes to making agreements. In order to proceed with confidence, questions need to be answered clearly to provide assurance for both sides. Who is responsible for what, and how is that responsibility determined? The answers to these questions are found in the exemption clauses of a contract.

An exemption clause can be thought of as the “what-if” part of a contract—the clause that explains the consequences of breaching the agreement, unsafe behavior, or any other variables that may occur. There are three main types of exemption clauses that it is critical to be aware of when creating and managing contracts.

Exclusion Clauses

Typically, an exclusion clause is used to eliminate a party from any responsibility in the case of a breached contract. An exclusion clause may be a full or partial exclusion, but it will protect that party from any responsibility regarding a specific event.

The terms and conditions of almost any product today contain exemption clauses. The section that states a company is not responsible for the use of this product in a certain way, such as negligence or recklessness when using that product, is a common example of an exemption clause.

The benefits of this type of inclusion in a contract are significant: they remove all liability. Yet the difficulty isn’t in including an exclusion clause, but in enforcing it. Courts are often suspicious of total exclusion clauses, and unless they are written correctly, they can be easily overturned. It’s critical that exclusion clauses are clear and reasonable, or a court will not accept them. A simple way to ensure the consistency and clarity of exclusion clauses within an organization is by templatizing contracts. With a contract lifecycle management platform that has access rights along with a full template library, organizations can be sure that no wording is changed and the company is properly protected.

Limitation Clauses

The limited liability clause, or limitation clause, is similar to the exclusion clause but does not go to the same extent as a complete exclusion. With limitation clauses, one party is not totally excluded from liability in the case of a certain event, but their liability is limited, often making this kind of contract more acceptable in court.

For example, a limitation clause could state that in the event of an injury, the company will pay up to $500 in damages. Limitation clauses are often stated in the negative, such as “The company will not be liable for more than $500 in damages.” This effectively limits the amount of damage that the company can take while still granting some liability so there is not a total exclusion. Maintaining consistency with limitation clauses can also be streamlined through templates and preset wording in a contract lifecycle management platform.

Indemnity Clauses

Indemnity clauses are often the most complex out of the three main exemption clauses. With this particular clause, Ione party agrees to “indemnify” the other party: to compensate for their harm or loss. This means that instead of seeking to sue for damages, one party agrees to protect the other party in the case of a lawsuit.

For example, a company may develop a new kind of technology and sell it with an indemnity clause. A customer then purchases the technology and is subsequently sued by another company who claims the technology is a copy of theirs. The original company is then liable to cover the cost of the lawsuit for the customer because of the indemnity clause included in the contract.

Drafting, managing, and negotiating exemption clauses can be challenging among startups as they determine what needs to be included, as well as enterprise businesses as they seek to get visibility and consistency in the agreements being made. Managing a contract throughout its entire lifecycle—from creation to signature and beyond—is simpler when managed on a cloud-based contract lifecycle management platform. Having all people, processes, and documents in one place brings the benefits of security, collaboration, and organization to any organization. While the content of a contract may remain complex, ensuring that content is consistent and easier to manage is possible with the power of a platform.

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