Exclusion clauses may not exclude everything

An exclusion clause is a beneficial contractual arrangement made in anticipation of future contingencies that might hinder or prevent performance. Usually, parties to a contract exclude liability for certain types of losses, which may be suffered by either party or limit the amount of their liability following such loss. The primary aim of incorporating such clauses in a contract is to accommodate consequences arising from non-performance, part-performance or the negligent performance of a contract. They are risk mitigation measures for the parties.

The law of damages is codified in sections 73 and 74 of the Indian Contract Act, 1872 (act), which provide for damages by way of compensation in case of a breach of contract. Although there is no express statutory bar against contractually excluding or limiting liability for damages, section 23 of the act deals with situations where the consideration or object of an agreement is unlawful and thus deemed to be void. Other than in such circumstances, however, such clauses are enforceable although they may be subject to considerations such as the bargaining power of the parties and public policy.

The approaches adopted by the courts in considering the validity of such clauses are exemplified by the following cases.

In Central Inland Water Transport Corporation Limited & Anr. v Brojo Nath Ganguly & Anr., the Supreme Court (SC) held that an unfair or an unreasonable clause in a contract or an unfair or unreasonable contract entered into by parties of unequal bargaining power will render the agreement void and unenforceable under section 23 of the act.

The SC, in Bharathi Knitting Company v DHL Worldwide Express Courier Division of Airfreight Ltd., considered that when limitation of liability or exclusion of liability clauses are included in the contract, the courts cannot award damages greater than the liability agreed. In other words, liability is restricted by contractual agreement.

In Asian Techs Limited v UOI, the SC held that an exclusionary clause prohibited a department from paying damages, but did not otherwise prevent an arbitrator from awarding damages that were otherwise payable by the employer on account of its breach of contract.

In Maharashtra State Electricity Board v Sterlite Industries (India) Ltd., the Bombay High Court held that parties to a contract were free to include an express provision for the computation of damages and to exclude thereby the mode of computation under section 73 of the act.

However, a contrary view was taken by a single judge of the High Court of Delhi in the case of Simplex Concrete Piles (India) Limited v UOI, who held that where any clause of the contract restricted the right to claim damages under sections 73 and 55 of the act it violated public policy under section 23 of the act.

The Delhi High Court, in Public Works Department v M/s. Navayuga Engineering Co. Ltd. & Anr., distinguished the Simplex case and pointed out that in Simplex, the contractor had no option but to sue for damages in case of a breach, whereas in this case, the contractor had the option to sue for damages by not agreeing to the time extension of the contract.

In the recent case of Sushilaben Indravadan Gandhi and Anr. v The New India Assurance Co. Ltd. & Ors., the SC applied the principle of contra proferentem and held that the exclusion clause must be construed against the insurer. The court thus ordered that compensation be paid.

After considering the decisions and observations of the courts in the cases cited, it may be concluded that exclusion or limitation of liability clauses cannot be arbitrarily implied. A court may intervene to ensure that the contract is not rendered discriminatory. Such a contract is where one contracting party has greater bargaining power than the other. The effectiveness of such clauses will depend on whether they can be construed clearly and may be deemed to be fair and reasonable. The position appears to be, therefore, that as long as the parties had equal bargaining power and were aware of the terms of the contract they entered into, such clauses will be enforced. It is thus imperative that such clauses are clearly and unambiguously drafted to exclude or limit liability in accordance with the main object and intent of the contract.

Faranaaz Karbhari is of counsel and Akriti Shikha is an associate at HSA Advocates.