Do Parties Have An Unfettered Right To Exclude Or Limit Their Liability For

Introduction

The law of damages in India is codified in Sections 73 and 74 of
the Indian Contract Act, 1872 (“Contract
Act“). Section 73 of the Contract Act provides that a
party that suffers breach of contract is entitled to receive from
the party that has broken the contract, compensation for any loss
or damage caused to him thereby, which naturally arose in the usual
course of things from such breach or which the parties knew, when
they made the contract, to be likely to result from a breach.
Section 73 of the Contract Act bars the grant of compensation for
remote and indirect loss or damage sustained on account of breach
of contract.

This bifurcation between damages towards losses, which naturally
arise in the usual course of things (first limb) and losses that
the parties knew, when they made the contract, to be likely to
result from a breach of the contract (second limb), appears to be
borrowed from the principle laid down in the celebrated English
decision of Hadley v. Baxendale.¹ The first limb is
popularly referred to as general damages, whilst the second limb is
referred to as special damages i.e. additional loss caused by a
breach on account of special circumstances, outside the ordinary
course of things, which was in the contemplation of the
parties.

Parties to a contract can, and usually do, exclude liability for
certain types of losses, which may be suffered by each or either
party, or limit the amount of their liability pursuant to such
loss. Though clauses limiting liability are by and large enforced,
this may be subject to considerations such as bargaining power of
the parties and public policy.

In Part I of this post, we examine the legal position on
exclusion and limitation of liability clauses in India, and the
approach adopted by Indian courts while applying such clauses.

Position in India

Whilst there is no express statutory bar in India against
contractually excluding or limiting liability for damages, Section
23 of the Contract Act provides that the consideration or object of
an agreement is unlawful inter alia if it is of such a
nature that, if permitted, it would defeat the provisions of any
law or if the court regards it as immoral or opposed to public
policy. An agreement whose object or consideration is unlawful is
deemed to be void.

In the case of contracts where parties are found to have unequal
bargaining power, it is important to be wary of the possibility
that courts may refuse to enforce clauses excluding or limiting
liability, which are found to be unconscionable. In 1986, the
Supreme Court introduced to India the principle that courts will
not enforce an unfair or unreasonable contract or an unfair or
unreasonable clause in a contract, entered into between parties who
are not equal in bargaining power.² Illustrative instances of such
inequality in bargaining power were enumerated, including where it
is a result of the great disparity in the economic strength of the
contracting parties, where the weaker party is in a position in
which he can obtain goods or services or means of livelihood only
on the terms imposed by the stronger party or go without them,
where a man has no meaningful choice, but to give his assent to a
contract or to sign on the dotted line in a prescribed or standard
form or to accept a set of rules as part of the contract, however
unfair, unreasonable and unconscionable a clause in that contract,
form or rules may be. Contracts that contain terms so unfair and
unreasonable that they shock the conscience of the court were held
to be void as opposed to public policy. Though the court was
dealing with a provision for termination of employment, which was
found to be unfair, the aforesaid findings were made in a more
general context, and after referring to English judgements dealing
with commercial matters, including contracts which contained
exclusion or limitation of liability clauses. The court…