Liquidated Damages and Limitation of Liability Clauses under Indian Law

Commercial contracts in India routinely contain a liquidated damages clause, a cap on liability and an exclusion of indirect loss. Each works differently under Indian law than many parties assume, especially those used to English law.

Damages for breach: section 73

Under section 73 of the Indian Contract Act, 1872, the injured party recovers compensation for loss or damage that arose naturally in the usual course of things from the breach, or that the parties knew, when they made the contract, would be likely to result from it. Remote and indirect loss is not recoverable.

Liquidated damages: section 74

Section 74 deals with contracts that name a sum payable on breach, or contain a penalty. It allows the injured party to recover reasonable compensation not exceeding the amount named, whether or not actual damage or loss is proved. Three Supreme Court decisions shape how it is applied:

• Fateh Chand v. Balkishan Das (1963): Indian law does not distinguish between a penalty and liquidated damages in the way English law does. In either case the court awards reasonable compensation, capped at the named sum.
• ONGC v. Saw Pipes (2003): where the parties made a genuine pre-estimate of damages and it is difficult to prove the actual loss, the pre-estimate can be awarded without proof of loss.
• Kailash Nath Associates v. DDA (2015): damage or loss is essential. Where loss can be proved, it must be proved, and where none is caused, nothing is payable. The named sum is the upper limit, not an entitlement.

Drafting points

1. Record in the contract how the sum was estimated and why actual loss would be hard to prove, such as the cost of delay to a project or lost use of a system.
2. Keep the figure proportionate. A sum that works as a threat rather than an estimate invites the court to cut it down.
3. State whether liquidated damages are the sole remedy for the breach they cover, or whether other remedies remain.
4. Keep the documents that would prove loss anyway.

Limitation of liability

Between businesses, Indian courts generally respect agreed caps on liability and exclusions of indirect or consequential loss as an exercise of freedom of contract. They read them strictly, against the party relying on them, so ambiguity helps the claimant. A party cannot rely on a clause to escape liability for its own fraud. Standard-form terms imposed on a much weaker party can be struck down as unconscionable under section 23 of the Contract Act, as the Supreme Court did in Central Inland Water Transport v. Brojo Nath Ganguly (1986), and in consumer contracts the Consumer Protection Act, 2019 allows unfair contract terms to be declared void.

Drafting points

• Define the cap clearly: a fixed sum, or a multiple of the fees paid or payable over a stated period.
• Say what sits outside the cap, such as breach of confidentiality, IP infringement indemnities, data protection breaches and wilful misconduct.
• Define “indirect” or “consequential” loss rather than relying on the label; list the heads of loss excluded, such as lost profits or lost data.

Indemnities

A contract of indemnity under sections 124 and 125 of the Contract Act protects a party against loss caused to it by the promisor or a third party. Commercial indemnities, especially for third-party IP claims and data breaches, are drafted more broadly than the statute and need clear triggers, procedures for handling claims, and a decision on whether they sit inside or outside the liability cap.

Our commercial contracts practice drafts and negotiates these clauses, and our free Contract Health Check asks whether anyone chose your liability cap deliberately.

This article is for general information and states the law as at 12 October 2026. It is not legal advice. For advice on your situation, contact the firm. Published by BRB Legal.