India: Limitation Of Liability Clause In An Agreement

Last Updated: 25 July 2017
Article by Bhumesh Verma

Let us do an exercise. You may not have bothered so far, so you could do it today.

Have a look at the backside of your Drycleaner's slip for the garments you have given him for laundry or dry cleaning. If you do not find such slip, try reading some other service provider's slip.

Such slips have some terms and conditions written in very small font size. One of these terms in alia, is to the effect that "The service provider's liability in any eventuality shall not exceed ____________ (a particular amount)."

If you give you 2-piece Armani suit (which cost you half a million Rupees) for dry cleaning, the dry cleaner charges you a small sum, say Rupees 1,000 or 2,000 for its services. What if the suit were to be damaged during the process? As a customer, you may like full compensation for the loss or replacement of your suit. However, such a commitment does not make commercial sense for the dry cleaner. So what your drycleaner does, it tries to limits its liability for any mishappening by providing a limit on its liability.

As we have discussed at various places, parties have rights and obligations under the agreement. They are required to perform their respective sets of responsibilities according to pre-agreed terms and conditions, norms, time-frames, etc.

Invariably, one or more parties are required under certain circumstances to compensate the other(s) for any failure, non-performance, breach, delay and other specified reasons.

A limitation of liability clause stipulates that a party will be obligated to pay to the other in such an event under the terms of an agreement. This clause limits the amount as well as the types of damages a party can recover from the other.

This is an efficient way to cap the liability amount undertaken by a party (usually the service provider). Invariably, this exposure is capped at the fees paid to the service provider under the agreement or another small amount which may be more or less than the fees. This way, among other things,:

  1. the party limiting its liability can gauge the extent of its potential exposure under a particular agreement;
  2. its auditors can also predict the maximum exposure and contingent liabilities; and
  3. the party can take adequate insurance cover to take care of any potential liabilities.

This clause is more prevalent in service agreements and normally favours the service provider who wants to limit its exposure.

The reason and rationale for such a clause is to protect the service provider from undertaking risk which may not be commensurate with the small fee that it may be charging for doing a particular assignment or handling an equipment or thing (as cited in the dry cleaner's example above).

The service provider's profit margin on projects or assignments in many cases may support taking unlimited risk in respect thereof. Even insurance covers come with several riders and disqualifications and even insurers insist on limitation of liability clauses in agreements.

Usually, the party drafting the agreement has an upper hand in this regard. It incorporates limitation of liability clause in its favour to limit its exposure from the first draft itself.

However, the enforceability of limitation of liability clauses is not absolute (particularly in cases involving gross and deliberate negligence on part of the service provider) and depends on merits of each case.

Here are some examples:

  1. The Distributor shall have no liability to compensate the Company for any claim pressed by the latter under this Agreement except as expressly provided under this Agreement.
  2. The Agent shall not be liable or responsible for any action taken or omitted by him in pursuance of this Agreement in good faith, except for gross negligence, bad faith or wilful misconduct adjudicated by a court of competent jurisdiction.
  3. The aggregate liability of the Agent towards the Principal in respect of any losses, costs claimed by the Client in relation to this Agreement shall not exceed the fees received to the Agent provided that any such claim is made not later than within 15 (fifteen) days of termination of this Agreement.
  4. The aggregate liability of the Service Provider and its directors, officers, employees, agents, sub-contractors in respect of any claims, losses, costs or damages arising out of or related to this Agreement shall not exceed the fees received by the Service Provider under this Agreement or Rs. 25,000 (Rupees twenty five thousand) only, whichever is greater. Further, any such claim(s) must be made during the engagement period of the Service Provider or within 3 (three) months of the termination or expiry of this Agreement, as the case may be. The Service Provider's obligation shall also be restricted only to actual and direct losses and not to any indirect, special or consequential losses. The Service Provider shall not be subjected to any punitive or exemplary damages.
  5. The aggregate liability of the Service Provider in respect of any claims, losses, costs or damages arising out of or related to this Agreement shall not exceed the fees received by the Service Provider under this Agreement or Rs. 25,000 (Rupees twenty five thousand) only, whichever is less. The Client shall be entitled to press only those claims in respect of which a loss or damage exceeds Rs. 5,000. The Client shall first make efforts to recover such losses through insurance. Any amount paid by the insurance company of the Client shall also be deducted from any claim pressed by the Client.
  6. No Party shall have any liability towards each other under this Agreement, except in the case of a material breach. Even in the case of a material breach, a Party shall only be liable to make good any actual and direct losses. The breaching party shall not bear any indirect, special or consequential losses nor be subjected to any punitive or exemplary damages.

Note : The above is a sample chapter from my forthcoming book on "Drafting of Commercial Agreements".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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