Limitation of Liability clause in an agreement

Let us do an exercise. You may not have bothered so far, so you could do it today.

Have a look at the backside of your Drycleaner’s slip for the garments you have given him for laundry or dry cleaning. If you do not find such slip, try reading some other service provider’s slip.

Such slips have some terms and conditions written in very small font size. One of these terms in alia, is to the effect that “The service provider’s liability in any eventuality shall not exceed ____________ (a particular amount).”

If you give you 2-piece Armani suit (which cost you half a million Rupees) for dry cleaning, the dry cleaner charges you a small sum, say Rupees 1,000 or 2,000 for its services. What if the suit were to be damaged during the process? As a customer, you may like full compensation for the loss or replacement of your suit. However, such a commitment does not make commercial sense for the dry cleaner. So what your drycleaner does, it tries to limits its liability for any mishappening by providing a limit on its liability.

As we have discussed at various places, parties have rights and obligations under the agreement. They are required to perform their respective sets of responsibilities according to pre-agreed terms and conditions, norms, time-frames, etc.

Invariably, one or more parties are required under certain circumstances to

compensate the other(s) for any failure, non-performance, breach, delay

and other specified reasons.

A limitation of liability clause stipulates that a party will be obligated to pay

to the other in such an event under the terms of an agreement. This clause

limits the amount as well as the types of damages a party can recover from

the other.

This is an efficient way to cap the liability amount undertaken by a party

(usually the service provider). Invariably, this exposure is capped at the fees

paid to the service provider under the agreement or another small amount

which may be more or less than the fees. This way, among other things,:

(i) the party limiting its liability can gauge the extent of its potential

exposure under a particular agreement;

(ii) its auditors can also predict the maximum exposure and contingent

liabilities; and

(iii) the party can take adequate insurance cover to take care of any

potential liabilities.

This clause is more prevalent in service agreements and normally favours

the service provider who wants to limit its exposure.

The reason and rationale for such a clause is to protect the service provider

from undertaking risk which may not be commensurate with the small fee

that it may be charging for doing a particular assignment or handling an

equipment or thing (as cited in the dry cleaner’s example above).

The service provider’s profit margin on projects or assignments in many

cases may support taking unlimited risk in respect thereof. Even insurance

covers come with several riders and disqualifications and even insurers insist

on limitation of liability clauses in agreements.

Usually, the party drafting the agreement has an upper hand in this regard.

It incorporates limitation of liability clause in its favour to limit its exposure

from the first draft itself.

However, the enforceability of limitation of liability clauses is not absolute

(particularly in cases involving gross and deliberate negligence on part of the

service provider) and depends on merits of each case.

Here are some examples:

1. The Distributor shall have no liability to compensate the Company for any

claim pressed by the latter under this Agreement except as expressly

provided under this Agreement.

2. The Agent shall not be liable or responsible for any action taken or

omitted by him in pursuance of this Agreement in good faith, except for

gross negligence, bad faith or wilful misconduct adjudicated by a court of

competent jurisdiction.

3. The aggregate liability of the Agent towards the Principal in respect of any

losses, costs claimed by the Client in relation to this Agreement shall not

exceed the fees received to the Agent provided that any such claim is made

not later than within 15 (fifteen) days of termination of this Agreement.

4. The aggregate liability of the Service Provider and its directors, officers,

employees, agents, sub-contractors in respect of any claims, losses, costs or

damages arising out of or related to this Agreement shall not exceed the

fees received by the Service Provider under this Agreement or Rs. 25,000

(Rupees twenty five thousand) only, whichever is greater. Further, any such

claim(s) must be made during the engagement period of the Service

Provider or within 3 (three) months of the termination or expiry of this

Agreement, as the case may be. The Service Provider’s obligation shall also

be restricted only to actual and direct losses and not to any indirect, special

or consequential losses. The Service Provider shall not be subjected to any

punitive or exemplary damages.

5. The aggregate liability of the Service Provider in respect of any claims,

losses, costs or damages arising out of or related to this Agreement shall not

exceed the fees received by the Service Provider under this Agreement or

Rs. 25,000 (Rupees twenty five thousand) only, whichever is less. The Client

shall be entitled to press only those claims in respect of which a loss or

damage exceeds Rs. 5,000. The Client shall first make efforts to recover such

losses through insurance. Any amount paid by the insurance company of the

Client shall also be deducted from any claim pressed by the Client.

6. No Party shall have any liability towards each other under this Agreement,

except in the case of a material breach. Even in the case of a material

breach, a Party shall only be liable to make good any actual and direct

losses. The breaching party shall not bear any indirect, special or

consequential losses nor be subjected to any punitive or exemplary

damages.

****************************************************

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].