Commercial Transaction Newsletter – September 2015
WHAT IS AN EXCULPATORY CLAUSE AND ARE THEY VALID?
An exculpatory clause is a provision is a contract where one party attempts to limit or remove its liability for events occurring to the other party. In the case of Stewart v. Chalet Village Properties, the Tennessee Court of Appeals ruled that an exculpatory clause in a Short Term Lease of a vacation rental house was not valid because it was against public policy. In the Stewart case, the Tennessee Court of Appeals pointed out that the rule in Tennessee is that if an exculpatory provision affects the public interest, it is void as against public policy, despite the general rule that parties may contract that one shall not be liable for its negligence to another. The Court said there were six criteria that it would apply to the facts in a case to determine the validity of an exculpatory clause. Those criteria are:
1. Does it concern a business of a type generally thought suitable for public regulation?
2. Is the party engaged in performing a service of great importance to the public?
3. Does the party hold itself out as willing to perform this service for any member of the public who seeks it?
4. As a result of the essential nature of the service and the economic setting of the transaction, does the party invoking the exculpation possess a decisive advantage in bargaining strength.
5. In exercising a superior bargaining power, does the party confront the public with a standardized adhesion contract of exclusion?
6. As a result of the transaction, is the person placed under the control of the other, subject to the risk of carelessness by the controlling party?
In Stewart, the Tennessee Court of Appeals was dealing with a Short Term Lease of a vacation rental property that had an exculpatory clause. The renter was injured as a result of the Landlord's failure to maintain the property in a proper manner. The renter sued the Landlord, who then defended on the basis of the exculpatory clause. In the Stewart case, the Tennessee Court of Appeals ruled that the exculpatory clause in the rental agreement in the case affects the public interest and thus is invalid because it is contrary to public policy.
MY RECOMMENDATION: Exculpatory clauses are still beneficial for a party to use. However, one needs to be aware that they are not guaranteed effective. The enforceability depends on the facts and the circumstances in each particular case.
For a pdf copy of the newsletter, click here: What Is An Exculpatory Clause And Are They Valid_