What is an Exclusive Remedy Clause?

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One of the reasons that companies enter into written contracts with each other is to provide a certain amount of predictability in business dealings.  The contract allows both parties to know what to expect from each other over a term that can last for months or years.  However, when one party breaks the contract, this predictability is shattered if the remedy for the breach is left up to an arbitrator or judge.  Including an exclusive remedy clause into the contract can resolve this potential source of unpredictability.

Having a pre-determined remedy already included in the contract allows the company to predict with precision what will happen even if the other party fails to keep their promise and breaches the contract.  A common example of an exclusive remedy is for sale agreements where the buyer’s exclusive remedy for a defective product is a replacement or refund.  Because the seller already knows what the result of potential litigation will be, the risk and unpredictability of entering into the sales contract are much lower.

However, exclusive remedy clauses are not always recommended as many courts feel uncomfortable enforcing them and may reject them in their entirety.  Therefore, it is always best to discuss your options thoroughly with an attorney before signing or drafting a contract with an exclusive remedy clause.  Please contact our office if you would like further information regarding exclusive remedy clauses or drafting international business contracts.