The Importance of a Conspicuous Exculpatory Clause
A recent decision in Wagner, Averett vs. Landcastle Acquisition Corporation reaffirms previous holdings that exculpatory clauses in contracts must be conspicuous to be enforced.
An exculpatory clause is part of an agreement or contract that relieves one party from liability or limits one party’s liability, should a dispute arise. An enforceable exculpatory clause can be of great importance in facilitating the resolution of a potential business dispute. Many times, potential business disputes are resolved prior to litigation being initiated because an enforceable exculpatory clause acts as a deterrent to the party who is bound by the clause.
Many exculpatory clauses are upheld, but a Court has the authority to declare such a clause to be void if they are deemed to be inconspicuous. In other words, if the clause doesn’t stand out, it’s not noticeable and therefore it is inconspicuous and void.
Exculpatory clauses in contracts should be in a separate paragraph, have a heading, be in bold type, or have a different font. Sometimes the exculpatory provision calls for the initials of the other party to ensure it’s been seen.
Other requirements include the exculpatory clause should be clear, understandable, and specific.
This case involved the accounting firm for Warren Averett, LLC. The engagement letter contained an exculpatory clause that limited damages to the fees paid to the accounting firm, approximately $80,000.
The Court of Appeals held that the exculpatory clause was unenforceable because it was not sufficiently conspicuous, therefore the case was remanded for trial on a claim for $17.5 million.
The court agreed the exculpatory clause was insufficiently prominent within the context of the surrounding text. It wasn’t in a separate paragraph, it didn’t have a separate heading, and there were no other distinguishing features such as font size or bold text.
A very costly drafting error, indeed.