Stipulated sums and limitation clauses

The law governing stipulated sum clauses and limitation clauses in India has long been complex. In part, this is because these clauses bring into direct conflict two principles, both of which are fundamental to contract law: the principle of freedom of contract, and the principle that the law provides full compensation for breach. But it also reflects the fact that these clauses are used in a very wide range of transaction types, ranging from employment contracts to complex cross-border commercial transactions. Although the judiciary has shown a clear understanding that the law must have the flexibility to deal differently with different types of transactions, the doctrinal tests on which they rely are not well suited to giving weight to factors specific to a particular type of transaction. The result, as this chapter shows, is a law that is not just characterised by a lack of clarity but is also frequently over-interventionist, and that contains a surprisingly large number of different approaches to deciding when these clauses are enforceable. These approaches draw not just on the statutory provisions themselves, but also on broader ideas of unconscionability, inequality of bargaining power, and public policy. Against this background, this chapter draws on previously unexamined documents in the India Office Records on the history of the 1899 amendment to the Contract Act, to argue that the Act’s legislative history gives us the basis for restating the law on remedial clauses in a way that resolves the complexity in the current law and also provides a clearer guide to the types of circumstances in which it is appropriate for the judiciary to intervene in contracts. The starting point is the relationship between contract law and the social context in which it operates; and, in particular, the social purpose which the courts’ powers to intervene in remedial clauses can and should serve. The question of whether or not contract law should seek to discharge broader social functions is a heavily contested topic in academic writing about contracts. In the Indian context, however, the question must be taken to have been settled in favour of contract law having such a social role: as this chapter shows, the statute assumes that contract law should be applied in a way that is sensitive to its social context, and it seeks to ensure that courts have the legal tools needed to intervene when necessary while also protecting bona fide commercial transactions from judicial intervention. Put together, these points have a strong resonance with the type of factors that underpin judicial intervention in remedial clauses today, and they provide a basis for framing a more structured and systematic approach to stipulated sums and limitation clauses.