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Indemnity and Limitation of Liability Clauses: Strategic Risk Allocation in Commercial Contracts
Obhan & Associates | English | AcademicThink | Nov. 14, 2025 | UndeterminedLegal Exposure
Indemnity and limitation of liability clauses are essential tools in commercial contracts for managing and allocating financial risk. Under Section 124 of the Indian Contract Act (ICA), indemnity contracts involve one party promising to protect another from losses caused by the promisor's or others' conduct. Section 125 supplements this by granting the promisee rights to recover damages, legal costs, and settlement amounts. Limitation of liability clauses restrict the extent and types of damages a party may owe, aligning with Section 74 of the ICA, which provides for reasonable compensation capped at the amount agreed upon in the contract.
The enforceability of these clauses depends heavily on their clarity and reasonableness. Courts in India recognize indemnity claims before actual loss occurs and hold that indemnity covers liabilities arising from the promisor’s own conduct as well as third-party claims. Under common law principles, unless excluded, indemnity may include consequential and indirect damages, highlighting the need for precise contractual drafting.
Limitation of liability clauses generally receive supportive judicial treatment as long as the caps reflect a fair and reasonable pre-estimate of potential losses. Courts assess the commercial reasonableness of these caps, factoring in public policy and bargaining power. Landmark cases such as Carl Estate Private Limited v. Jagdish J.N. Counte and Mahanagar Telephone Nigam Ltd. v. Tata Communications Ltd. emphasize that liability limits function as maximum recovery amounts unless deemed unfair or unreasonable.
The Supreme Court's decision in Bharati Knitting Company v. DHL Worldwide Express upholds limitation clauses even when actual losses exceed the capped amount, reinforcing the principle that clear and reasonable limitation clauses provide significant protection against excessive financial exposure in commercial contracts.