jurisdiction

In India, contracts are governed by the Indian Contract Act, 1872 ("Contract Act"). Under Section 10 of the Contract Act, any agreement is considered a lawful contract if it is made by free consenting parties, for a lawful consideration and with a lawful object. The Contract Act applies agnostically to both B2B and B2C arrangements. Insofar as contractual limitations or exclusions of liability are concerned, the Contract Act generally allows contracting parties to exercise commercial wisdom to freely allocate risk through liability caps, exclusions of certain losses, exclusions to indemnities, etc., subject to specific statutory constraints set out in the Contract Act. These include: 

  • Section 23, which renders unlawful agreements void;
  • Section 28, which restricts contractual limitations on legal remedies;
  • Section 73, which provides for the right of an aggrieved party to seek unliquidated damages arising from breach of contract so long as such damages do not arise from remote and indirect losses; and
  • Section 74, which provides parties the right to decide the quantum of and claim ‘reasonable’ liquidated damages in the case of breach of contract.

2. Are there any mandatory provisions that make certain limitations or exclusions of liability void or unenforceable (for example, liability for gross negligence, wilful misconduct, personal injury, death, fraud, or statutory warranties)?

Under Sections 15, 16, 17, 18 and 19 of the Contract Act, any contract or any provision thereof which is executed by the parties (including clauses on limitation or exclusion of liability) can be challenged in court and held void if such contract or specific provision has been agreed to by the parties without free consent, i.e., in the presence of coercion, undue influence, fraud or misrepresentation. 

Additionally, Indian courts have typically refused to enforce contracts or provisions that are contrary to public policy, or that impermissibly restrict a party's ability to enforce its rights or initiate legal proceedings, or clauses that are unconscionable or unfair. Further, as per Section 23 of the Contract Act, any contract which involves or implies injury to any person or property or any contract which would defeat the provisions of any law (including any prescribed statutory warranties or conditions, such as under the Sale of Goods Act, 1930, or the Consumer Protection Act, 2019) would be considered void.

Separately, while there are no provisions that prohibit the limitation or exclusion of liability arising from gross negligence and wilful misconduct, the widely accepted norm of contracting parties is to exclude liability arising from gross negligence and wilful misconduct from the ambit of clauses that limit their liability. Accordingly, most Indian contracts will normally exclude personal injury, death, fraud, gross negligence and wilful misconduct from the ambit of the limitation of liability section.

3. To what extent may parties validly exclude liability for consequential, indirect or special losses? 

Parties may generally exclude liability for consequential, indirect, special losses or punitive damages in commercial contracts under Indian law, and such exclusions are routinely enforced where they are clearly drafted and negotiated between parties of relatively equal bargaining power. This is consistent with Section 73 of the Contract Act, which limits recoverable damages to losses that arise naturally in the usual course of business or losses that were contemplated by the parties at the time of contracting, and excludes recovery for remote and indirect losses. However, exclusion clauses are construed strictly and may not be enforced where they are ambiguous, unconscionable, contrary to public policy, or seek to defeat mandatory provisions of law. 

While Indian courts have generally upheld contractual exclusions and limitations of liability in commercial contracts, there are judicial precedents where the courts have held such provisions to be void where it is grossly inequitable to a party with lesser bargaining power, or where the limitation of liability conflicts with the main purpose of the contract.

4. Is it permissible to exclude liability for loss of profit, revenue, data, goodwill or anticipated savings? 

Yes, loss of profit, revenue, data and goodwill are usually considered to be remote and indirect losses arising from a breach of contract and are typically included in a limitation of liability clause. This is also in line with Section 73 of the Contract Act, which allows an aggrieved party to seek compensation for breach of contract where the losses so incurred are not remote or indirect. That being said, more recently, contracting parties in India prefer to exclude claims arising from loss of data or data breaches from the ambit of the limitation of liability clause given that the new data protection law in India (i.e., the Digital Personal Data Protection Act, 2023) carries hefty penalties which may extend up to INR 250 crores (~USD $26.2 million / ~GBP £20 million).

5. Are financial caps on liability commonly upheld?

Yes, financial caps on liability are common in Indian commercial contracts and are generally upheld. Indian courts have upheld such liability caps so long as the financial cap does not completely disentitle a party from claiming damages, which it is otherwise entitled to claim under law.

6. Are “exclusive remedy” clauses enforceable, and under what circumstances might a court refuse to treat an exclusive remedy as exhaustive?

Commercial contracts in India often include exclusive remedy clauses wherein parties may agree that only a specified remedy, such as indemnity or liquidated damages, would be applicable for specific types of breaches. 

Indian law takes a broadly permissive view of exclusive remedy and exclusion clauses, treating them as a legitimate exercise of contractual autonomy by the contracting parties. That said, such exclusive remedy provisions are usually not enforced when they are perceived by courts as being unconscionable and violating ‘public policy’. What constitutes unconscionability and what violates ‘public policy’ is determined on a case-by-case basis. However, these questions are typically considered by Indian courts only in cases where there is materially disproportionate bargaining power between the contracting parties. 

7. Where a limitation or exclusion is deemed partially unenforceable, is a court permitted to apply severance or blue-pencil rules to preserve the remaining wording?

Yes, severability clauses are well recognised in the Indian market wherein only specific portions of a contract which are held to be unenforceable by a competent court are struck down while the remaining portions of the contract remain valid. Indian courts apply the rule of ‘substantial severability’ over ‘textual divisibility’ where any trivial or technical portion of the contract is separated from the substantive part of the contract if such substantive portion is legal, lawful and otherwise enforceable.

8. Can the parties contractually shorten or extend statutory limitation periods for bringing claims? If so, what constraints apply?

No. As per Section 28 of the Contract Act, any contract which: (a) absolutely restricts a party from enforcing its rights under or in respect of any contract within a specified time period; or (b) extinguishes the right of a party or discharges a party from liability on the expiry of a specified time period, would be void. 

Additionally, the Limitation Act, 1963 statutorily prohibits the enforcement of any contract after a period of three (3) years from the date of breach of contract.

9. Are there any public policy considerations that override contractual limitation or exclusion of liability clauses in business to business contracts?

As explained above, exclusion clauses are construed strictly and may not be enforced where they are ambiguous, unconscionable, contrary to public policy, or seek to defeat mandatory provisions of law. There are judicial precedents where the courts have held such provisions to be void where it is grossly inequitable to a party with lesser bargaining power, or where the limitation of liability conflicts with the main purpose of the contract. 

The question of whether a limitation clause is ambiguous, unconscionable, contrary to public policy, or seeks to defeat mandatory provisions of law is usually decided by the courts on a case-by-case basis.

10. Are limitation or exclusion of liability clauses treated differently in cross-border contracts: (a) governed by the law in your jurisdiction but the supply of goods/services is performed abroad; or (b) governed by a foreign law (i.e. not local law) but the supply of goods/services is performed in your jurisdiction.

There is no standalone special statutory regime in India governing limitation or exclusions of liability clauses in cross-border contracts solely by reason of their cross-border character. The enforceability of such clauses continues to be assessed under the same principles as apply to domestic contracts where the governing law is Indian law. 

Principally, Sections 10, 23, 28, 73, and 74 of the Contract Act continue to apply irrespective of the fact that delivery/performance of the contract occurs outside India. 

When governed by foreign law, the courts in India have honoured the right of the parties to agree to resolve disputes in their choice of foreign courts, provided the same is expressly agreed by the parties in the contract. In such a scenario, given that the contract is performed in India, any enforcement of such a contract in India will require the parties to seek intervention of Indian courts to enforce a valid decree or order provided by a competent court of the jurisdiction chosen by the parties.