What is an example of an exemption clause?

An exemption clause limits or removes a party’s liability for certain outcomes if a breach of contract occurs. A few examples might include: [Company] is not responsible for service delays or cancellations caused by severe weather, traffic conditions, or other events beyond its reasonable control. [Seller]’s total liability for defective products is limited to the repair or replacement of the affected goods or a refund of the purchase price, at [Seller]’s discretion. [Consultant] provides information and recommendations based on professional judgment but cannot guarantee specific results. This type of clause clarifies when one party will not be held accountable for losses or damage, helping both sides manage risk and expectations.

What is an exemption in a contract?

An exemption in a contract refers to a situation where one party is excused from liability under specific circumstances. The exemption is usually defined through an exemption clause , which identifies the event, losses, or damages for which that party will not be held responsible. It’s a way to protect against risks that are beyond a party’s control and narrow the scope of the contract to more comfortable terms.

What are exclusion and limitation clauses?

An exclusion clause removes liability for certain types of losses entirely while a limitation clause sets a financial cap on the costs one party incurs if a contract or agreement is reached. While both clauses are technically considered exemption clauses , they function very differently. Here’s an example of an exemption clause and a limitation clause : Exclusion clause . A service provider states that it is not liable for indirect or consequential damage. Limitation clause . A supplier limits its liability to the total amount paid under the contract. These clauses help to allocate risk and make potential outcomes more predictable for both sides.

How do exemption clauses affect liability in a contract?

Exemption clauses define when a party is or isn’t legally responsible for losses or damages that occur under a contract. When written clearly and applied fairly, they help both sides understand their responsibilities and obligations while limiting unexpected financial exposure. However, if a clause is overly broad, hidden, or unfair, a court may render it invalid and require the party to accept full liability. Precise drafting and proper disclosure are key to making these clauses enforceable in the event of a dispute.

What Are Exemption Clauses? Types of Exemption Clauses in Contracts

Exemption clauses are a way for businesses to limit liability if a breach of contract occurs. They’re a common addition to many contracts and are designed to narrow the scope of responsibility when something goes wrong.

Example: [Company] is not responsible for delays caused by shipping or freight services.

Used correctly, these clauses help to protect both parties by setting clear expectations and distributing risk more fairly. They also try to account for factors that are out of a party’s control. When poorly written, exemption clauses can cause confusion and disputes. They may even be declared legally unenforceable.

In this guide, we’ll take a closer look at what exemption clauses are, why they matter, and how to draft them properly. We’ll also show you how to deploy them quickly and consistently during the contract creation process.

Key takeaways:

Exemption clauses in a contract aim to limit or remove the liability of a party if something goes wrong.
Both parties can use exemption clauses to balance contractual risks more clearly.
Contract management software like PandaDoc allows for rapid deployment of legally valid exemption clauses for any contract.

What is an exemption clause?

Exemption clauses (sometimes called exclusion clauses or limitation clauses) are a specific type of contract clause that limits or removes one party’s liability in a specific circumstance. It sets clear boundaries for when a party won’t be held responsible for losses, damages, or delays, making it a useful tool for managing risk.

These clauses are common in business clauses, and can be found in everything from manufacturing and supply agreements to service contracts and partnership deals.

Below, you’ll find several examples of commonly used exemption clauses:

[Company] is not responsible for service delays or cancellations caused by severe weather, traffic conditions, or other events beyond its reasonable control.
[Seller]’s total liability for defective products is limited to the repair or replacement of the affected goods or a refund of the purchase price, at [Seller]’s discretion.
[Consultant] provides information and recommendations based on professional judgment but cannot guarantee specific results.

Exemption clauses aren’t just limited to business relationships, however. Direct-to-consumer service agreements can also carry clauses that exempt a company from things like service interruptions due to inclement weather or system maintenance.

While versatile and open-ended, these clauses can also be abused by organizations who are seeking to avoid contractual obligations for other reasons. With that in mind, these clauses need to be precise and set clear guidelines around when they can be leveraged and enacted.

Why are exemption clauses important?

Accepting the responsibilities in any contract comes with an inherent amount of risk. Exemption clauses give companies a way to manage uncertainty and prevent both parties from unfair liability claims.

This is critical because, no matter how a contract is structured, there is always a chance that something will go wrong. Shipping delays, mishandled packages, system failures, and other unexpected events can lead to problems and loss of profits. Without exemption clauses, contracting parties might be held responsible in this course of dealings.

Example:

BrightTech Manufacturing wants to sign an agreement with North River Materials to deliver essential components for its production line. If North River fails to deliver those materials on time or in the correct quantity, BrightTech could face production delays, lost profits, and damage to its reputation.

If something goes wrong, BrightTech might hold North River responsible for the losses and seek damages through the legal system. For North River, entering into such a contract could carry unfair risk if it could be blamed for every delay, even those outside its control.

To manage this risk, North River includes an exemption clause in its contracts stating that the company is not liable for delays caused by factors beyond its control, such as shipping disruptions or raw material shortages. The company can still be held accountable if it fails to meet its contractual obligations, but the clause helps limit its liability to fair and reasonable circumstances.

By setting limits on responsibility, exemption clauses bring added predictability to a business relationship. Both parties know the extent of their potential liability and what level of protection they can expect. This clarity helps to reduce disputes, encourages transparency, and helps both parties plan with confidence.

What are the different types of exemption clauses?

There are several types of exemption clauses, each of which is designed to achieve a specific legal or practical goal.

Some clauses are designed to completely remove the liability for certain outcomes or limit how much liability that the business can undertake. Others can shift the risk between contracting parties altogether.

Understanding these distinctions is essential when drafting or reviewing a contract. The type of clause in use determines how risk is distributed, what remedies are available if things go wrong, and how enforceable the agreement will be in a legal standing.

Below, we’ll cover the three most common types of exemption clauses and what they are designed to do.

1. Exclusion of liability clauses

Exclusion clauses are relatively common clauses that aim to exclude certain types of liability altogether. They specify particular events, damages, or losses for which a party can’t be held liable and are most often used to account for variables that a business simply can’t control.

Examples:

A web hosting company might include an exclusion clause that states it is not responsible for downtime caused by third-party network failures.
A manufacturer could exclude liability for damage that occurs if a product is used incorrectly on or outside of its intended purpose.

In both cases, the company simply has no control over the circumstances, and nothing they do can change that fact.

Exclusion clauses are especially useful in high-risk industries or complex supply chains, but they require precision. If the language is vague or overly broad, courts may question the reasonableness of the clause and declare it invalid. Because these clauses attempt to eliminate liability completely in certain scenarios, they are subject to close legal scrutiny and must be written clearly and fairly in order to remain enforceable.

2. Limitation of liability clauses

Limitation clauses take a more balanced approach by setting a cap on how much one party can be held responsible in the event of a breach or a loss. As with exclusion clauses, they see regular use as risk management tools in modern contracts.

Examples:

A software provider might include a limitation clause stating that its total liability will not exceed the fees paid by the customer during the previous year.
A logistics company could cap its liability at a fixed dollar amount per shipment so that a single loss doesn’t result in disproportionate financial damage.
In many cases, a limitation clause adds a level of predictability and shields against losses that could exceed the value of the contractual term. At the same time, the business retains a portion of the responsibility and can’t fully avoid punitive damages in the event of a breach of contract.

Limitation clauses are common in both commercial contracts and consumer contracts because they strike a balance between protection and fairness. They can still carry penalties in the event of a consequential loss, and they offer some bargaining power to both sides as the finer details are negotiated.

However, they still need to be clearly worded and reasonable in scope so that obligations and penalties are clearly understood by all parties.

3. Indemnity clauses

Indemnity clauses are used to shift risk from one party to another. In simple terms, the first party (the indemnitor) agrees to cover the specific losses or damages that the second party (the indemnitee) might face because of the actions of the first party during the source of the contract.

These clauses are especially common in contracts where one side’s work or decisions could create legal or financial problems for the other.

Examples:

A marketing agency might agree to indemnify its client against any copyright infringement claims made in campaign materials the agency created.
A construction contractor might indemnify a property owner for any injury or property damage that occurs on-site as a result of the contractor’s work.
These clauses make sure that the party causing the problem takes responsibility for it and that those obligations aren’t handed off to the other party.

Indemnity clauses are useful because they determine in advance who will handle the financial consequences if something goes wrong. As with the other clauses, the language needs to be clear about what is and isn’t covered. Overly broad clauses can create unexpected exposure or make it unclear which party is ultimately responsible when circumstances are murky.

Pros and cons of exemptions clauses

Although exemption clauses can be powerful tools for managing risk in any legal document, they can come with some downsides and are subject to pushback.

When used correctly, exemption clauses clarify expectations, offer additional protections, and provide additional guidelines to help contracted parties navigate unfavorable situations. They can also prevent minor problems from escalating into full-blown disputes.

On the other hand, poorly written clauses can create confusion, misrepresentation of risks, and ultimately damage trust between contracting partners. Often, this results in protracted and expensive legal battles that delay deals and cut into profits.

Below are some of the key advantages and disadvantages of using exemption clauses in a contract.

Pros

1. Risk management. Exemption clauses help businesses prepare for unexpected events by setting boundaries on liability. Overall, these clauses can help to eliminate outlying scenarios and make it easier to predict potential losses if things go wrong.

2. Predictability and clarity. By defining where responsibilities begin and end, exemption clauses reduce the overall ambiguity within a contract. Both parties have a better understanding of their exposure and can negotiate for favorable terms before signing.

3. Cost control. Limiting potential liability helps brands manage costs, which can lead to better pricing and more sustainable operations. Limitations can also prevent small problems from escalating into major financial losses.

4. Balanced risk allocation. When written fairly, exemption clauses allow both sides to take responsibility for the risks they can actually control. This approach evens the playing field, especially in long-term or high-value contracts.

5. Reduced legal disputes. Clear limits on liability can prevent disagreements from turning into legal battles. When everyone knows what to expect, it’s easier to quickly resolve issues and maintain relationships.

Cons

1. Potential for unfairness. If an exemption clause heavily favors one side, it can create an uneven power dynamic. This can happen when a larger company imposes strict limits on a smaller partner or customer, who has limited power to negotiate.

2. Legal uncertainty. Courts carefully examine exemption clauses, especially when they appear one-sided or confusing. A vague or overly broad clause might be struck down, leaving a business exposed to the very risks it tried to avoid.

3. Damage to business relationships. Overly aggressive clauses can make clients or partners feel that one side is trying to escape accountability. Long term, this erodes trust, harms reputations, and can make future deals harder to secure.

4. Limited protections. In many jurisdictions, exemption clauses can’t override certain legal duties. For example, the United Kingdom’s Unfair Contract Terms Act and its successors state that parties cannot exclude liability for negligence or fraud and must satisfy the requirement of reasonableness.

5. Misunderstanding or misuse. If a clause is buried in the fine print or written in overly complex language, the other party might not fully understand it. This can lead to confusion, disputes, or claims of bad faith.

Best practices for drafting exemption clauses

A well-written exemption clause will ultimately protect a business while remaining transparent and enforceable. To achieve this, the clause needs to emphasize clarity, fairness, and foresight.

The goal isn’t to avoid responsibility altogether but to create an agreement that defines risk in a way that both parties understand and accept. Because a contract can’t account for every single mishap or problem, exemption clauses help by narrowing the scope of coverage in various ways.

Here are a few best practices to keep in mind when drafting or reviewing exemption clauses.

Use clear and specific language

Clarity is the single most important factor in determining whether an exemption clause will hold up in court. Vague or sweeping terminology is highly open to interpretation, which can lead to poor outcomes when left to legal experts for clarification.

Rather than using convoluted phrasing or overly broad language meant to avoid risk or exposure altogether, use language that clearly defines what liability is being excluded or limited.

Consider the two phrases below:

The company accepts no responsibility for losses.
The company is not responsible for delays caused by events outside of its reasonable control, including weather conditions or supply disruptions.

While the first phrase tries to absolve the company from losses, those losses are undefined. Does the phrase mean lost profits from sales of goods, shipments, and supplies lost during transit, or something else entirely? It’s impossible to know.

The second phrase narrows the scope of the exclusion considerably to “delays” (not losses) that are caused by elements that it likely can’t control. While it’s a more reasonable and measured approach with clearly defined guidelines, the phrase can also be extended to cover issues that are outside of its “reasonable control” but that aren’t weather conditions or supply disruptions.

Keep the clause visible and transparent

Exemption clauses are important and should never be buried in fine print or hidden in dense blocks of terms and conditions. They must be easy to find, clearly labeled, and presented openly before a contract is signed.

Choosing to conceal these clauses may make them unenforceable, as courts may invalidate clauses that were not properly disclosed or brought to the other party’s attention. This can be avoided by giving exemptions their own, dedicated space inside your contract.

In PandaDoc, it’s even possible to use content blocks and distinct formatting to add headings and text that separates exemption clauses from the surrounding text. You can also place initials fields with mandatory acknowledgements enabled beside these clauses to prove that signers saw and acknowledged this language prior to signing.

Balance risk fairly between parties

The best exemption clauses try to balance protection and accountability. A clause that completely shields one party from liability or absolves any responsibility can undermine negotiations and be seen as unenforceable.

When drafting, consider the stakes, the risks, and what each party can realistically control, then assign liabilities accordingly. For example, a shipping company may not be liable for weather-related shipping delays but should probably remain responsible for mishandling or administrative errors within its control.

A fair approach promotes stronger relationships and reduces the likelihood of disputes farther down the line.

Review for legal compliance

Even a well-written clause can fail if it conflicts with legal or regulatory requirements.

Before finalizing a contract, review applicable laws in your jurisdiction, particularly consumer protection legislation and contract law principles that govern liability exclusions. The regulations governing exemptions and liability clauses vary by country, state, and province, so it’s important to confirm what applies in your specific situation.

Whenever possible, have exemption clauses reviewed by legal counsel. Once you have approved language, build pre-approved templates that align with company compliance standards. Platforms like PandaDoc can help maintain version control and ensure consistent language across all your contracts.

Are exemption clauses legally enforceable?

While exemption clauses are powerful tools in a contract, they aren’t automatically enforceable. A fair amount of contract law, along with heightened legal attention, means that courts will ultimately determine whether a clause is valid and can actually protect the party relying on it.

For an exemption clause to hold up in the legal system, it must be part of the contract, clearly written and interpreted, and considered fair and reasonable within the context of the agreement. The following principles outline how enforceability is generally assessed.

Incorporation

In order to be legally valid, an exemption clause must be incorporated into the contract. This means it must be explicitly agreed upon by both parties and form part of the written agreement.

If the clause is introduced after the contract has been signed, or if one party was never made aware of it, then a court may decide that it was not properly included The safest approach is to ensure that the clause appears clearly in the main contract document or is specifically referenced as part of the agreement’s terms and conditions.

The easiest way to do this is by incorporating any standard exemption clauses into template automation via a contract management solution like PandaDoc. By adding this into your standard agreement workflow, you can make sure that the language, context, and protections are always included.

Construction

Even if an exemption clause is properly included, it needs to be drafted in a way that a court can parse its meaning in relation to the rest of the contract.

In other words, the construction of the clause needs to include clear words and an obvious meaning that can’t be easily misinterpreted by readers. Because courts tend to review exemption clauses in a very strict scope, ambiguous or overly broad language is often purposefully interpreted in the way that least benefits the party that drafted it. This practice is called contra proferentem.

To avoid problems (and negative outcomes in a legal dispute), an exemption clause needs to use plain language that leaves no room for doubt. However, it can still be somewhat broad, when the situation demands. For example, a clause stating that a supplier isn’t responsible for “events outside of its control” is very broad but also clearly defined in its scope.

Because of these dangers, it’s common for brands to seek legal advice and consult jurisdictional case law when creating contracts. These are reasonable steps to ensure proper construction, as it allows companies to craft suitable language with minimal downsides.

However, trusting sales reps and other non-legal professionals with the ability to manipulate delicate legal phrasing can open a company up to exposure. To prevent those issues, use a contracting tool with content locking and a dedicated content library. Taking this approach allows teams to manipulate document designs and insert the appropriate phrasing but prevents users from editing the clause itself.

Legal validity

While a clause must be incorporated and clearly worded, it must also be reasonable under the law. Courts will look at factors such as the relative bargaining power of both parties, the nature of the transaction, and whether the clause creates an unfair imbalance of risk.

Certain types of liability cannot be excluded in many jurisdictions. For example, exemption clauses can’t typically remove liability for personal injury or death caused by negligence. Consumer protection laws also restrict how much liability can be excluded in contracts with individual customers.

Because rules vary across regions and industries, it’s important to understand which laws apply to your contract. For example in the United States, the Uniform Commercial Code (UCC) and various state laws govern these issues in commercial contracts.

Given the complexity of these rules, it’s always best to seek legal guidance when drafting exemption clauses before adding them to your contracts or document generation tools.

Simplify contract creation and clause management with PandaDoc

Creating contracts that are clear, compliant, and easy to manage takes care and attention to detail. Exemption clauses and legal reviews need to align to keep agreements consistent and enforceable.

PandaDoc expedites these processes with easy-to-use systems and processes. Customizable templates can include approved legal language, standardize exemption clauses, and maintain version control across every document in your library. Teams can even leverage built-in approval workflows to make sure that every contract is reviewed and approved before being sent to customers.

It’s even possible to bring external collaborators into PandaDoc to expedite the negotiation and feedback process on upcoming contracts. Collaboration tools like virtual data rooms and in-line comments make it easy to isolate and resolve disagreements that keep deals from moving forward.

Sign up for a free 14-day trial to learn how PandaDoc can help you draft and manage every contract with confidence.

Disclaimer

PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDoc services are governed by our Terms of Use and Privacy Policy.

Frequently asked questions

Contract clauses are individual provisions or sections within a contract that define specific rights, responsibilities, or conditions agreed to by both parties.

Each clause addresses a distinct issue (payment terms, confidentiality, warranties, etc.) and work together to form the framework of a valid agreement. Clauses can help ensure that all important aspects of the business relationships are clearly documented and that everyone is on the same page before the contract is signed.

There are several types of contract clauses, covered in greater details within this article.
An exemption clause limits or removes a party’s liability for certain outcomes if a breach of contract occurs.

A few examples might include:
- [Company] is not responsible for service delays or cancellations caused by severe weather, traffic conditions, or other events beyond its reasonable control.
- [Seller]’s total liability for defective products is limited to the repair or replacement of the affected goods or a refund of the purchase price, at [Seller]’s discretion.
- [Consultant] provides information and recommendations based on professional judgment but cannot guarantee specific results.
This type of clause clarifies when one party will not be held accountable for losses or damage, helping both sides manage risk and expectations.
An exemption in a contract refers to a situation where one party is excused from liability under specific circumstances.

The exemption is usually defined through an exemption clause, which identifies the event, losses, or damages for which that party will not be held responsible. It’s a way to protect against risks that are beyond a party’s control and narrow the scope of the contract to more comfortable terms.
An exclusion clause removes liability for certain types of losses entirely while a limitation clause sets a financial cap on the costs one party incurs if a contract or agreement is reached.

While both clauses are technically considered exemption clauses, they function very differently.

Here’s an example of an exemption clause and a limitation clause:
- Exclusion clause. A service provider states that it is not liable for indirect or consequential damage.
- Limitation clause. A supplier limits its liability to the total amount paid under the contract.
These clauses help to allocate risk and make potential outcomes more predictable for both sides.
Exemption clauses define when a party is or isn’t legally responsible for losses or damages that occur under a contract. When written clearly and applied fairly, they help both sides understand their responsibilities and obligations while limiting unexpected financial exposure.

However, if a clause is overly broad, hidden, or unfair, a court may render it invalid and require the party to accept full liability. Precise drafting and proper disclosure are key to making these clauses enforceable in the event of a dispute.

Originally published July 25, 2023, updated November 24, 2025