By: David Barry

Contracts, we all sign them in some way shape or form on a weekly or maybe even a daily basis. While some of these contractual agreements may be in regards to services provided in the context of consumer services such as auto repair or the purchase of consumer items, which generally are governed by the terms of the warranty or state consumer protection laws. You may have noticed that many of these transactions contain phraseology which limits the liability of the seller or service provider.

These terms are sometimes referred to as exculpatory clauses. You are probably more familiar with these clauses in a setting as described above, but did you know that these same exculpatory clauses are permissible when you contract with another concerning a professional service such as medical care, a large financial transaction, and real estate transactions just to name a few.

Further, these exculpatory clauses go beyond just disclaiming any liability regarding the workmanship or quality of the services provided, but may also relieve a party for liability from their own negligence in performing the contract. It is important to understand the enforceability and legality of these clauses whether you are the one seeking to be protected by an exculpatory clause or the party who will be barred from pursuing a claim based on the liability excluded by the clause.

As a general matter, Tennessee case law provides that parties may contract that one will not be responsible for the negligence of another, subject to certain exceptions. One of those major exceptions is the so-called ‘public policy’ exception. This comes into play when the exculpatory clause concerns an industry or service which implicates matters of public policy. Real estate, rental agreements, medical care and inspection services are areas which often fall under this exception.

Tennessee courts have developed a 6-factor test to determine if a contractual exculpatory provision falls under the control of this exception. If the provision is deemed to fall under this exception, courts may disregard the exculpatory provision. Those factors are as follows:

1. Does the transaction concern a type of business thought suitable for public regulation? Simply put, is this area of business subject to governmental regulations.

2. Is the party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public? So ask, is the party seeking protection through an exculpatory clause providing a service that is essential to the public or at least some members of the public.

3. Does the party who seeks protection by the clause hold itself out as performing services for any member of the public who seeks it, or those who meet established standards? Think of a service that is either available to all members of the public and/or those who meet certain standard qualifications. Think of a home construction loan for example.

4. Due to the essential nature of the service, in the economic setting of the transaction, the party seeking exculpation has a decisive advantage of bargaining strength against any member of the public who seeks his services? In other words, the party seeking protection provides an essential service and due to that possesses greater bargaining power than the member of the public seeking the service.

5. Due to superior bargaining power, the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees to protect against negligence. Ask, is it a standard form contract, and may I pay an additional fee to avoid the exculpatory clause?

6. Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents.

It is not necessary that all of these factors be present for a court to invalidate an exculpatory provision, but some must be present.

It is important that you consult with legal counsel as to the effectiveness of exculpatory provisions whether you are the party seeking protection from an exculpatory clause or a consumer and concerned about your rights in the event the other party is negligent in performing the contract. This is one of those situations that can truly make or break a case.

David Barry, Associate in the Chattanooga office, focuses on Litigation (Arson and Fire, Civil Rights, Construction and Real Estate, Employment Practices, Insurance Coverage and Bad Faith, Insurance Defense, Property and Casualty, and Trucking/Transportation), Liability (Automobile, Government, Premises, and Products), Appellate Practice, Employment, Medical and Pharmacy Malpractice and Insurance Subrogation law.

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