This article has been written by Atulaya Shresth pursuing a Diploma in US Contract Drafting and Paralegal Studies course from LawSikho  and edited by Shashwat Kaushik.

What are exculpatory clauses

‘Exculpation’ means the act of freeing from guilt or blame. This word is typically used to denote a defence against any offensive behaviour or against any failure to honour a promise. In legal parlance, ‘exculpation’ as a means of defence is something of which the courts have always been cautious, for it absolves the doer of any offensive behaviour from any penal action or absolves the signatory of a contract of any breach on his part from any liability. ‘Exculpation’ can be desired by either party to a contract and is manifested in terms of exculpatory clauses by the desiring party therein. Exculpatory clauses are also known as exemption, exclusion, exception or limiting clauses.

Usage of exculpatory clauses 

The usage of exculpatory clauses has assumed greater significance by the parties to a contract, i.e., generally a service provider and a service seeker, to avoid unintentional delays in the execution of the contract, i.e., the provision of the service concerned or any direct and ancillary matters connected thereto. Some very common examples would be any commercial supply contracts of any kind, rent agreements, lease agreements, buying a platform ticket or ticket to a movie or availing of paid parking services. In all these cases, be it the agreements or the tickets or receipts issued, they contain a clear statement as to the exculpation of the liability of the service provider in certain situations, like any loss or theft of the belongings of the service seekers. One can find the prevalence of these exculpatory clauses almost everywhere, be it gym memberships, any sporting events or gigs, medical services, etc., to ensure smooth commercial activities or transactions.

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Essential and non-essential services

Commercial contracts have evolved with the acceptance of the ideology of laissez-faire which has encouraged the parties to the contract to frame the clauses, rules and regulations that they would amicably want to bind them in the commencement, administration, execution and dispute resolution of and related to their business, which ultimately shall ensure that the businesses get the much needed boost and the economy of the country thrives. Non-essential services, wherein the service providers make the service seekers undertake commercial contracts containing exculpatory clauses includes sporting events, adventure sports, gymnasiums, gigs, parks, reserves, etc. whereas essential services with same description includes medical services and utility services like water supply, electricity supply, gas supply, etc.

Digital platforms

In the digital era, wherein service providers have brought almost all the non-essential and essential services at a single tap of their smartphones through applications and like means, every single user or service seeker, knowingly or unknowingly, agrees to the terms and conditions before using such applications. These terms and conditions also contain a bunch of exculpatory clauses related to jurisdiction, usage and matters related thereto. Most of the service seekers give their consent to such exculpatory clauses without even actually reading them, given the fact that the application opens with a pop-up saying that the user, by using the application, consents to its terms and conditions.

Importance of exculpatory clauses

The exculpatory clauses, though, might seem unfair to the service seekers for they exculpate the service providers for breaching any specific or general obligation under the contract or taking any offensive action but they do carry a crucial significance to their existence. They can be :  

Clear demarcation of rights and obligations

It demarcates clear cut boundaries between the parties to the contract or between the service providers and the service seekers of their rights and obligations and ways to tread in case of their denial or breach. The parties who voluntarily enter into a contract by making an informed decision become extra cautious when such contracts contain exculpatory clauses. There are minimal chances of anything being kept hidden from any party to the contract.

Sense of responsibility

The parties agreeing to include an exculpatory clause in the contract renders their consent freely under ideal scenarios and this inspires them to execute their respective rights and obligations under the same with a sense of responsibility, helping them to succeed in their commercial or business motives.

Economical

With the pace and volume at which economic activities and start-up culture are booming, commercial contracts and subsequent transactions have also escalated proportionately. This also, as a corollary, has given impetus to quick dispute resolutions if need arises, which obviously does not involve traditional litigation to keep the business or commercial activity actively propelling. Given such requisites, commercial or business contracts form the very basis on which quick or alternate dispute resolution systems work and the nature of transactions occurring between a service provider and a service seeker or between the parties to a contract containing exculpatory clauses is such that if every minor and petty negligence or breach is taken into account or is allowed to be actionable or prosecutable, there would be a massive floodgate of litigations augmenting the courts and the very purpose of initiating the business or entering into a contract would take a back seat, jeopardising the economy and livelihood of the parties concerned. Even the alternative dispute resolution mechanisms take at least a few months to be decided and time is too precious in this breakneck and fast moving commercial world to lose.

Tackle irresistible or possible contingencies

If in the future one of the parties to the contract tries to delay the performance of his part of the contract or doesn’t perform his obligations under the same or performs it not as per the terms thereof so as to intentionally cause the other party substantial loss, or if either or both parties suffer losses due to some irresistible reasons, irrespective of whether such reason is foreseen, unforeseen, precedented or unprecedented, then in such situations, it is the exculpatory clause that shall come to the rescue of the party suffering the loss. Thus, employing exculpatory clauses ahead of time is beneficial to sail through irresistible or possible contingencies that might arise in the future.

Provides clarity in case of potential breach

There is always a commercial or business motive behind a contract and while drafting its terms and conditions, exculpatory clauses are employed to provide clarity in case of potential breach of any of those terms and conditions by any of the parties to the contract. Absence of such clauses would not be clear or known to the parties, except that any dispute post breach is to be resolved through mutually agreed dispute resolution mechanisms or forums.

Limit the jurisdiction of competent courts

Parties to a contract are free to decide their own terms and conditions, as long as they do not violate the constitution of the country or the existing laws governing such contracts. One such freedom pertains to deciding the most convenient court or forum and the processes to be followed therein in case any dispute arises between the contracting parties. Exculpatory clauses are an effective means to limit the jurisdiction, in case of any dispute, from among various competent courts or forums situated in different cities to a particular court or forum or city or to any court or forum in a particular city.

Enforceability and interpretation

The exculpatory clauses assume paramount significance as they have the capability of bringing about a diametrical change in the consequences of a potential breach of any obligation under a contract. Therefore, it comes as no surprise that the courts tend to be very circumspect while interpreting and deciding the enforceability or otherwise of an exculpatory clause in a contract, and the checkpoints that the courts consider in doing so vary from case to case, contract to contract or clause to clause basis, but the very basic and most decisive among them includes-

  • Unambiguity, specificity and obviousness- The exculpatory clause must be clearly worded, specific, obvious and unambiguous. Such clauses, if not made in good faith, are kept open ended and broad in scope so as to obtain the maximum possible benefit and avoid liability. The courts tend to read down to the extent of such ambiguity exculpatory clauses, which are wide in scope and ambiguous. For them to be enforceable, exculpatory clauses ought to be consistent and specific with the real intention behind the contract, not otherwise.
  • Adequate notice- The party insisting on the inclusion of an exculpatory clause in a contract must bring such inclusion expressly, obviously in clear and unambiguous words, to the notice of the other party absent, which the courts scrutinise to determine whether or not such inclusion was made with equivocal and express consent of both parties to the contract and if found otherwise, such exculpatory clauses are given a narrow interpretation or are read down to the extent of such inadequacy in bringing such inclusion to the other party.

In M/S Modern Insulators Ltd. vs. Oriental Insurance Co. Ltd. (2000), the Supreme Court held that the party who inserted the exculpatory clause, which doesn’t form a part of the standard contract and didn’t even bring the fact of such insertion to the notice of the other party, cannot take advantage of such a clause.

Equal bargaining power

A contract involves two parties agreeing over a set of terms and conditions that they mutually decide and undertake to give effect to or perform for a specified period of time. It may or may not be directed towards a common goal but both parties do benefit from each other. This is an ideal situation wherein the crucial element is that both parties stand on an equal footing, holding equal bargaining power and independence to negotiate on the terms and conditions laid down in the contract. The problem arises when the parties to the contract don’t stand on an equal footing to freely negotiate the terms and conditions of the contract. This disparity results in the execution of contracts containing clauses, including exculpatory clauses favourable to the stronger party. The courts, however, ensure the absence of this imbalance while interpreting and directing the enforcement of the exculpatory clauses.

In the case of commercial contracts, the concept of unequal bargaining power has no application, as held in the case of Central Inland Water Transport Corporation Ltd. and Anr. vs. Brojo Nath Ganguly and Anr. (1986).

Moreover, if parties voluntarily and freely enter into contracts with disparities in bargaining powers, they cannot later claim otherwise to seek benefit from the law. In this regard, a reference may be made to the case of S.K. Jain vs. State of Haryana and Anr. (2009). 

Gross negligence

Any person practising any skill cannot be expected to become a highly skilled person with top-notch competence; rather, what is required of him is to be able to practise and deliver his skilled expertise the way a prudent, ordinary and responsible man would upon learning such a skill. This is commonly referred to as the Bolam Test and is considered to be a rule of evidence or practise and not a rule of law in cases of professional negligence, and most often the exculpatory clauses are employed to get absolved of any liability arising in case of potential breach of a contract wherein such breach arises due to negligence. Negligence, if unintentional or unsubstantial and not gross, i.e., minor errors of judgement, doesn’t lead to immediate reading down of the exculpatory clause shielding and absolving the liability against the same but if gross, irrespective of whether it is intentional or unintentional, shall lead to reading down of the exculpatory clause shielding and absolving the liability against the same. 

Public policy

People are the supreme authority in a democracy, whose will is reflected in the Parliament of the country. Any law made or to be made always has to get through the filter of public policy, whose responsibility initially lies with the Parliament but ultimately lies with the judiciary. Thus, any clause that is exculpatory or otherwise appears to be opposed to public policy shall be declared void as per the law governing the contracts.

In Afrox Health Care (Pty) Ltd. vs. Strydom (2002), the South African Supreme Court of Appeal upheld a contractual clause that excluded the liability of the appellant for negligence. The Court, disagreeing with the respondent’s arguments, noted that the constitutional right to health guaranteed under the Constitution of South Africa will not be violated if the exemption clause is made enforceable, as the said constitutional right did not prohibit the hospital from contracting certain conditions before rendering the health care services and that the right to health care needs to be balanced with the principle of freedom of contract, which was also supported by constitutional values.

Fraud

Fraud vitiates the most solemn transactions and the exculpatory clauses are no exception. If the party insisting on the inclusion of an exculpatory clause does so by practising fraud upon the other party to the contract, it is no brainer for the courts to read down the clause in its entirety or to the extent where fraud was practised, if proved.

Conclusion 

Exculpatory clauses are, in sum and substance, both a weapon for defence and an offence, depending upon the employment and intention of the employer. Liability arising out of intentional breach of contracts or breach, whether intentional or unintentional, resulting from gross negligence can and should never be allowed to be covered or absolved under the garb of exculpatory clauses but those arising out of irresistible contingencies, unintentional errors of judgement, or minor negligence that are attributable to human nature can and should be shielded by the use of exculpatory clauses. The courts have always been very cautious in interpreting and deciding the enforceability of exculpatory clauses, giving due regard to various parameters to ensure fairness and parity for both parties to the contract. 

References

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