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Limitation of Liability Clause from Indonesian Legal Perspective

 

What is limitation of liability clause

 

A limitation of liability clause, commonly found in contracts and legal agreements, serves to restrict the liability of one party in case of damages, losses, or injuries caused to the other party. Essentially, it sets a cap on the amount that the liable party must pay under specific circumstances. By including this clause, organizations can safeguard themselves during disputes and define their financial responsibility within the terms and conditions of the contract.

 

For example: Party A shall not be liable to Party B for any indirect, consequential, or punitive damages arising from [specific events or circumstances]. In no event shall [Party A]'s total liability exceed [specified amount].

 

Difference between limitation of liability and indemnification clause

 

The purpose of limitation of liability clause is to set a limit on the amount of liability one party can be liable for if there is a problem with a contract which causes financial loss. This clause typically protects the vendor or service provider. When there is something wrong with their service, the service provider will only be liable to pay to the maximum limited amount.

 

On the other hand, the indemnification clause purposes to allocate the responsibility for defending against legal claims and potentially paying any associated costs (including attorney fees and settlements) to one or both parties. For example: If Party A indemnifies Party B, it means Party A will defend and cover costs if any third-party claims arise due to Party B’s actions or services. Unlike limitation of liability, which focuses on financial exposure, indemnification shifts the risk of legal claims from one party to another.

 

A limitation of liability clause applies to claims from third-party as well as claims brought by the contracting parties themselves. In contrast, indemnity provisions focus specifically on shifting the risk of paying and defending third-party claims.

 

A limitation of liability provision might even protect a party that fails to fulfil its obligations, limiting the other party’s recourse to repayment of the money paid. Indemnity, however, doesn’t prevent parties from suing each other for non-performance.

 

Both clauses serve different purposes, and their inclusion in a contract depends on the specific context, risks, and negotiation dynamics.

 

Where Limitation of Liability Clause Comes Into Play

 

There are some common scenarios where this clause comes into play, for example:

 

In a Software Development Contract, the party developing the software want to ensure that if there is a problem or failures with the software, then, it will only be liable for the certain maximum amount, even if the damages cost is higher. It is important to safeguard the software company from potentially financial losses if the software fails.

 

In insurance contracts, a limitation of liability clause sets the upper limit for the payment an insurer must provide to the insured under specific conditions. For instance, if a policy covers property damage, this clause might cap the insurer’s liability at a predetermined amount. These clauses serve to bring predictability to both the insurer and the insured, preventing excessive payouts that could strain the insurer’s resources.

 

In Cybersecurity and Data Breach Agreements, organizations frequently incorporate limitation of liability clauses. These clauses serve two essential purposes: managing risk and providing clarity regarding the extent of financial responsibility for service providers in the event of a security breach.

 

In a Professionals Services Contracts (such as consultants, architects, construction service or engineers), these clauses limit their liability for errors or omissions. For instance, a construction company might include a cap on damages in a construction project contract. That way, it balances risk and allows professionals to provide services without facing unlimited liability.

 

In a Product Sales and Manufacturing Contracts, Manufacturers and suppliers frequently include limitation of liability clauses in contracts with buyers to limit the manufacturer’s liability for defects, malfunctions, or injuries caused by their products. It provides clarity on the financial consequences if a product-related issue arises.

 

Limitation of liability according to Indonesian Law

 

In Indonesia, the parties to an agreement have the freedom to regulate the contents of the agreement, as long as it does not conflict with the law, norms and morality. Article 1249 of the Civil Code (“hereinafter referred to as the Civil Code”) stipulates that “If in an agreement it is stipulated that the person who fails to fulfill it, as compensation must pay a certain amount of money, then the other party may not be given an amount that is more or less than such amount........”. This provision is often the basis for the parties to an agreement to employ the limitation of liability clause.

 

Because it is regulated by Article1249 of the Civil Code and also based on the freedom of contract principle, the limitation of liability clause is a legitimate clause under the Indonesian Law. The limitation of liability clause can serve as a protection to the obligated party in an agreement from arbitrary damage claim. Nevertheless, the application of the limitation of liability in an agreement requires the good faith from the responsible party, to not use this clause as a way to neglect its fulfilment of obligation. The limitation of liability in an agreement shall not contradict with the principles of balance, moral principles, and the principle of fairness which are also an integral part of contract law. Therefore, the application of this clause shall not cause in losses and injustice for the other party of the agreement.

 

That being said, the limitation of liability clause is totally prohibited in the context of consumer protection. As regulated under the Article 18 of Law Number 8 of 1999 concerning Consumer Protection, a standard contract in consumer services and/or goods must not contain a limitation of liability clause. Such contract will be null and void and unenforceable.

 

There has been no real legal case in Indonesia whereas the limitation of liability in an agreement was disputed. In Indonesia, the court is given a discretion to find the law, it means the court has the freedom to apply the amount of loss that must be paid by the defaulting party. In practice, when calculating the amount of loss, judges are not bound by statutory regulations regarding evidence and often work based on presumption and general provisions regarding evidence. In other words, the limitation of liability clause may not be enforceable if there in injustice, and the court will decide the amount of loss that the liable party must pay regardless the cap amount agreed on the limitation of liability clause.

 

How To Make Limitation Of Liability Clause Enforceable Under Indonesian Law

 

Drafting an effective limitation of liability clause is crucial to protect your organization while ensuring fairness and clarity in contracts. Here are some practical tips for creating a robust limitation of liability clause:

 

1. Noticeability of the Limitation of Liability Clauses in the Contract

 

A limitation of liability clause must stand out in the contract, it is written in bold text and capital letters, or any other way to ensure the Parties are aware of the existence of this clause. Hidden, buried or difficult to find clause will cause the Parties unaware of the presence of this clause. This infringes the principle of mutual consent and fairness and this clause may not be enforceable.

 

2. Clear and Unambiguous Language

 

When drafting limitation of liability clause, using clear and straightforward language and no ambiguity can prevent disputes later on.

The scope of liability and the types of damages covered need to be specified. For example, be specific on whether the damage is direct financial losses, lost profits, or consequential damages. Avoid using vague language like “any and all losses”.

 

It is also important to incorporate the relevant bases for claims. For example, breaches of contract, negligence, defect of the product or service or misrepresentation.

 

3. Reasonableness and Proportionality

 

The limitations of liability should be both reasonable and proportionate. Courts closely examine clauses that are excessively restrictive or unfairly biased toward one party. When setting these limits, take into account factors such as the transaction’s nature, industry norms, and the relative bargaining power of the parties. It’s essential to avoid imposing an unreasonably low cap that essentially eliminates liability.

 

Avoid employing language in contracts that exceeds what the law allows. Courts have the authority to invalidate clauses that eliminate liability for acts of gross negligence, fraud, or intentional misconduct.

 

4. Exceptions and Carve-Outs

 

Clearly state any exceptions to the limitation. For instance, intentional wrongdoing or fraudulent acts should fall outside the clause. If your company intentionally misrepresents a product or service, the limitation may not apply.

 

5. Consider Industry Norms

 

Limitation of liability clause may not applicable all the same for every industry. The wordings of the clause should be crafted on a case-by-case basis. You will have to research common practices within your industry for what limitations are typically accepted. Referring to industry standard for liability caps in similar agreements will give an insight how limitation of liability clause should be properly drafted.

 

If you are unsure how to draft proper limitation of liability clause, you may want to consult with legal experts to help you strike the right balance between protecting your interests and maintaining fairness. A well-drafted limitation of liability clause benefits both parties. It provides predictability, manages risk, and ensures that neither side faces undue financial exposure.

 

Disclaimer: This article is for informational purpose only and is not intended as a legal advice and cannot be relied on as a legal advice or any other form in similar nature. Should you need legal advice or assistance please contact your own lawyer of adviser.