Exculpatory Clause
Exculpatory Clause a provision designed to relieve a trustee from liability for certain breaches of trust. Provisions of this nature are strictly construed by the courts. In addition, no clause in a trust instrument is effective to relieve a trustee from liability for a breach of trust that is committed in bad faith, intentionally, with reckless indifference to the interests of the beneficiary, or for a breach of trust from which the trustee personally profits. New York has gone further than the ordinary standard and by statute has declared that an attempted grant to an executor or trustee of a testamentary trust of exoneration of his fiduciary liability for failure to execute reasonable care, diligence, and prudence shall be deemed contrary to public policy and void[1].
Examples of exculpatory clause
For example, that Madison Manufacturing Company requires all of its employees to sign an employment contract with a clause stating that employer (Madison) is not responsible for any injury or damage that an employee may suffer as a result of accidents, carelessness, or misconduct of that employee or any other Madison worker. In this situation, because the exculpatory clause attempts to remove the employer's potential liability for any injuries to its employees, a court would usually find that the clause is contrary to public policy and unenforceable[2].
Bailment cases
Exculpatory clauses are very common in bailment cases. Bailment means giving possession and control of personal property to another person. The person giving up possession is the bailor, and the one accepting possession is the bailee. When you leave your laptop computer with a dealer to be repaired, you create a bailment. The same is true when you check your coat at the restaurant or lend your Matisse to a museum. Bailees often try to limit their liability for damage to property by using an exculpatory clause.
Judges are slightly more apt to enforce an exculpatory clause in a bailment case because any harm is to property and not persons. But courts will still look at many of the same criteria we have just examined to decide whether a bailment contract is enforceable. In particular, when the bailee is engaged in an important public service, a court is once again likely to ignore the exculpatory clause[3].
Unenforceable clause
Courts often but not always ignore exculpatory clauses, finding that one party was forcing the other party to give up legal rights that no one should be forced to surrender. An exculpatory clause is generally unenforceable when[4]:
- it attempts to exclude an intentional tort or gross negligence
- the affected activity is in the public interest, such as medical care, public transportation, or some essential service
- the parties have greatly unequal bargaining power
Advantages of Exculpatory Clause
The primary advantage of an exculpatory clause is that it can provide a trustee with a degree of protection from potential liability for any breach of trust. Additionally, it can serve to help clarify the expectations and responsibilities of the trustee and beneficiary, allowing for a smoother and more efficient execution of the trust. Some of the advantages of an exculpatory clause include:
- Protection from liability: An exculpatory clause can help protect a trustee from being held liable for any breach of trust.
- Clarity: An exculpatory clause can help clarify the expectations of the trustee and the beneficiary, allowing for a smoother and more efficient execution of the trust.
- Flexibility: An exculpatory clause can provide flexibility to the trust and allow a trustee to make decisions without fear of being held liable for any breach of trust.
- Cost Savings: Having an exculpatory clause in place can help save the trust money by reducing potential legal costs that may arise from a breach of trust.
Limitations of Exculpatory Clause
- Exculpatory clauses are strictly construed by the courts, so they must be carefully worded in order to be effective.
- No clause in a trust instrument is effective to relieve a trustee from liability for a breach of trust that is committed in bad faith, intentionally, with reckless indifference to the interests of the beneficiary, or for a breach of trust from which the trustee personally profits.
- In New York, an attempted grant of exoneration of fiduciary liability for failure to execute reasonable care, diligence, and prudence is deemed contrary to public policy and void.
- The courts have the power to void or limit the scope of an exculpatory clause if they deem it to be too broad or otherwise unfair to the beneficiary.
Introduction: Here are some other approaches related to Exculpatory Clause:
- The Uniform Trust Code (UTC) expressly provides that exculpatory clauses are not valid unless certain conditions are met. These conditions include that the clause must be in writing and signed by the beneficiary, that it is fair and reasonable to the beneficiary, and that the exculpatory clause must not eliminate the trustee’s duty of loyalty to the beneficiary.
- A trust may also provide for a limitation of liability of the trustee, but this does not necessarily constitute an exculpatory clause. A limitation of liability provision only limits the amount of damages that the trustee may have to pay for a breach of trust.
- A trust may also provide for indemnification of a trustee for losses incurred in the course of the trustee’s duties. This is different from an exculpatory clause in that it does not absolve the trustee from liability, but rather reimburses the trustee for losses incurred as a result of a breach of trust.
- Certain jurisdictions, such as California, have also enacted statutes that provide for limited immunity for trustees in certain circumstances.
In summary, there are several approaches to protect trustees from liability, including exculpatory clauses, limitations of liability, and indemnification provisions. Some jurisdictions also have statutes that provide for limited immunity for trustees in certain circumstances.
Footnotes
| Exculpatory Clause — recommended articles |
| Hammer clause — Subrogation waiver — Discharge of contract — Ex Gratia Payment — Indemnity principle — Statute barred debt — Dual insurance — Vesting order — Assignment clause |
References
- Beatty J.F., Samuelson S.S., (2012), Business Law and the Legal Environment, Cengage Learning, Brazil.
- Beatty J.F, Samuelson S.S., (2010), Essentials of Business Law, Cengage Learning, Canada.
- Fremont-Smith M.R., (2010), Governing Nonprofit Organizations, Harvard University Press, London.
- Miller R., Jentz G., (2007), Business Law Today: The Essentials,Cengage Learning, Singapore.
Author: Małgorzata Oleksińska
