This is the third and the last part of the three-part series re-evaluating the significance of the liability cap clause in contractual agreements in the aftermath of the pandemic. This Part deals with the enforceability of liability cap clauses in contracts and aims to elucidate how it is dependent on the merits of each case. Thereby, it restricts a contracting party from absolutely taking a defence based on the existence of the said clause and disclaim his/her partial or complete liability towards an agreed transaction in the contract.
When can the capping of liability become unenforceable?
The inclusion of the limitation of liability clause needs to be considered with utmost care. The parties to a contract should be aware that if they seek to impose exclusions that are too wide or liability caps that are too low, they then run the risk of deeming the entire clause unenforceable, unenforceable before the court of law, thereby exposing the defaulting party at risk of potentially unlimited liability.
In cases where damages are too high, for instance, if damages amount to Rs. 1,20,00,00,000 /- but the limitation of liability is set to Rs. 50,000/-, the Court will most probably scrutinize the insufficiency of the damages being decided at the time of entering into the contract and refuse the enforcement of the said clause. This is because a court of law is bestowed with the responsibility of making good the losses in such cases and with a clause stating an amount many times lesser than the actual loss or damage caused, such an objective of the Court will not be fulfilled.
What does the law pertaining to unfair capping of liability say?
The provisions of the Indian Contract Act, 1872 under Section 24 provides that if any part of a single consideration for one or more objects, or any one or any part of any several considerations for a single object, are unlawful, the agreement is void. Furthermore, Section 23 of the said Act provides whether or not, an object or a consideration, is to be declared lawful and enforceable, and one such condition provided for ascertaining the legality of the object or consideration included in a contract, under the said provision is “where the court regards it as immoral, or opposed to public policy“.
In this context, a capping of liability clause ensures that parties to a contract do not become unjustly burdened due to risks that may not be commensurate with the relatively low fee or consideration that has been charged or taken by any party, thereby ensuring that the agreements entered into are fair, reasonable, and in line with public policy.
The view of the Apex Court
The Hon’ble Supreme Court in Bharathi Knitting Company v. DHL Worldwide Express Courier Division of Airfreight Ltd ([1] (1996) 4 SCC 704), while dealing with a similar clause, which limited the liability of a courier company in the event of any loss/damage caused to a shipment, provided in their terms and conditions printed on a consignment note for shipment of a package, upheld the decision of the National Consumer Disputes Redressal Commission, which limited the amount awarded to the consignor for deficiency of service, to the amount specified in the limitation of liability clause. The Court held that parties who sign documents containing contractual terms are usually bound by such contracts and rejected the contention that there was no consensus ad idem between the parties on limitation of liability. Thus, it is crucial for the contracting parties, and in their best interests to ascertain one’s liability cap prudently in order to ensure its enforcement as and when the need arises.
Conclusion
Capping of liability clauses can be an important inclusion for many commercial contracts. But an inadequately and ambiguously drafted clause may fail to be enforced in the court of law and in-turn backfires at the contracting parties, exposing them to extreme financial liabilities. Whereas a well-drafted clause that is precise and conspicuous is not only enforceable in a court of law, but also allows the parties to balance their risk against the potential benefits of the contract, to procure appropriate insurance cover, and to control and predict their potential financial exposure.
Thus, it becomes very crucial as to how the parties negotiate their way through, while including the said clause in their contract, and accordingly agree on the limits of liabilities, along with the losses/risks which areas sociated with such liabilities.
Corrida Legal is the preferred corporate law firm in Gurgaon (Delhi NCR) and Mumbai. Reach out to us on Linkedln or contact us at contact@corridalegal.com /+91-8826680614 in case you require any advice regarding capping of liability.