Limitation of Liability- A Safety Net For The Contracting Party

Article for Blog Post Writing Competition 2011 | by Akash Saha

May 26th, 20111:21 pm

Limitation of liability in layman’s language means limiting once liability to an agreed amount.

It often happens that while performing a contract, the party might breach the contract (not necessary willfully). In such cases, it is not possible to pay the whole of the total damage as it might lead to the party getting insolvent and bankrupt. To protect itself from such situations, the clause of ‘Limitation of Liability’ is made. Such clauses limit one’s liability to a certain amount that has been pre-decided by the parties which may be to the total cost of the contract or as agreed upon between the parties.

Section 74 of the Indian Contract Acts 1872 deals with Limitation of Liability – “When a contract has been broken, if a sum is named in the contract as the amount be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss or proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.

Also Indian Contract Act 1872 expressly classifies liability arising by reason of death or personal injury, fraud or gross negligence as unlimited liability.

The best way to explain limitation of liability of liability is through an example: – X enters into a contract with Y to construct a factory. A definite clause that X will put is that of a limitation of liability clause. The clause might be of a kind given below –

‘Except in cases of criminal negligence or willful misconduct,

(a) the contractor shall not be liable to the employer, whether in contract, tort, or otherwise, for any indirect or inconsequential loss or damage, loss of use, loss of production, or loss of profits or interest costs, provided that this exclusion shall not apply to any obligation of the contractor to pay liquidated damages to the employer and

(b) the aggregate liability of the Contractor to the Employer, whether under the Contract, in tort or otherwise, shall not exceed the total contract price, provided that this limitation shall not apply to any obligation of the contractor to indemnify the employer with respect to patent infringement.”

As we can see here, the ‘contractor’ has limitation of liability up to the aggregate value of the contract. Contractor will not be liable for any liability resulting from any indirect or inconsequential loss or damage arising out of the contract or tort. However, in the vent of criminal negligence, willful misconduct or any patent infringement on the part of contract, where the contractor’s liability will not be limited to the aggregate value of the Contract.

Article by-

Akash Saha

3rd Year Student,  BBA_LLB(Hons),

School of Law Christ University, Bangalore

[Submitted as an entry for the Blog Post Writing Competition, 2011]

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