Limiting liability
Prohibition on exclusions and limitations
What liabilities cannot be excluded or limited by a supplier in a contract?
As per the Contract Act, the parties can contractually agree to limit their liability under the contract However, the enforceability of exclusion or limitation of liability clauses is not absolute and cannot be arbitrarily applied and depends on the facts of the case.
As contracts that bar and disentitle a contractual party to claim damages or monetary entitlement to which such party is entitled, are void, there are various instances where courts have struck down contracts limiting the liabilities in relation to death, personal injury, fraud, negligence or misrepresentation or where a supplier excluded its liability on account of defective product sold to the buyer.
Indian courts have also held that while an individual may waive the law that is made for individual benefit, in the event such law includes an element of public interest or public policy, such rights arising from the law cannot be waived – as the same becomes a matter of public policy or public interest.
Financial caps
Are there any statutory controls on using financial caps to limit liability for breach of contract?
While there are no specific statutory controls prescribed on using financial caps to limit liability for breach of contract, the Contract Act provides that any damages claimed by a party on breach of a contract by the other party should be just and reasonable and such damages should have naturally arisen in the usual course from such breach.
The Contract Act also recognises the concept of liquidated damages (ie, where a sum is named in a contract as the amount payable by way of damages). In such cases, the party raising a claim for breach may receive reasonable compensation provided it is a genuine pre-estimate of damages fixed by both parties and not a penalty.
Parties may also contractually agree to limit liabilities and in such cases, the amount specified in the contract is the outer limit or cap on the damages that can be claimed, however, any claim has to be substantiated as the actual loss suffered and whether the same is reasonable. In Bharathi Knitting Company v DHL Worldwide Express Courier Division of Airfreight Ltd (1996) 4 SCC 704, the Indian Supreme Court enforced the limitation of liability clause in the terms and conditions printed on a consignment note for shipment of a package. The court limited the amount awarded to the consignor for deficiency of service, to the amount specified in the limitation of liability clause.
In addition to the above, there are also judicial precedents where the courts have struck down the limitation of liability in a contract because it is unreasonable, discriminatory or against public policy.
Indemnities
Are there any statutory controls on indemnities used to cover liability risks in contracts?
There are no statutory controls or restrictions on the quantum of loss that can be claimed under indemnities in contracts.
Unlike the claim for damages for breach of contract under the Contract Act, the loss claimed under indemnity under the Contract Act is not caveated by the test of reasonability and causation. In fact, the courts in India have held that an indemnified person can seek the indemnifier to pay the liability directly, instead of first incurring such cost and then suing for indemnity.
Liquidated damages
Are liquidated damages clauses enforceable and commonly used in your jurisdiction?
The clauses that obligate parties to pay liquidated damages are enforceable and commonly incorporated in commercial contracts executed in India provided the same must not be punitive in nature (for breach of contract). For a liquidated damages clause to be legally enforceable, the thumb rule to consider is whether the damages specified are a genuine pre-estimate of losses. Further, to enforce such a clause, a loss must be suffered by the party and the stipulated damages should be an effort to restore the affected party to the same position as if the contract had been properly performed.
