This is the second part of a three part series re-evaluating the significance of the liability cap clause in contracts with an emphasis on limiting financial exposure and keeping in mind the aftermath of the pandemic. This part shall delve into the intricacies of what the Liability Cap clause shall constitute of and the aspects of what are to be included in the said clause.
How to ascertain the terms of the clause?
The limiting of liability in commercial contracts is frequently subject to intense negotiations between the contracting parties, where they try to justify the exclusion of liability for certain types of losses or placing a financial cap on the parties’ overall liability. Often the pecuniary limit of the liability is set within the fess and compensation paid under the agreement.
What terms are to be excluded?
It is to be noted that the limitation of liability clause cannot put a cap on damages arising from any fraud, misconduct or illegal acts of the contracting parties.
What is the extent to which the liability of a contracting party be capped?
The liability clause is independent in terms of any governing law as to the determination of the ceiling amount, thus the determination is undertaken by the contracting parties considering the following:-
- The proportional role of the party that is incorporating the liability clause for safeguarding from extensive financial damage to its company in case of a breach of the contract.
- The total fee/consideration that the contract is subject to, by the contracting party in pursuance to the concerned transaction(s).
- The maximum amount that can be claimed by the claimant in case of a breach, as specifically stated in the Contract itself or any other arrangement like no compensation but only a refund of the payments already made.
All the above scenarios are essentially directed towards an ascertainment of the quantum of the financial damage that can probably incur in case of a breach.
The contracting party capping their liability can ascertain their potential liability exposure under a particular clause by including the said clause in their contract. It is immensely mandatory for such a clause to be precise and conspicuous. The said clause needs to unambiguously depict the kind of losses against which the liability of the contracting party is provided to be capped or excluded. Further, the said clause needs to be fair in terms of comparability in pursuance to probable loss, and thus be ascertained prudently.
Despite of inclusion of the said clause, it does not provide an absolute protection against one’s liabilities under a contract, as the same can be scrutinised by the court of law, and accordingly decide its legality.
Kindly refer to Part 3 for insights into the enforceability of the Liability Cap clause which will be released shortly.
Corrida Legal is consistently rated as the best corporate law firm & lawyers in Gurgaon (Delhi NCR) and Mumbai. Reach out to us on LinkedIn or contact us at contact@corridalegal.com/+91-9211410147 in case you require any advice regarding capping of liability.
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