Damages vs Limitation of Liability

In this connection, reference may be made to Sections 55, 73 and 74 of the Indian Contract Act, 1872 ("Act") deal with compensation for loss or damage caused by breach of contract. Section 73 of the Act stipulates that 'When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused'.^[1] The Act, however, does not place a limitation on the extent of damages that can be claimed as a result of breach of contract. In fact, what it provides for us is that the aggrieved party has to be placed, as far as the money can do, in the same position in which such party would have been if no breach had occurred.

The issue of whether damages, that can be claimed under law, may be limited contractually was considered for the first time by the Hon'ble Supreme Court in Sri Chunilal V. Mehta and Sons Ltd. vs The Century Spinning and Manufacturing Co., Ltd.^[2]

Chunilal Mehta & Co., were appointed as Managing Agents for a term of 21 years by an Agreement dated June 15, 1933. On April 23, 1951, the Board of Directors of Century Spinning terminated the Agreement of 1933 and passed a resolution removing Chunilal as Managing Agents on April 23, 1951. Chunilal Mehta filed a suit claiming Rs. 50 lakhs by way of damages for wrongful termination of the Agreement which was subsequently amended to Rs. 28,26,804/-. Century Spinning admitted before the Court that the termination was wrongful and so the only question to be decided was the quantum of damages to which Chunilal was entitled to.

Clause 14 of the Agreement provided for the precise amount of damages that would be payable by Century Spinning if the Agreement was terminated before expiry of 21 years. The clause clearly stated that Chunilal shall receive from the Company as compensation or liquidated damages for the loss of appointment a sum equal to the aggregate amount of the monthly salary of not less than Rs. 6,000/- for and during the whole of the unexpired portion of the Agreement. Considering the fact that the parties have named a sum of money to be paid as liquidated damages it must be deemed that the right to claim an unascertained sum of money as damages stands excluded.

Chunilal Mehta & Co. contended that granting damages at Rs. 6000/- for the unexpired period would render the words "not less than" as appearing in clause 14 redundant and that it was therefore entitled to compensation computed on the basis of the total estimated remuneration under clause 10 for the unexpired period i.e, 10% of the profits subject to a minimum of Rs. 6,000/- per month.

The Hon'ble Supreme Court after examining the various clauses of the Agreement held that the parties intended to confer on Chunilal Mehta & Co. what is in fact a right conferred by Section 73 of the Act and to interpret the Agreement as contended by Chunilal Mehta& Co. would render the entire clause otiose. The right to claim liquidated damages is enforceable under Section 74 of the Act and where such a right is found to exist in a contract, no question of ascertaining damages really arises. Where the parties have deliberately specified the amount of liquidated damages there can be no presumption that they, at the same time, intended to allow the party who has suffered by the breach to give a go-by to the sum specified and claim instead a sum of money which was not ascertained or ascertainable at the date of the breach. By providing for compensation in express terms the right to claim damages under the general law is necessarily excluded and, therefore, in the face of the clause it is not open to contend that that right is left unaffected.

A similar view was expressed by the Hon'ble Supreme Court in the case of Bharathi Knitting Company vs DHL Worldwide Express Courier Division of Airfreight^[3] wherein the Hon'ble Supreme Court reiterated that the limit of damages would depend on the terms of the contract and the facts of each case. Where the terms and conditions of the contract limit the liability for any loss or damage and the contract specifically provides that the liability for any consequential or special damages or any indirect loss was excluded, damages shall be limited to the extent of what has been agreed contractually.

The Hon'ble High Court of Delhi taking a cue from the above judgement in the case of Simplex Concrete Piles (India) Ltd. Vs Union of India^[4] examined the validity of Section 55 and Section 73 of the Act in light of Section 23 of the Act viz public policy.

The Hon'ble High Court of Delhi held that contracts are entered into because they are sacrosanct. If a contract can be broken at will, it will destroy the very edifice of the Contract Act. It is inconceivable that in contracts performance is at the will of a person without any threat or fear of any consequences of a breach of contract. If there has to be no benefit and commercial gain out of a contract, because, the same can be broken at will without any consequences on the guilty party, the entire sub-stratum of contractual relations will stand imploded and exploded.

The provisions pertaining to the effect of breach of contract, two of which provisions are Sections 73 and 55, are the very heart, foundation and the basis for existence of the Act. If Sections 73 and 55 are not allowed to prevail, then, parties would in fact not even enter into contracts because commercial contracts are entered into for the purpose of profits and benefits and which elements will be non-existent if deliberate breaches without any consequences on the guilty party are permitted. Putting it differently, the entire commercial world will be in complete turmoil if the effect of Sections 55 and 73 of the Act are taken away.

The expressions "public policy" and "if permitted will defeat the provisions of law" in Section 23 have to be interpreted to further the object of the Act and not defeat the same. It is clearly a matter of public policy and public interest that the sanctity of the contracts is preserved. To permit a contractual clause having the object to defeat the very contract itself, is a matter of grave public interest. If such a clause is allowed to stand, then, the same will defeat the very basis of existence of the Act.

Provisions of the contract which will set at naught the legislative intention reinforcing the Act, are void as they are against public interest and public policy. Such clauses are also void because it would defeat the provisions of law which is surely not in public interest to ensure smooth operation of commercial relations. It can therefore be stated that contractual clauses and their interpretation to disentitle the aggrieved party to the benefits of Sections 55 and 73, would be void on account of being violative of Section 23 of the Contract Act.

The Hon'ble High Court of Delhi's interpretation effectively renders any and all contractual clauses placing restriction on claims for damages invalid and upholds the sanctity of the contracts and the bindingness thereof.