Indemnity and Limitation of Liability Clauses in Indian Contracts

Two clauses in a commercial contract decide who bears the loss when something goes wrong: the indemnity clause, which makes one party compensate the other for specified losses, and the limitation of liability clause, which caps or excludes what a party can be made to pay. They are often negotiated last and read least carefully, though in a dispute they are usually the first clauses a court or arbitrator examines.

This article explains how these clauses work under Indian law and the points that are usually negotiated.

Indemnity under the Indian Contract Act

Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as one by which a party promises to save the other from loss caused by the conduct of the promisor or of any other person. Section 125 gives the indemnity holder the right to recover damages, costs of suits and amounts paid under a compromise, within the terms of the indemnity.

In commercial contracts, indemnities are drafted much more widely than the statutory definition. They commonly cover:

• Breach of representations and warranties
• Third-party claims, for example for infringement of intellectual property
• Losses from negligence, fraud or wilful misconduct
• Breach of confidentiality or data protection obligations
• Tax, statutory dues or penalties arising from the indemnifying party’s acts

Indemnity compared with damages

Point	Damages for breach	Indemnity
Basis	Sections 73 and 74 of the Contract Act	The terms of the indemnity clause
Trigger	Breach of contract	The event specified in the clause, which need not be a breach
Remoteness	Only losses that arise naturally or were in contemplation are recoverable	Depends on how widely the clause is drafted
Third-party claims	Not directly covered	Usually the main purpose of the clause

Limitation of liability

A limitation clause usually does two things: it caps total liability, often at the fees paid or payable under the contract over a period, and it excludes certain kinds of loss, typically indirect and consequential loss and loss of profit.

Indian courts generally give effect to such clauses between commercial parties of comparable bargaining strength, but a clause will not protect a party from liability for its own fraud, and terms that are opposed to public policy are void under Section 23. Section 28 also makes void any term that absolutely restricts a party from enforcing its rights through legal proceedings.

Common carve-outs from the cap

• Fraud and wilful misconduct
• Breach of confidentiality
• Infringement of intellectual property
• Personal data breaches, given the obligations under the Digital Personal Data Protection Act, 2023
• The indemnity for third-party claims, which is often kept outside the cap or given a separate, higher cap

Points usually negotiated

• Scope: whether the indemnity covers only third-party claims or also direct losses between the parties
• Procedure: notice of claims, the right to control the defence, and no settlement without consent
• Cap and basket: the overall cap, a minimum threshold before claims can be made, and the period within which claims must be raised
• Mitigation: an obligation on the indemnified party to reduce its loss
• Insurance: whether the indemnity is backed by insurance and whether the cap should match the cover
• Consistency: the indemnity, limitation and termination clauses should be read together so that they do not contradict each other

Related reading: executing an agreement properly and drafting a shareholders’ agreement.

Frequently asked questions

Can liability be excluded completely?

A complete exclusion is rarely accepted in practice and may not be upheld where it defeats the purpose of the contract or covers fraud. A reasonable cap with defined carve-outs is far more common.

Does an indemnity need a separate agreement?

No. It is usually a clause in the main contract. Standalone indemnity bonds are used in specific situations, for example by banks or government bodies.

Is indirect loss always excluded?

Only if the contract says so. Many contracts exclude it expressly, and the exact wording matters, since loss of profit can be direct or indirect depending on the facts.

ചുരുക്കം (Summary in Malayalam)

കരാറിൽ എന്തെങ്കിലും പ്രശ്നമുണ്ടായാൽ നഷ്ടം ആര് വഹിക്കണമെന്ന് തീരുമാനിക്കുന്നത് ഇൻഡെംനിറ്റി, ലിമിറ്റേഷൻ ഓഫ് ലയബിലിറ്റി എന്നീ വ്യവസ്ഥകളാണ്. ഇന്ത്യൻ കോൺട്രാക്ട് ആക്ട് സെക്ഷൻ 124, 125 ആണ് ഇൻഡെംനിറ്റിയുടെ അടിസ്ഥാനം. ലയബിലിറ്റിക്ക് പരിധി (ക്യാപ്) നിശ്ചയിക്കുകയും പരോക്ഷ നഷ്ടം ഒഴിവാക്കുകയും ചെയ്യുന്നത് സാധാരണമാണ്. എന്നാൽ വഞ്ചന, രഹസ്യം ലംഘിക്കൽ, ബൗദ്ധിക സ്വത്തവകാശ ലംഘനം, ഡാറ്റാ ലംഘനം എന്നിവ സാധാരണ ക്യാപിൽ നിന്ന് ഒഴിവാക്കും. ഈ വ്യവസ്ഥകൾ കരാറിലെ മറ്റ് വ്യവസ്ഥകളുമായി ചേർത്ത് വായിക്കണം.

This article gives a general overview of indemnity and limitation of liability clauses under Indian law. The effect of a clause depends on its wording and the facts; for any particular contract, the clause should be reviewed as a whole. The article is not advice on any particular case.