Exculpation, explained

Understanding the importance of exculpation provisions in an effort to limit liability

An exculpation provision is included in an agreement to relieve certain parties of liability if damages are assessed with respect to the agreement. Typically, in a real estate agreement where a “single purpose entity” or “special purpose entity” (SPE) that owns real property is executing an agreement, the officers, employees, members, partners, investors, subsidiaries, affiliates, agents, consultants, and attorneys of such entity want to ensure that they do not face any personal liability on behalf of such property owning entity, and therefore will include an exculpation provision in all of the property owner entity’s agreements. The following is an example of an exculpation provision:

Exculpation.  Notwithstanding anything to the contrary contained herein, no present or future principal, director, officer, employee, representative, advisor, affiliate, manager, shareholder, agent or direct or indirect partner or member of the property owner, nor any principal, director, officer, employee, representative, advisor, affiliate, manager, shareholder or agent of any such partner or member shall have any personal liability under this Agreement.

Enforcement in California

Civil Code Section 1668 states that certain exculpatory clauses “are against the policy of the law.” However, in the context of commercial real estate transactions, California courts have repeatedly found general exculpatory clauses enforceable notwithstanding Civil Code Section 1668. Any non-person entity should insert an exculpation provision to protect them from potential liability.

An “exculpation” provision is just one method of limiting a party’s liability. A party may want to include an “anti-sandbagging provision,” survival period, and basket and cap provisions to limit its potential liability.