Exclusion Clause: What It Is and When To Use It

Exclusions are among the most important clauses in a contract, along with confidentiality clauses, force majeure, and dispute resolution clauses. The language in these sections must be neither overly flexible or too stringent. Developing ideal positions and standard guidelines for writing these clauses is an important first step. For ensured compliance, however, artificial intelligence (AI) is the answer.

What Is an Exclusion Clause in Contract Law?

In contract law, exclusion clauses aim to exclude or limit a party’s liability in the event of default. While exclusions can be among the most hotly contested and negotiated portions of a contract, they are found in nearly every type of agreement. There may be a cap on damages, a short time limit for filing claims, or restrictions placed on the types of recoverable losses available. However, these clauses can be difficult to uphold in court if the language seems undefined or unfair.

What Are the Rules of Constructing an Exclusion Clause?

When constructing the exclusion clause, companies must take care to:

Avoid ambiguity - If there is any uncertainty about the exclusion clause meaning, the court will issue a legal doctrine known as “contra proferentem,” which goes against the party responsible for the exclusion.

How Are Exclusion Clauses Commonly Used?

Exclusions that limit liability may include common cases such as:

A true exclusion - which recognizes the potential for the breach but includes reasonable care to perform duties on one party and not the other. For instance, a company may limit the categories of damages or use or exclude all incidental damages entirely.

Why Is an Exclusion Clause Important in Risk Analysis?

No matter the type of contract, exclusion clauses can either save significant money for the company or open up the potential to pay a lot of money. In consumer contracts, a lack of exclusions can land a company on the bankrupting end of a class-action lawsuit. For mergers, these limitations can be deal-breakers.

What Automated Contract Review Can Do with Exclusion Clauses

Automated AI helps corporate legal departments handle exclusion clauses in several key ways:

Ensures Compliance - Companies can set rules for exclusion clauses in an AI Digital Playbook, including preferred language, acceptable variations, and boilerplate fallbacks. Once digitized, legal tools can extract individual clauses from current drafts and compare them with the contract playbook to maintain adherence to company standards. The use of such tools can be especially helpful when training new staff members.

LexCheck can help your corporate legal department reduce risk with exclusion clauses while maximizing legal team efficiency. Reach out to us at sales@lexcheck.com to learn more, or request a demo to experience the technology first-hand.