Section 73’s Shadow: A General Counsel’s Primer on When Contractual Risk Allocation Becomes Void Under Indian Law

Introduction 

A General Counsel faces a considerable challenge when drafting a high-value service agreement: how to limit the client’s liability without rendering the contractual safeguard legally void. Imagine a scenario involving a multi-year infrastructure development contract where unforeseen delays caused by one party trigger claims for massive consequential damages far exceeding the project’s profit margin. The effectiveness of the carefully inserted exclusion clause becomes the central point of commercial and legal risk. The question then arises: Does the freedom to contract offer an unfettered right to extinguish liability, or does the Indian Contract Act, 1872, maintain an overriding statutory minimum? This exploration delves into the collision between contractual clauses and legislative mandates, using the judicial interpretation of key sections of the Contract Act to educate the General Counsel on enforcement risks.

The statutory right to remedy begins with Section 73 of the Contract Act, which establishes compensation for loss or damage that naturally arose in the usual course of things (general damages) or that the parties knew to be likely (special damages). This provision, rooted in common law, also imposes two critical constraints: it denies compensation for remote and indirect loss and requires the aggrieved party to consider the duty to mitigate the inconvenience caused by non-performance. Given the uncertainty in quantifying damages, particularly in complex commercial transactions, contracting parties include limitation or exclusion clauses as essential risk reduction mechanisms. But can a party simply contractually waive the remedial rights created by Section 73?

Historically, the answer leaned toward “yes.” Courts affirmed the principle of freedom of contract, upholding clauses that stipulated a liquidated sum (thereby excluding claims under general law, as seen in Sri Chunilal v. Mehta and Sons Limited), strictly enforcing liability caps (Bharathi Knitting Company v. DHL Worldwide Express Courier¹), and even recognizing contract terms that allowed only for an extension of time but not compensation for delays (ONGC v. Wig Bros.²). This approach treated exclusion clauses as standard terms, binding upon signatories even if the exact legal effect was unknown. However, a significant legal rupture occurs when the contractual power of an economically superior party dictates terms to a weaker one. Should courts enforce clauses merely because they exist in the signed document, even if they result in manifest unfairness?

The judiciary began to look beyond “procedural unfairness” (coercion, fraud) and toward substantive unfairness by invoking the doctrine of public policy under Section 23. The Delhi High Court, in the seminal case of Simplex Concrete Piles (India) Limited v. Union of India, declared that a clause imposing an absolute prohibition on claiming damages otherwise due under Section 73 was void. The reasoning was clear: Sections 73 and 55 constitute the “very heart, foundation and basis” of the Contract Act, and allowing a clause to negate the legislative intent is against public policy. This was reinforced in MBL Infrastructures v. Delhi Metro Rail Corporation. Crucially, the Simplex principle distinguishes between the void absolute prohibition and the generally enforceable clause that limits liability to a threshold or excludes indirect/consequential losses. The Supreme Court cemented this focus on unequal bargaining power in Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly³, ruling that unconscionable, unfair, and unreasonable clauses in contracts where one party had no meaningful choice but to sign are void under Section 23. While this principle exempts commercial transactions between parties with equal or almost equal bargaining power, it grants a clear path to challenge an exclusion clause if it can be proven that the party imposing it held significant economic dominance, resulting in substantive unfairness (LIC of India v. Consumer Education and Research Centre⁴). If the clause is not merely apportioning risk but systematically eliminating all recourse for the injured party, can it genuinely be called a negotiated term?

Beyond the damage calculus, Counsel must verify the basic enforceability of the entire agreement, as flaws here will inevitably nullify any liability cap. Does the contract satisfy the fundamental requirements of enforceability, or is its foundation inherently void?

First, Section 25 renders an agreement void without consideration, except in specific, narrow cases like a written promise to pay a time-barred debt. Second, the agreement must respect economic freedom. Section 27 voids any agreement that restrains an individual from exercising a lawful profession, trade, or business, except for reasonable limits associated with the sale of goodwill (a crucial distinction for employee non-competes). Third, Section 26 voids agreements in restraint of marriage. Fourth, clarity is mandatory: Section 29 voids agreements whose meaning is not certain or capable of being made certain. Fifth, the contract must not be a wager (Section 30), involving a mutual chance of gain or loss on an uncertain event.

Finally, Counsel must ensure the judicial mechanism is preserved, as Section 28 voids clauses that absolutely restrict a party from enforcing their contractual rights through ordinary legal tribunals or that limit the time for such enforcement. While an arbitration clause remains valid, any clause shortening the statutory period of limitation is void. If an agreement contains both lawful and unlawful components, the doctrine of severability applies: if the unlawful part cannot be effectively isolated, the entire agreement is void; otherwise, the lawful part remains enforceable.

Given the uncertainty generated by relying on the vague doctrine of “public policy,” the Law Commission of India has proposed a statutory law to address substantive unfairness, suggesting that clauses excluding liability for breach without adequate justification should be deemed void. Until such safeguards are legislated, the General Counsel’s most critical task is to ensure that liability clauses are limited and reasonable, not absolute, thereby surviving the judicial inquiry into whether the bargain truly reflects a negotiation between equals. Can your client demonstrate that their exclusion clause was not an oppressive diktat but a justified component of a freely chosen commercial risk model? The answer determines the clause’s—and potentially the contract’s—survival.

Conclusion

The ongoing judicial scrutiny of exclusion clauses signals a crucial shift from the classical doctrine of caveat emptor to a modern emphasis on contractual equity, presenting both future ramifications and immediate hurdles for the General Counsel. While the Supreme Court carved out an exception for sophisticated commercial parties with equal bargaining power, the expanding application of substantive unfairness—triggered by the Delhi High Court’s Simplex ruling and the Supreme Court’s principles in Central Inland—means the commercial sanctity of even limited liability clauses remains perpetually subject to challenge if a power disparity can be proven. 

This places a significant burden of justification on the dominant party, shifting the focus from simply what was signed to how the terms were imposed. The hurdle now lies in the lack of a clear legislative definition for “substantive unfairness” in non-consumer transactions, forcing companies to operate in an environment where the validity of their risk apportionment strategies hinges precariously on a judge’s assessment of ex-post economic equity rather than ex-ante contractual intent, potentially destabilizing high-value project financing where risk must be quantifiable.

This legal evolution prompts fundamental questions about the future of contract enforcement in India: Will the courts eventually discard the equal bargaining power exception, extending the unconscionability doctrine to all contracts to foster a more paternalistic approach to commerce? Should the legislature act upon the Law Commission’s proposals, statutorily recognizing “unfair contracts” that exclude liability without adequate justification, thereby providing the very certainty that the current common law approach denies? Until statutory clarification delineates a clear “safe harbor,” General Counsel must grapple with the risk that clauses designed to eliminate remote liability may ironically become the central point of litigation, forcing parties to debate fairness and public interest rather than performance and damages. The next wave of contractual disputes will undoubtedly test the elasticity of Section 23, determining whether the right to remedy under Section 73 can truly be waived, or if it constitutes a core public right that transcends even the most carefully negotiated dotted line.

Citations

1. Bharathi Knitting Company v. DHL Worldwide Express Courier(1996) 4 SCC 704
2. ONGC v. Wig Bros.(1996) 4 SCC 704.
3. Central Inland Water Transport Corporation Limited v. Brojo Nath Ganguly 1986 AIR 1571
4. LIC of India v. Consumer Education and Research Centre1995 (5) SCC 482

Expositor(s): Adv. Anuja Pandit