Reviewed and Validated by: Naman Jain, Associate
Introduction – Net Contribution Clauses in India
A net contribution clause provides for proportional liability of each party which has been involved in the loss regardless of its culpability or involvement in causing such loss. In a net contribution clause, the liability is eventually fastened based on the court’s adjudication on the amount to be paid by each party based on the principles of reasonableness and equitability.
The clause is included for the purpose of limiting a party’s liability to the amount that is fair for the party to pay. This clause can be helpful in situations where there are multiple parties with different expertise involved in the work.
Enforceability and Legal Considerations
The enforceability and effectiveness of a net contribution clause is determined primarily by the language of the clause and the laws of the jurisdictions in which the clause is applied. In India, any such contractual clauses limiting liability must be judiciously drafted to ensure that they do not run afoul of Section 23 of the Indian Contract Act, 1872 that prohibits agreements against public policy. Courts may closely examine such clauses to see if they place an unfair bar on a party’s ability to seek full compensation for a loss. If the clause unreasonably places the risk of a loss upon one of the able parties, it may also be rendered unreasonable and unenforceable.
Practical Drafting Considerations
Practically speaking, the net contribution clause must be written in a manner that specifies the terms under which liability will be apportioned and the framework by which the responsibility of each party will be evaluated. It should also signal how disputes over contribution are to be resolved — be it by arbitration, expert determination or in a court. Such practice provides transparency and minimizes the risk of lengthy legal battles. This is especially relevant in the Indian construction and professional services industries, in which several different parties, such as architects, engineers, and contractors, are typically involved with a project and can use such clauses to not only limit their financial exposure but also to ensure fairness when liability is distributed.
