India: Do Parties Have An Unfettered Right To Exclude Or Limit Their Liability For Breach Of Contract? – Part II

In Part I of this post, we had discussed the concept of exclusion or limitation of liability clauses and the position in India. In this part, we will examine the position of such clauses in England and provide our views on such clauses.

Position in England

The application of clauses excluding or limiting liability in England is more consistent. When faced with standard form contracts or contracts where there is inequality of bargaining power, English courts apply the test of fairness or reasonableness of clauses in such contracts and refuse to enforce provisions of contracts that are unconscionable or exploitative.¹

The position in this regard was codified in the Unfair Contract Terms Act, 1977 ("UCTA"), which inter alia prescribes limits on the extent to which liability for breach of contract, negligence or other breaches of duty can be contractually avoided through exclusion or limitation of liability clauses. Clauses that attempt to exclude liability for death or personal injury, resulting from negligence are rendered void, whilst clauses excluding liability for any other loss or damage resulting from negligence are subject to a test of reasonableness.² In cases where one party is dealing on the other's written standard terms of business, the latter cannot, by reference to any term of the contract, exclude or restrict any liability in respect of his breach, except insofar as the contractual term satisfies the requirement of reasonableness.³ This applies only to cases where parties are governed by the standard business terms of one of the parties. The aforesaid limits do not apply to international supply contracts, which have been defined inter alia as contracts for sale of goods made by parties whose places of business are in the territories of different States.⁴

The UCTA provides that a term will be reasonable if it is a fair and reasonable one to be included, having regard to circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.⁵ The factors to be considered while determining whether restriction of liability to a specified sum of money satisfies the requirement of reasonableness, are the resources which the person restricting his liability could expect to be available to him for the purpose of meeting the liability should it arise, and how far it was open to him to cover himself by insurance.⁶ Certain other guidelines for determining reasonableness are also specified, including the strength of the bargaining power of the parties relative to each other, whether the customer received an inducement to agree to the term and whether the customer knew or ought reasonably to have known of the existence and extent of the term.⁷ The UCTA places the burden of showing that a contractual term satisfies the requirement of reasonableness on the person claiming that it does. Most of the provisions of the UCTA do not apply to consumer contracts, which are separately governed by the Consumer Rights Act, 2015.

The English Court of Appeal in Watford Electronics Ltd v. Sanderson CFL Limited⁸ has held that "Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement, which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other - or that a term is so unreasonable that it cannot properly have been understood or considered - the court should not interfere." In this case, the court found that the relevant clause of the contract excluded liability for indirect and consequential losses under the second limb of the Hadley v. Baxendale⁹ (supra) rule and restricted liability for losses flowing directly from breach of the contract, and that this clause was reasonable for the purpose of the UCTA.

Contracts, which are not the standard business terms of one of the parties, will be subjectively examined to determine the bargaining powers of the parties to such contracts. The House of Lords, in Photo Production Ltd. v. Securicor Transport Ltd.,¹⁰ held that an exclusion clause would apply even in case of a fundamental breach of the contract and that it would be wrong to place a strained construction upon words in an exclusion clause, which are clear and fairly susceptible of only one meaning, in commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contracts can be most economically borne. The UCTA was not applied in this case as the contract in question was executed before the UCTA came into force.

Concluding remarks

The position in India appears to be that so long as parties were aware of the terms of the contract, a clause excluding or limiting liability will be enforced. Where parties have equal bargaining power and are able to participate in the drafting or negotiation of the contract, there cannot be any argument to avoid the applicability of such clauses. In the case of a standard form contract, it would appear that as long as the party that has no option but to accept the terms of such a contract, has notice of the terms and has signed the contract, then a clause excluding or limiting liability will be enforced. Where a standard form contract has not been signed, the party seeking to oppose enforcement of a clause excluding or limiting liability could argue that such a clause is unreasonable and unfair on account of the unequal bargaining power of the parties.

In Simplex Concrete Piles (India) Limited v. Union of India¹¹ , the contract appeared to contain a bar against the contractor's remedy insofar as it barred the admission of a claim for compensation. The ratio in this decision, that a clause which bars a contractor from claiming damages which it is entitled to under Sections 55 and 73 of the Contract Act will be void by virtue of Section 23 of the Contract Act, is generic and may have far-reaching consequences. However, this decision by the Delhi High Court may be argued as being applicable only in the facts of that case viz. to a contract which bars the contractor's remedy altogether.

It is, therefore, important to draft and negotiate exclusion or limitation of liability clauses carefully. A commercial contract, which has actually been freely negotiated between the parties pursuant to legal advice, may specifically say so, in order to avoid any argument to the effect that there was any unequal bargaining power. Liability should be excluded for specific types of losses (loss of profit, loss of goodwill, etc.) as opposed to outright exclusion of liability for any loss which may be suffered. Whilst indirect and remote losses cannot be granted under Section 73 of the Contract Act, the second limb of Section 73 does provide for consequential losses, which parties knew to be likely to result from a breach of the contract. Depending on the circumstances, it is advisable to record specific antecedents, which parties are aware of and to clarify that the parties are not aware of any other circumstances that are relevant to the performance of the contract. If this is followed, then parties will be held liable only for losses which they could have contemplated as recorded in the contract. This reduces exposure to the application of a subjective standard by a court or tribunal, to ascertain what losses the parties may have contemplated when they entered into the contract. It may also be prudent for parties who operate on standard form contracts to ensure that the other party signs the document, recording such standard terms.

Footnotes

1 See A. Schroeder Music Publishing Co. Ltd. v. Macaulay (formerly Instone) (1974) 1 WLR 1308

2. Section 2 of the UCTA

3. Section 3 of the UCTA

4. Section 26 of the UCTA

5. Section 11 of the UCTA

6. Ibid

7. Schedule 2 to the UCTA

8. [2001] 1 All ER Comm. 696

9. (1854) 9 EX 341

10. [1980] 2 WLR 283

11. ILR (2010) II Delhi 699

Originally published June 8, 2020

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.