Interpretation Of Exclusionary Clauses Vis-A-Vis Rule Of Damages

The idea of limiting/ excluding the liability of either of the parties entering into the contract, on the breach of any contractual obligations, goes against the very edifice of the rule of damages/liability under the Indian Contract Act 1872.

However, the intent behind incorporating the exclusionary clause in a contract is Firstly, not to cause any undesirable hardships to the parties which can be foreseen or anticipated by the parties before entering into the contract, Henceforth, giving effect to the principle of business efficacy i.e. “to the transaction which are intended at all events by the parties who are businessmen” as laid down in Nabha Power Ltd. Vs Punjab State Power Corporation Ltd & Another, (2018) 11 SCC 508.

Secondly, by mitigating the risk attached to any contractual transaction. Since, with the condition of foreseeability as laid down in Hadley v. Baxendale, 156 ER 145 (1854) and moving towards the decision of Hon'ble Supreme Court of India in Maula Bux v. Union of India, (1969) 2 SCC 554 wherein it was laid down that the court has the authority to award the reasonable compensation in case of a breach even if no actual damages are proved. The court of law in order to protect the interest of the aggrieved party has been adopting a liberal approach and widening the ambit of granting damages. Therefore, an exclusion clause limits the liability from any unreasonable hardship and helps in the smooth execution of the agreements. Further, the reasonableness of this clause rests on the assumption that there was a consensus-ad-idem between both the contractual parties for incorporation of the particular exclusionary clause in the contract.

Scheme Of Law

Section 73 of the Indian Contract Act, of 1872 specifies the Compensation for loss or damage caused by the breach of contract. If any of the parties in a contract commits a breach or fails to discharge the obligation created by the contract then the party at the breach is liable to compensate the other party. Section 74 deals with the damages where the penalty is already stipulated in the contract and Section 75 elaborates upon the damages where a person rightfully rescinds a contract is entitled for any damages which he has sustained through the non-fulfillment of the contract.

Section 23 of the Indian Contract Act elaborates upon the factors that are to be considered as lawful or unlawful factors concerning the objects and consideration of the contract. Any consideration or object of an agreement is unlawful inter-alia if it would defeat the provisions of any law or if the court regards it as immoral or opposed to public policy. Henceforth any agreement whose object or consideration are unlawful shall be deemed to be void.

The Approach Adopted By The Court

There are no prefixed rules stipulated in any legislation specifying the extent or limit, up to which the liability of parties can be excluded via incorporating an exclusionary clause. Hence, if the terms of the exclusionary clause are unambiguous, reflective of the intent of the parties, and are not in contravention of any statutory provision then the contracting parties can limit the liability up to any extent. However, the question arises that whether the exclusionary/exemption clause can absolve the liability of the party to the contract, in toto and whether it goes against Section 23 of the Act.

It is a trite law that the contract shall be strictly interpreted in its true sense and the court of law shall restrict itself from giving any wider or ambiguous interpretation to any contractual terms. As recently observed by the Hon'ble Apex Court in Bangalore Electricity Supply Company Limited (BESCOM) V/s E.S. Solar Power Pvt. Ltd. & Ors., (2021) 6 SCC 718 that"In seeking to construe a clause in a Contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise which has to be undertaken is to determine what the words used mean." However, it is also well within the power of the court to construe a contract reasonably in order to give real essence to the intention of the parties, as laid down in Food Corporation Of India & Ors. V/s Abhijit Paul, 2022 SCC OnLine SC 1605 “The process of interpretation, though the exclusive domain of the Court, inheres the duty to decipher the meaning attributed to contractual terms by the parties to the contract”

Further, the Apex Court in Central Inland Water Transport Corporation V/s Brojo Nath Ganguly Nath Ganguly, AIR 1986 SC 1571 observed that if it appears to the court that when the parties entered into a contract they had unequal bargaining power, hence, one of the parties was at a dominant stage as compared to the other and there existed a probability that right of the other party has been exploited then the court going beyond the concept of strict interpretation shall avoid enforcing any such clause in a contract, to enforce the real essence of the contract and save the interest of the party at lower pedestal.

The issue involving the exclusionary clause wherein the arbitrator was restricted in awarding any kind of damages, came for consideration before the Delhi High Court in Simplex Concrete Piles (India) Ltd V/s. Union of India, 2010 SCC OnLine Del 821, it was observed:

• The basic issue behind the court was, whether a clause in any agreement can totally exclude the liability of any of the parties, and if the answer is in the affirmative then whether it is void under Sections 23 of the Indian Contract Act, 1872.
• The court outlined the issue to the point of whether a contractual clause in any agreement can waive off the Right to damages under section 73 of the Act, in toto. The exclusionary clause was analyzed under the light of Section 23 of the Act.
• The court held that, If there is a public policy or public interest element intrinsic to these provisions, then the rights under these sections cannot be waived by any contractual term. Sections 73 & 55, are the basic foundations for the Act, since if any of the parties can break the contract without suffering any liability or if there is no right available to the aggrieved party to ask for the damages then it will defeat the very edifice of the Act. There will be no rationale for entering into a contract if the breach of the same is without any circumstances in whatsoever manner. Therefore, these provisions shall be considered as a matter of public policy. Henceforth, any contractual clause that goes against the Public Policy shall be deemed to be void under Section 23 of the Act.

Further, In Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan, (1987) 2 SCC 654, the exclusionary clause in an insurance contract, irrespective of the circumstances made the owner absolutely liable leading to the driving by an unlicensed driver. It was held that “The exclusion clause has to be “read down” in order that it is not at war with the “main purpose” of the provisions enacted for the protection of victims of accidents so that the promisor is exculpated when he does everything in his power to keep the promise.” Therefore, it can be safely concluded that the exclusionary clauses are not immune to the general principles, main purpose & provisions of the contract law.

Way Forward:

With reference to the above-stated discussions, it can be safely concluded that when it comes to the interpretation of the exclusivity clause in a contract, the courts have treated it at par with any other contractual terms. Since there is no statutorily prescribed limit for limiting the liability via an exclusionary clause in any contract, hence it is open to the parties to decide any prescribed limit for the exclusion clause. At first instance, while interpreting the exclusivity clause, the principle of strict interpretation of the contractual term is followed, However, as seen in Central Inland Water Transport Corporation (Supra) & Food Corporation Of India (Supra), wherever it appears to the court that a condition warrants the court to apply its judicial mind to construe the contractual clause so that it isn't read as unreasonably or arbitrarily, then the court moves forward from the principle of strict interpretation to reasonable construction of contract. Although, In a situation where the liability is excluded in toto or is against the general principle of law, the validity of the exclusivity clause comes to turmoil as held in Simplex Concrete Piles (India) Ltd (Supra) & Skandia Insurance Co. Ltd. (Supra). However, as of now this still remains to be a grey area and it is upon the discretion of the court to interpret the exclusionary clause on the basis of the facts and circumstances of the case.

The prevailing circumstances warrant looking into the issue of prescribing, certain statutory limits/terms & conditions governing the manner and circumstances in which an exclusionary clause shall be construed by the court and incorporated by the contracting parties. However, before interpreting any contractual term the court shall move on with the basic presumption that such clause is not excluding the basic liability of the party and it shall not be contrary to any provision of law & general principle of the Act.

The author is a student at Dr. Ram Manohar Lohia National Law University, Lucknow. Views are personal.