Is Your Exculpatory Clause Worth the Paper it’s Written on?

Today, in an unpublished decision, a New Jersey appellate court held that an overbroad exculpatory clause contained in a fitness services agreement was unenforceable. For those who don’t know or who otherwise live under a rock, exculpatory clauses are everywhere. I signed one basically every time my kids went to a birthday party. Businesses use them to try to limit their liability exposure in a whole variety of contexts, often in situations involving risk of personal injury but also in other situations like where use of a business’s service or product might result in property damage, both of the tangible and intangible varieties. As a general principle, exculpatory clauses can shield a business from liability that it would ordinarily have under the law. Courts don’t like exculpatory clauses, but will give effect to ones that comply with the law. The clause has to be enforceable to be of any use, and too many businesses use ones that aren’t. This is that kind of case.

The facts are simple- a fitness club patron got badly hurt when she was told to get on a treadmill that was already in operation. She got on, and, as you might imagine, she was thrown off the moving treadmill. The trial court said she couldn’t sue and dismissed her compliant because the exculpatory clause barred suits for injuries caused due to the club’s negligence. The appellate division reversed, saying that such exculpatory clauses serve no public purpose and are therefore unenforceable.

There is a key lesson here to be learned by businesses of all stripes that use exculpatory clauses in their form contracts (and ones that don’t, but should).

If you run a business and use form agreements, you may very well use exculpatory clauses as part of your comprehensive risk management program. They can be great and help limit the business’s exposure to lawsuits, or at least provide an avenue to quick dismissal. But for the risk program to work, all the parts have to work. If you have selected an insurance policy under the assumption that your exculpatory clause will be enforceable and a court invalidates it, your risk management program is broken. If you aren’t balancing the use of exculpatory clauses to limit law suits against the risk of loss of customers, you might not have a risk management program at all.

Exculpatory clauses and other liability-limiting contractual provisions like arbitration clauses, forum selection clauses and choice of law clauses are wonderful tools for businesses when used properly. When used as part of a comprehensive risk management plan, they can save you headache and hard-earned money. When used incorrectly, they are worse than useless because they cost you money. When was the last time you went over your form contracts and insurance policies to make sure you’re not losing money?

You can read the decision here (for the next 10 days at least)-