Exclusion Clauses In Contracts Barring A Claim For Damages: Enforceability In India

Indian courts generally enforce exclusion clauses that bar or cap a claim for damages, but the Delhi High Court has shown that a clause shutting out damages altogether can be struck down as void under Section 23 of the Indian Contract Act, 1872. So the answer to "is an exclusion clause enforceable in India?" is: usually yes, but not always.

This article looks at how far parties can contract out of the right to claim damages for breach of contract under Section 73. It covers the key Supreme Court and High Court rulings on exclusion clauses and limitation of liability clauses, the public policy and unconscionability arguments used to challenge them, and what the law might look like going forward. If you draft, negotiate or litigate commercial contracts, the distinction between a cap, an exclusion of indirect loss and a complete bar on damages matters a great deal.

The article is written for lawyers, in-house counsel and business owners who want a clear view of where Indian contract law stands on this question.

Section 73 of the Indian Contract Act: Damages for Breach of Contract

Section 73 gives the party who suffers from a breach of contract a statutory right to compensation from the party in breach. Before it was written into the Contract Act, the right to claim damages was a common law remedy, available for torts as well as for breach of contract.

The section says that when a contract is broken, the injured party is entitled to compensation for any loss or damage that arose naturally in the usual course of things from the breach, or that the parties knew, when they made the contract, was likely to result from it. No compensation is payable for remote and indirect loss. The same rule applies to obligations resembling those created by contract. The Explanation adds that, when estimating the loss, the means that existed of remedying the inconvenience caused by non-performance must be taken into account.

It helps to read Section 73 as five separate rules:

1. General (or normal) damages. Compensation for loss that arises naturally and in the usual course of things from the breach.
2. Special damages. Compensation for loss that the parties knew, when they entered into the contract, was likely to follow from a breach.
3. No remote or indirect loss. Nothing is payable for loss that is too remote or only indirectly caused by the breach.
4. Quasi-contractual obligations. The same principles apply where the obligation only resembles a contract.
5. The loss must be assessed after taking into account the means available to the injured party to reduce it.

The real question for commercial parties is what happens when the contract itself rewrites or removes this right. Can the parties contract out of Section 73?

Why Contracts Include Exclusion and Limitation of Liability Clauses

Large commercial contracts carry real risk. A breach can lead to a damages claim far larger than the profit the defaulting party ever expected to make from the deal. Where the claim covers compensatory and even punitive heads, that uncertainty can threaten the financial health of the party in breach.

To manage this, parties began writing clauses that limit or remove their liability for damages. These usually take one of three forms:

1. Liability cap. Damages are limited to a maximum amount set in the contract.
2. Exclusion of specific losses. Indirect, consequential or loss-of-profit claims are ruled out.
3. Complete exclusion. Any claim for damages or compensation on breach is barred.

Used sensibly, these clauses are a risk allocation tool. They bring certainty and let each side price the deal knowing its worst-case exposure.

The difficulty is that the party inserting the clause is often the economically stronger one. Where the other side has no real choice but to sign, the question becomes whether a court can refuse to enforce the clause simply because it looks unfair or unreasonable. That tension between freedom of contract and fairness runs through the rest of this article.

How Indian Courts Have Enforced Exclusion Clauses

The traditional position is that exclusion clauses are valid and binding. Courts treat them like any other term, grounded in the freedom of parties to contract. The main decisions are below.

A few themes come out of these cases:

1. A clause that names a fixed sum shuts out any claim above it (Chunilal Mehta). Note that this clause did not bar damages. It only fixed the amount.
2. A party who signs a contract cannot back out of an exclusion clause just because it later turns out to be inconvenient (Thawardas Pherumal, Bharathi Knitting).
3. An arbitrator has no power to ignore an exclusion clause and award compensation anyway (Wig Brothers, relying on Ramnath International Construction and Rajasthan State Mines and Minerals v. Eastern Engineering Enterprises).
4. The Bombay High Court in Sterlite drew support from Section 62 of the Sale of Goods Act, 1930, which recognises the right of parties to vary or modify liability that would otherwise arise by implication of law.

The general approach, then, is that a party who signed the contract is bound by its terms, whether or not they read them. Unless the clause is challenged on a recognised ground such as coercion, fraud, misrepresentation or mistake, the courts hold the parties to their bargain.

Who is usually on the other side of these clauses?

In almost every one of these cases, one party was the State or a State instrumentality, and the other a private contractor. The State typically uses standard form contracts, so the contractor has little or no room to negotiate. The same pattern shows up in consumer contracts, where a company's standard terms leave the buyer with a take-it-or-leave-it choice.

That is the heart of the problem. There may be no procedural unfairness at the time of signing, since nobody was forced or deceived, and yet one side's economic strength lets it impose terms the other cannot realistically refuse.

Challenging Exclusion Clauses as Against Public Policy (Section 23)

Exclusion clauses do not fit neatly into the usual grounds that vitiate a contract, such as coercion, undue influence, fraud, misrepresentation or mistake. Those grounds deal with procedural unfairness. This is why Indian courts have mostly enforced exclusion clauses even where the parties were plainly unequal.

The Delhi High Court took a different route in Simplex Concrete Piles (India) Ltd. v. Union of India.

Simplex Concrete Piles v. Union of India

The standard contract between the Union of India and Simplex said that if the Union caused any delay, the contractor would only get an extension of time and no compensation. The court asked whether a party in breach, who would normally owe damages under Section 73 or charges under Section 55, can stop the injured party from claiming them just by saying so in the contract.

The court decided the question independently of two conflicting Supreme Court decisions that had read the same clause differently. It held that clauses barring a party from claiming what it is otherwise entitled to under Sections 73 and 55 are void under Section 23 of the Contract Act. In the court's view, those sections are the heart, foundation and basis of the Act, and the sanctity of contracts takes precedence over a clause that leaves the injured party with no remedy. Such a clause defeats the legislative intent and is against public policy.

MBL Infrastructures v. Delhi Metro Rail Corporation

The Delhi High Court followed Simplex in MBL Infrastructures v. Delhi Metro Rail Corporation. It said a clause that prohibits a claim for damages defeats the purpose of the Contract Act, hinders the smooth operation of commercial transactions, and is contrary to the fundamental policy of Indian law.

Where the line is drawn

The Simplex ruling is narrow in one important respect. It strikes down only clauses that impose an absolute prohibition on claiming damages. It does not reach clauses that:

1. merely limit liability up to a stated threshold, or
2. exclude liability for indirect or consequential loss.

The Delhi High Court confirmed this in PLUS 91 Security Solutions v. NEC Corporation India Pvt. Ltd. Where the parties have agreed that certain types of damage, such as indirect or consequential loss or loss of profit, are excluded, the exclusion must be enforced and the Simplex ratio does not apply.

The Madras High Court had earlier refused to enforce a clause printed on the back of an invoice that capped a service provider's liability at a fixed amount, on public policy grounds. In light of the many later decisions enforcing limitation clauses, that view is unlikely to be treated as good law today.

The effect of Simplex is to move the test away from procedural unfairness and towards substantive unfairness, which asks whether the clause itself is unfair, whatever the circumstances of signing.

Unconscionable Clauses and Unequal Bargaining Power

Since Simplex rests on Section 23, the next question is whether an exclusion clause between two contracting parties can be tested against public policy at all. Two Supreme Court decisions suggest it can, in the right circumstances.

Central Inland Water Transport Corporation v. Brojo Nath Ganguly

In this landmark case, the Supreme Court looked at the law in the United States and the United Kingdom on unreasonable contract terms and held that unfair, unreasonable and unconscionable clauses in contracts between parties of unequal bargaining power are void under Section 23. The principle covers situations where the weaker party can only get goods, services or a livelihood on the stronger party's terms, or has no meaningful choice but to sign on the dotted line.

The court also set a limit. The principle does not apply where the bargaining power of the parties is equal or almost equal, and where both are businessmen entering into a commercial transaction. That carve-out is what lets commercial parties negotiate freely and allocate risk through caps and exclusions.

Even so, Central Inland gives a party a route to argue that an exclusion clause is unconscionable, provided it can show real inequality of bargaining power.

LIC of India v. Consumer Education and Research Centre

In a different context, the Supreme Court held that where a clause looks unreasonable or unfair, the court must look at the relative bargaining power of the parties. In dotted line contracts the weaker party has no chance to bargain, so courts may strike down the offending clause.

The counter-argument: Gherulal v. Mahadeodas

The other side of the debate rests on Gherulal v. Mahadeodas, where the Supreme Court said public policy should be invoked only in clear cases where harm to the public is substantially incontestable. Although a new head of public policy is theoretically possible, the court advised against trying to discover new ones, for the sake of stability in society.

Should Courts Strike Down Exclusion Clauses? Both Sides of the Argument

Both positions have force. The real question is how to protect weaker parties without unsettling commercial contracts where both sides negotiated at arm's length.

The Way Forward: Statutory Reform of Unfair Contract Terms

The Contract Act deals well with procedural unfairness. Undue influence, coercion, fraud and misrepresentation are all covered. It has no express provision for substantive unfairness, meaning a challenge to a term simply because it is harsh, unreasonable or unconscionable. Courts have filled the gap by stretching the public policy doctrine in Section 23, and Central Inland, LIC and Simplex together give a party enough room to attack an exclusion clause on that basis.

To succeed, the challenger must prove that the clause is clearly unfair, unreasonable or unconscionable, and that the other side held a substantially dominant economic position when the contract was made. The Supreme Court in Central Inland accepted that such cases cannot be listed in advance, and that each must be judged on its own facts and circumstances.

Consumer contracts: the Consumer Protection Act, 2019

The law has moved faster for consumers. The Consumer Protection Act, 2019 expressly recognises an “unfair contract”, which includes imposing an unreasonable charge, obligation or condition on a consumer that puts the consumer at a disadvantage. In Ireo Grace Realtech Pvt. Ltd. v. Abhishek Khanna, the Supreme Court observed that consumer courts can declare unfair contractual terms null and void. An exclusion clause in a consumer contract can arguably fall within this definition.

The Act protects only “consumers”. It cannot be used in a purely commercial transaction between businesses.

The Law Commission of India's 199th Report

For other contracts, the Law Commission of India in its 199th Report proposed a new law on substantive unfairness. A term would be treated as unfair if it is harsh, oppressive or unconscionable, with guidelines to help courts decide. The Commission further proposed that a term should be deemed substantively unfair and void if it:

1. excludes or restricts liability for negligence, or
2. excludes or restricts liability for breach of express or implied terms of the contract without adequate justification.

In other words, an exclusion clause that removes liability for breach would be presumed unfair unless it was inserted with adequate justification.

Our view

We lean towards the Law Commission's approach. Substantive unfairness should be recognised by statute, with clear guidelines applied case by case. A clause that bars only one party from claiming damages for breach may well be unfair and unreasonable, and courts should have a statutory tool to strike it down. That would also spare courts from relying on a vague and undefined concept like public policy.

Until that happens, courts should keep upholding the freedom to contract while remaining alert to parties who had no equal bargaining power in reality. When deciding whether to strike down an exclusion clause, they should look at the overall economic position, commercial standing and actual negotiating power of each side, and step in where the clause was inserted only to absolve one party from liability for its own breach.

Courts should not interfere where the benefit of the clause runs to both parties, where it was inserted after good faith negotiation, or where the parties had equal or almost equal bargaining power.

Practical Takeaways for Drafting and Challenging Exclusion Clauses

In India, an exclusion clause is usually enforceable, but the type of clause decides how safe it is.

1. Caps and exclusions of indirect or consequential loss are the safest. Courts enforce them, and Simplex does not touch them (PLUS 91).
2. A complete bar on damages is the riskiest, especially in a standard form contract with the State or a dominant commercial party. The Delhi High Court may treat it as void under Section 23 (Simplex, MBL Infrastructures).
3. Mutual clauses negotiated in good faith between parties of similar strength are the most likely to survive.
4. Challengers need to show both that the clause is unfair or unconscionable and that the other side had overwhelming bargaining power. Being the weaker party is not enough on its own.
5. Consumers have an additional route through the "unfair contract" provisions of the Consumer Protection Act, 2019.
6. Drafters should keep the clause proportionate, make it two-way where possible, and record the commercial reasons for it, which is the kind of "adequate justification" the Law Commission has in mind.

Indian law on exclusion clauses is still unsettled at the edges. Until Parliament acts on the Law Commission's recommendations, the outcome in any dispute will turn on the wording of the clause and the real bargaining position of the parties.

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.