Exclusions or limitations of liability indemnification are valid if they meet the general conditions applicable to contractual. However, they may be unenforceable in the following cases: when they extend to willful violations or defaults, or to violations or defaults resulting from gross negligence; when they are imposed in adhesion or consumer contracts; or when they result in the violation or annulment of rights that may not be removed or limited contractually.
Key commercial contract terms
Enforceability of exclusions/limitations of liability indemnification
Clauses that seek to exclude certain warranties or consumer guarantees or exclude or excessively limit liability will be construed strictly against the person that seeks to rely on the clause.
Clauses in standard form consumer contracts or standard form small business contracts that seek to limit or exclude liability are at risk of being considered unfair, and therefore void, under the unfair contract terms regime in the ACL.
Consumer contracts cannot exclude or limit certain consumer guarantees provided under the ACL or limit or exclude liability for breach of them. Any clause that seeks to do this will be unenforceable and such conduct could be considered to be misleading or deceptive and lead to legal action being taken against a person who included such clause in a contract or statement to a consumer.
Exclusion or limitation of liability is permissible in principle for damages caused by slight negligence; they are not permissible for willful misconduct. Limitations or exclusion of liability for gross negligence are not permissible in business-to-consumer contracts and exclusion for slight negligence is only possible to a certain extent and are explicitly excluded in certain cases.
Furthermore, any limitation of liability should be assessed as to whether or not it is contra bonos mores in the specific case.
Exclusion or limitation of liability for death and injury is not permissible.
The same principles apply for caps on direct damages, ie, a cap is considered as a limitation of liability and to be treated under the same principles.
Exclusion or limitation of liability for indirect or consequential damages is to a certain extent permissible, but these terms are not fully defined under Austrian law and a precise description of excluded damages is recommended.
Limitations of product liability for defects are severely restricted under Belgian law. Aside from product liability, liability in general may be excluded in principle, subject to certain conditions. For instance, liability may not be excluded if such would lead to a complete elimination of the main obligations of the agreement, or would lead to limiting one's liability for fraud, willful misconduct, death or personal injury.
The validity of the limitation/exclusion of liability clauses, as well as the establishing of a cap, are controversial in Brazil. The prevailing view is that such clauses are valid and enforceable, provided that they do not involve matters of public order or consumers' rights (especially in adhesion agreements), but that they would not apply in cases where the party has acted with willful misconduct or gross fault. The clauses may also be challenged in court, for instance, when the value of the indemnification agreed is not commensurate with the actual damage suffered or when the liability was an important element arising out of the nature of the transaction.
Nevertheless, even with the risk of being challenged, it is normal (and many times recommendable) to include limitations (eg, caps) and exclude certain liabilities, especially indirect damages (including loss of profit).
Exclusion or limitation of liability clauses are enforced based on contract principles applicable in the province in question. Courts as a rule will enforce such clauses in contracts that parties have negotiated, although they are frequently strictly construed. However, standard principles such as inequality of bargaining power (particularly in the case of consumer transactions), ambiguity or manifest unfairness of the clause may make such a clause unenforceable in a particular case. In some provinces consumer protection legislation limit the ability to effectively limit liability.
Exclusions and limitations on liability are usually enforced. Exclusions of liability for willful misconduct or gross negligence are not enforceable.
Enforceability of exclusions and limitations of liability against consumers are not allowed.
Limitation of liability is common in contracts. However, pursuant to the PRC Contract Law, if the gap between the actual loss and such limitation is too big, the court or arbitration institution is entitled to adjust the amount of compensation in its judgment or award.
Parties shall establish the extent and scope of rights granted and limitations of liability. Even though such limitations are usually recognized, limitations and exclusions of liability for gross negligence, fraud or bad faith and not enforceable.
The liability can be excluded or limited, with consent of both parties. This does not apply in respect of liability for damages caused willfully or in gross negligence, liability for interference in natural rights of a human individual (life, health, general personality right) or liability incurred by a weaker party, such as a consumer – none of these can be limited or waived in advance.
Exclusions and limitations on liability may be enforced, provided there are fair, clear and obvious. In addition, they should often be well-reasoned. In case of gross negligence, exclusions and limitations are usually not accepted.
In agreements with consumers, limitations and exclusions are in most cases contrary to mandatory provisions.
In B2B relationships, exclusions and limitations of liability are common and enforceable. However, exclusions and limitations of liability do not apply if the breach or damage results from gross negligence or willful misconduct. Highly biased and unconscionable exclusions and limitations of liability provisions can be either amended into a more reasonable form or nullified under Section 36 of the Contracts Act. This section is, however, very rarely applied to B2B contracts.
In the B2C context, several limitations apply to enforceability of exclusions and limitations of liability due to consumer protection legislation.
Exclusions or limitations of liability between businesses for breach of contract are both enforceable and common. Liability for gross negligence or willful misconduct cannot however be excluded. It is not uncommon to contractually cap one's liability, for example, to the total aggregate amount paid during a certain period in application of a given contract.
French law only makes a distinction between direct and indirect losses. Direct losses are those that are direct, foreseeable and caused by the act or breach concerned. Indirect losses are those that are not foreseeable but are linked to the act that has generated the loss (such as loss of data, revenue and goodwill). On occasion, courts will consider that lost revenues were foreseeable and therefore constitute direct losses.
Tort liability cannot be limited or excluded under French law.
Exclusions or limitations of liability towards consumers are generally unenforceable under French law.
As a general rule, limitations on liability can be enforced to a broad extent if individually negotiated (unless damages are due to willful intent). The ability to validly limit liability in general terms in conditions is, however, very restricted (B2C and B2B).
Damage claims under (unrestricted) statutory law generally include indirect and even unforeseeable damages. Thus, it is – at least in individually negotiated contracts – quite usual to agree on a liability cap caused by slight and gross negligence. Claims directly based on the specific Product Liability Act (Produkthaftungsgesetz) cannot be excluded or restricted.
It is customary for sellers to exclude indirect damages (including consequential, incidental and special damages), but the exclusions/ limitations of liability for death or personal injury resulting from negligence are not enforceable in either business or consumer contracts.
A cap on direct damages or aggregate liability is also common.
The enforceability of exclusions and limitations on liability is subject to the test of reasonableness. The court will enforce such clauses if it is fair and reasonable in the circumstances. The relevant considerations include: the strength of the bargaining positions of the parties, whether the buyer received an inducement to agree to the term, or if it had an opportunity of entering into a similar contract without such similar term with others, whether the buyer knew or ought to have known of the existence and extent of the term, and whether it was reasonable at the time of contract to expect that compliance with the condition would be practicable.
Exclusions and limitations of liability for breach of the implied terms and conditions under the Sale of Goods Ordinance are not enforceable against consumers.
Any contractual term limiting or excluding liability for deliberate non-performance of an obligation resulting in loss of life, or harm to physical integrity or health shall be null and void, so such terms are not enforceable.
The law relating to damages in contracts is contained under Sections 73, 74 and 75 of the Contract Act. Theory of damages in India rests on the concept of "restitution," that is, the sum of money awarded as compensation should be such as to put the injured party in the same position as he would have been, if he had not sustained the loss or damage for which he is getting damages.
Section 73 of the Contract Act prescribes that damages for breach of contract should either be such:
- As may fairly and reasonably be considered as arising naturally, according to the usual course of things, from such breach itself
- As may reasonably be/supposed to have been in the contemplation of the parties at the time they made the contract, as the probable result of the breach
Therefore, damages are not awarded for remote, indirect and consequential losses.
The concept of liquidated damages also finds its way into the Contract Act. It permits parties to determine, in advance, the amount of compensation to be paid on account of loss or damage caused by breach of contract. However, in this case as well, the discretion would lie with the court to determine the reasonable compensation that may be awarded for the breach, and if the amount mentioned in the contract is either unconscionable or disproportionate to the value of the performance promised, or consideration paid, the sum fixed would be deemed to be a penalty, which is not enforceable under Indian law. Also, the sum prescribed under contract, acts as a cap on the amount of damages that may be awarded, such that even where the reasonable damages is in fact greater than the sum prescribed under the contract, the court would only limit the damages to the amount mentioned in the contract.
Express exclusion/limitation of liability is recognized and generally respected.
Generally, liability can be subject to limitation (in the form of a financial cap) and exclusions (of certain heads of loss) in both consumer (subject to the fair and reasonableness requirements referred to above) and in business contracts. Exclusions of liability for fraud or death and personal injury caused by negligence and for certain implied warranties will not be enforceable in a consumer contract. Current Irish case law indicates that it may not be possible to exclude liability for a fundamental breach.
Under Israeli law, parties are free to enter into an agreement which sets out exclusion or limitation of liability of one party (such exemption from liability will only bind the parties which agreed to it), except with respect to bodily injury or death which cannot be contractually stipulated or if such exclusion/limitation of liability is of a supplier in a standard contract (and thus such exclusion/limitation might be regarded as an unfairly prejudicial term contained within a standard contract) or in exceptional cases where the court might intervene and cancel such a provision if it contravenes public policy or if it is considered to be morally or socially undesirable. It should be noted that in practice, parties usually limit liability to direct damages only or restrict the maximum amount of liability.
Provisions containing limitations of liability are generally enforceable, except in the event of willful misconduct and gross negligence.
In case of standard contracts drafted only by one party, limitation of liability clauses shall be approved in writing by the other party, as mentioned above.
In B2C agreements, clauses excluding or limiting the liability of the vendor in the event of death or injury to the consumer due to an action or omission of the vendor are in any case void.
Tort liability may not be excluded or limited.
Exclusions and limitations of liability are usually enforceable unless they are grossly unfair. In consumer contracts, full exclusions or partial exclusions in case of gross negligence or willful misconduct are unenforceable under the CCA.
Limitations of product liability for defects are severely restricted under Luxembourg law. Aside from product liability, liability in general may be excluded in principle, subject to certain conditions. For instance, liability may not be excluded if such would lead to a complete elimination of the main obligations of the agreement, or would lead to limiting one's liability for fraud, willful misconduct, death or personal injury.
Provided that granting a warranty is not mandatory, if the seller or service provider grants warranty to its client, it shall respect such warranty in all its terms and conditions and contain the minimum requirements set forth by the applicable law
In principle, a party will be liable for all damages related to an attributable breach of the contract. With some exceptions, commercial entities are largely free to agree on a limitation of liability. Limitations and exclusions, for example with respect to consequential damages, are common to Dutch law contracts. Liability clauses do not apply to the extent, in the given circumstances, this would be unreasonably unacceptable according to standards of reasonableness and fairness. Limitations of liability set out in general terms and conditions are generally deemed unreasonable in B2C relationships. In B2B relationships within the supply chain, risk for product liability can, in general, be apportioned between the parties on an agreed basis by indemnity protection.
An exclusion or limitation of liability clause will generally be construed strictly against the party that drafted the clause or against the party seeking to rely on the clause where there is ambiguity, particularly where there is an imbalance of bargaining power. Clear and unambiguous language is generally required to exclude liability for negligence.
Where such a clause seeks to limit or exclude liability in relation to certain guarantees or representations in consumer contracts, these will be unenforceable.
In New Zealand, no action may be brought for personal injury covered by the Accident Compensation Act 2001 other than proceedings for exemplary damages. However, this liability may not be excluded or limited.
Exclusions and limitations on liability are usually enforced unless they are unconscionable, unclear or not conspicuous. Exclusions of liability in cases of gross negligence or willful misconduct, and for contractual terms which inappropriately excludes or limits the legal rights in the event of total or partial non-performance are presumed to be unfair, however there is little case law established on this point.
The parties to a contract who are professionals conducting business entity may limit the liability for negligence in full. However, it is not permitted to exclude liability for willful conduct.
There are specific laws which prohibit the exclusion or limitation of liability, the most well-known of which is the liability for hazardous products.
For contracts concluded with consumers, clauses excluding or limiting liability towards the consumer in the event of an injury to a person or the non-performance or improper performance of an obligation are considered abusive.
As general rule, the enforceability of exclusions or limitation of liability is limited under Portuguese law. According to civil law, limitation of liability or exclusion of liability concerns the grounds of liability itself and the damages and losses. The law is not absolutely clear when dealing with the matter; therefore, some hold the opinion that the law does not prevent clauses limiting or excluding liability for acts of mere negligence, while others suggest that all clauses of exclusion or limitation are completely null and void.
Sellers, in their contracts for the sale of goods under Article 1709 (2) of the NCC, may limit their liability for hidden defects. A cap on direct damages or aggregate liability is also possible.
The liability may be limited (but not entirely excluded) by the parties only in the B2B context, but even in that case, liability for willful actions cannot be limited or excluded.
Exclusions/limitations of liability are rarely enforced in the KSA courts even if the parties to a commercial contract agree to such limitation.
Exclusions and limitations of liability are common and generally enforceable in Singapore.
However, this is subject to the Unfair Contract Terms Act (Cap. 396). For example, under Section 2(1) of the Unfair Contract Terms Act (Cap. 396), a person cannot exclude or restrict their liability for death of personal injury from negligence while Section 3(2)(a) of the Singapore Unfair Contract Terms provides that in a contract where one party is a consumer or is subject to the other party's written standard terms of business, the other party cannot exclude or restrict his liability if the other party is in breach of the contract or relies on any term to render a different kind of service from that which was reasonably expect of him (or not render any service at all), except if such an exclusion or restriction satisfies the requirement of reasonableness.
Not applicable for this jurisdiction.
Under Korean law, damage claims are made for compensation of:
- Ordinary damages
- Extraordinary damages
Ordinary damages are those that would normally be expected to result from a breach of contract or a particular tort. Extraordinary damages refer to all other damages than ordinary damages that arise from the special circumstances which the wrongdoer "knew" or "could have reasonably foreseen." Parties may validly agree to exclude indirect damages from compensation, limit indemnification for indirect damages, or exclude warranty liability. However, enforceability of such agreement may be restricted by:
- Public policy and general principles of equity under the KCC
- The court invalidating a clause that exempts a breaching party from liability for intentional wrongdoing or gross negligence on the part of that party
However, in practice, many companies provide for a damage cap despite the risk that such damage cap provision may be held unenforceable.
A cap on direct damages or aggregate liability is common.
Exclusions and limitation on liability are usually enforced unless they are unconscionable, unclear or not conspicuous. Exclusions of liability for fraud, personal injury, death, bad faith, gross negligence or willful behavior are not enforceable under Spanish law.
Exclusions and limitations of liability against consumers are generally not allowed.
Sellers in their contracts for the sale of goods customarily exclude indirect damages.
A cap on direct damages or aggregate liability is also common.
Exclusions and limitations on liability are usually enforced unless they are unconscionable, unclear or not conspicuous. Exclusions of liability for personal injury, death, intent and gross negligence are not enforceable.
In consumer situations, a term which disclaims the seller's liability in cases of personal injury or death is presumed to be unfair. The same applies to a contractual term which disclaims all liability in cases of gross negligence and for contractual terms which inappropriately excludes or limits the legal rights in the event of total or partial non-performance or inadequate performance by the seller or supplier of any of the contractual obligations.
Under Swiss mandatory law, it is not possible to validly exclude or limit the liability of a party for gross negligence or intentional breach of contract. In particular, the limitation of a party's liability to a certain cap and the exclusion of certain categories of damages (such as indirect or consequential losses and loss of profits) would not be valid in the event of gross negligence or intentional breach of contract. As a result, liability may only be validly excluded or limited for damages caused by a party with slight or medium negligence.
Liability for auxiliary persons, such as employees, may be waived entirely.
Exclusions/limitations of liability are enforceable in Taiwan – provided, however, that responsibilities/liabilities for willful misconduct or gross negligence shall not be released in advance and in certain situations; if the transaction is obviously unfair, an application may be filed to the court for adjustment of liability.
Ukrainian legislation generally provides a possibility for the parties to an agreement to limit the amount of damages (real damages or loss of profits) to be reimbursed under the agreement. However, in certain cases Ukrainian legislation directly prohibits contractual limitations of liability. In particular, parties cannot contractually limit the liability of the producer (seller or service provider) in case of death or injury caused to the consumer by the action or omission of such producer (seller or service provider) or liability for damages caused to consumers by the defective product. Contractual limitations of liability for deliberate breach of obligations is not allowed.
United Arab Emirates
Under UAE law, absolute exclusions of liability in contracts are null and void. Restrictions on the ability of one contracting party to recover losses arising from fault by the other contracting party are not generally enforceable in the UAE, unless this fault is the result of fraud or gross misconduct. Moreover, the UAE Courts would be reluctant to award damages for economic reasons, other than those which the claimant can prove were actually suffered as a direct result of the defendant's fault.
With some notable and important exceptions, commercial entities are largely free to agree between themselves how to apportion this risk and to limit their respective liability to each other. These can take varied forms from the complete exclusion of liability for specific types of loss to requiring claims to be made within a specific time frame.
Parties cannot, however, exclude or limit liability for:
- Certain implied warranties (for instance any clause which purports to supply goods without the right to do so)
- Death or personal injury caused by their, or their employees, negligence
- Fraud and fraudulent misrepresentation
Other common provisions seeking to exclude or limit liability (be they certain types of actions, such as negligence, or certain losses or claims, such as wasted management time) may need to pass the "reasonableness" test set out under UCTA in order to be valid and enforceable; this will however depend on a range of factors, including whether a supplier is contracting on its standard terms and the balance of bargaining power between the parties (in addition, please see the comments as to international supply contracts included in enforceability of warranty disclaimers).
English and Scottish contract provisions are construed Contra Proferentum (against the party that drafted them); therefore, care should be taken to ensure clarity and accurate drafting of liability clauses. Equally, where there is any ambiguity in an exclusion of liability clause this will be interpreted against the party seeking to limit/exclude its liability, so care should be taken when drafting to avoid ambiguous terms.
Liability will continue throughout the contract and may not cease after the contract has been fulfilled, terminated or expired, subject to statute and any warranties and indemnities set out in the contract.
It is common practice for the parties to agree on the total amount which can be claimed in the event that a contract is breached, and to expressly state this cap in the contract. As explained above, such a cap on liability may be subject to the reasonableness test depending on the circumstances.
Sellers, in their contracts for the sale of goods under Article 2 of the UCC, customarily exclude indirect damages (including consequential, incidental and special damages).
A cap on direct damages or aggregate liability is also common.
Exclusions and limitations on liability are usually enforced unless they are unconscionable, unclear or not conspicuous. Exclusions of liability for fraud, personal injury, death and in some states bad faith, willful injury or unlawful conduct, are not enforceable. Some states allow exclusions of liability for gross negligence if "gross negligence" is specified in the contract.
Enforceability of exclusions and limitations of liability against consumers may differ from jurisdiction to jurisdiction.
Most jurisdictions preclude recovery of punitive (exemplary) damages for contract breaches without a separate and independent tort claim.
Contracts with Federal and state government agencies may have statutory limits on their liability.