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Contract Drafting in view of the provisions of Indian Contract Act 1872

An Introduction-Limitation of Liability Clauses


November 19, 2011 (http://blog.contractdrafting.co.in/Blog/index.php/2011/11/19/limitation-of-liability-clauses/)
(http://blog.contractdrafting.co.in/Blog/index.php/author/rajeev-mishra/)
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Rajeev Mishra

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As a dedication to readers of this Blog (http://blog.contractdrafting.co.in/Blog/) , I am forcing myself to write something after a long hiatus.
The topic that I have chosen is Limitation of Liability and my discussion of this topic will cover:
1. Relevant section of Indian Contract Act;
2. Relevant judgements, which address the issue directly;
3. Suggestions to draft such clause in the agreements; and
4. Suggestions by other prominent authors on the subject.

How Indian contract law addresses this concept?


In the Indian context, Damage Clause and Limitation of Liability Clause are interlinked. I will be discussing Damage and
Liquidated Damages clause in detail later on.

Readers should ask


To understand the concept of Limitation of Liability, readers must first ask themselves:
1. Why there is a need to include (or not) a Limitation of Liability clause in the contracts?
2. When such need arises?
3. Are contract drafters better off if they exclude Limitation of Liability clause from their contracts?
Answers to above questions are very subjective in their scope. It is critical to first understand the influencing elements that will affect
the answers, including concepts of Breach, Termination of contract and its interrelation with damages.

Relation between Limitation of Liability, Breach, Termination and Damages


When one of the parties to a contract breaches the terms of contract, the other party has several options, in Indian context:
1. Enforce the performance of the contractual obligations by the other Party under the Specific Relief Act, if such remedy is
feasible, both under the boundaries of Specific Relief Act and the terms of the contract;
2. Seek contractual relief mentioned as consequence of termination or Liquidated damages;
3. Seek any other remedy available under specific law governing the contract, e.g., Consumer Protection Act, if applicable;
4. Seek equitable remedy from Courts under Indian Contract Act, under Sections 73-75 of Indian Contract Act ;
5. Seek restitution of contract;

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Relevant provisions of Indian Contract Act


Section 73 and Section 74 of the Indian Contract Act of 1872 (http://districtcourtallahabad.up.nic.in/articles/ICAct.pdf) , speaks of
the compensation that is payable to non-defaulting party in case of breach of a contract by the defaulting party, and Section 75 of
the Indian Contract Act of 1872 (http://districtcourtallahabad.up.nic.in/articles/ICAct.pdf) , speaks of compensation that is payable
to in case of rightful termination by non-defaulting party for non-performance of contract by the defaulting party. Readers are
advised to read the Illustrations given next to these three sections to understand the scope and nature of damages allowed and
prevented by Indian contract law.
In brief, Section 73 is about Compensation for loss or damage caused by breach of contract. Summary of Section 73: Compensation
is payable for loss or damages, which either naturally arose in the usual course of things from such breach or parties knew, at the
time of making of contract, that such loss or damage was likely to result from breach. Section 73 also specifically excludes payment
of compensation for remote and indirect loss or damage sustained as a result of breach of contract. Here compensation will be
paid to the non-defaulting party only if such partys losses or damages due to breach of contract by the defaulting party are proved.
On the other hand Section 74 is about Compensation for breach of contract where penalty stipulated for. Summary of Section 74:
Non-breaching party is entitled to a reasonable compensation, i.e., a sum not exceeding any specific amount mentioned in the
contract (whether specified in the contract as compensation or penalty (e.g., interest, liquidated damages)) in case of breach of
contract. It is not important to prove that non-breaching party suffered any actual damage or loss.
Section 75 is about Party rightfully rescinding contract entitled to compensation. Summary of Section 75: If a Party has right to
terminate a contract for non-performance, he is entitled to a compensation for damage sustained through non-fulfillment of
contract.

Observations
In light of above observations, it becomes clear that scope of any Limitation of Liability Clause in any contract cannot restrict the
scope of compensation payable for damages or loss suffered by the non-defaulting party due to breach or non-performance of
contract by the defaulting party, as this compensation is payable under the Indian Contract Act of 1872.
Although, there is no specific clause in Indian Contract Act of 1872, which gives guidance on Limitation of Liability provisions, there
is enough guidance on framing of such clauses.
Now, coming back to the Questions that we have asked initially, readers can now answer these as follows:
Answer to question in item (a). Inclusion of Limitation of Liability clause in a contract is important, especially in light of different status
of such clause in international business relations, to define a clear guideline for the parties to a contract. A Contract drafter should
take into account the residential status of parties, choice of law clause, jurisdiction clause, liquidated damages provision, and
subject matter clause. If a strong relation with India has been created in the contract through these clauses, the Limitation of Liability
clause should take this into account. If a strong relation with foreign law is being created, contract drafter should then take into
account the legal position applicable to Limitation of Liability clause in such foreign jurisdiction.
Answer to question in item (b). Inclusion of a Limitation of Liability clause is important in case one of the parties to the contract is from
India and another is from a foreign country.
Answer to question in item (c). If the parties, subject matter of contract, applicable law and jurisdiction, all are strongly linked to India,
contract drafters may exclude such Limitation of Liability clause from the contract; provided, they have included Liquidated
Damages Clause in the contract. It is recommended that they have included either of the two clauses, Limitation of Liability or
Liquidated Damages, in their contracts. But see the below discussion on the Judgement of Honble Supreme Court of India in
Bharathi Knitting versus DHL Worldwide (http://indiankanoon.org/doc/1042742/) . In international contracts, involving one of the
Indian Parties, and strong link to Indian law, must have both Limitation of Liability clause and Liquidated Damages Clause.
Otherwise, the international party may not be able to seek compensation under Section 74 of the Indian Contract Act, which is more
liberal in meaning as compared to Section 73 and Section 75 of the Indian Contract Act.

Relevant judgement in India


In India, some of the Relevant judgement addressing the Limitation of Liability of parties in a contract are those which are related to
insurance contracts. Since the Limitation of Liability clause in such contracts is also governed by relevant Insurance laws
applicable in India, applicability of these clauses is construed by the court within the four boundaries of the insurance laws.
However, in a notable decision of Bharathi Knitting Company versus DHL Worldwide Express Courier (1996) 4 SCC 704
(http://indiankanoon.org/doc/1042742/) , Supreme Court of India while rejecting the complainants appeal, upheld the judgement
by National Consumer Disputes Redressal Commission, New Delhi awarded only as sum of $100 as damages to the complainant,
which was the sum named in the Limitation of Liability Clause of the Consignment Note, the contract between the parties. However,

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readers attention is drawn to observations made by Honble Supreme Court: It is true that the limit of damages would depend upon
the terms of the contract and facts in each case. Readers are also advised that the appeal by complainant was based on absence of
consensus ad idem between the parties. Another point that Honble Supreme Court noted was that the complainant had failed to
take put insurance covers for the goods as advised in Clause 7 of the Consignment note. In light of above discussion, it cannot be
stated that above case is a definite state of law on all situations involving Limitation of Liability Clause. Also to be noted is the fact
that the award of such limited compensation was towards deficient services; which is better addressed by Tort law (still in nascent
stage inIndia). Since, no punitive damage is allowed in light of Section 73 of the Indian Contract Act, awarding a higher sum for
deficient services might be seen as penal.
I am sure, the findings might have been different had the facts were different.

How to draft a Limitation of Liability Clause?


While drafting a Limitation of Liability clause, readers may consider the points raised in the discussion above and the views made by
other authors in their articles.
A simple Limitation of Liability Clause may be drafted like this:
The aggregate liability of the Parties under the contract shall be limited to a sum of $___. This limitation on the liability of the parties
under this Agreement shall not prevent a Party to claim compensation for damages arising out of gross negligence or willful misconduct
of the defaulting party.
Readers may modify the language of above clause in a number of ways. But, what is important is that readers should identify what is
the limitation threshold (e.g., a named sum), scope of limitation of liability, exclusions, etc. Always remember that a named sum even
in Limitation of Liability clause will be addressed by courts in terms of limitations of Section 74 of the Indian Contract Act.
Readers may find many examples of these clauses in different kinds of contracts, website terms, EULAs, License Agreements, etc., all
of these are available using Google search engine. Readers are advised to go through as many examples they can to learn from the
variations. Readers are advised not to not use a standard version every time they draft such a clause. They should be creative in
drafting such clauses. Readers should always consider the context in which they are drafting the clause limiting the liability of
parties.

Suggestion by other authors on the topic


Readers are advised that the following observations made by the authors named below are their own, to which readers can refer to
for academic purposes. Any advice made by them is likely to be based on their personal observations, experience, applicability and
scope.
See detailed discussion on this concept by Mr. John C. Jack Tracy on his Blog (http://knowledgetonegotiate.blogspot.com/) .
Limitation of liability clauses (http://knowledgetonegotiate.blogspot.com/2011/03/limitation-of-liability-sections.html)
Limits of liability (http://knowledgetonegotiate.blogspot.com/2011/03/limits-of-liability.html)
Limitation of Liability thoughts on negotiating (http://knowledgetonegotiate.blogspot.com/2011/02/negotiation-thoughts-onnegotiating_13.html)
Limitation of liability versus insurance (http://knowledgetonegotiate.blogspot.com/2011/10/limitations-of-liability-versus.html)
Limitation of liability why suppliers would want them in other terms like delivery
(http://knowledgetonegotiate.blogspot.com/2011/10/when-would-supplier-want-to-include.html)
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TanyaJain22 3yearsago

canderebetotalexclusionofliablityunderindiancontractact?

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raajeevmishra

Mod >TanyaJain22

3yearsago

Yes,exclusionofliabilityisamatterofagreementbetweentheparties.

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