Limitation of Liability Clauses in Contracts – Are They Always Enforceable
Under the law of the Sultanate of Oman, obligations and liabilities arise from contracts, unilateral acts of individuals, any act resulting in a harmful action (tortious liability), acts that lead to gains, as well as directly from the law itself.
Many individuals and companies heavily rely on limitation of liability clauses in all types of contracts and agreements in Oman and elsewhere, without giving sufficient consideration to the actual validity or enforceability of such clauses in practice.
Contractual liability under Omani law is established when there is a valid contract between the defaulting party and the injured party. In addition, the defaulting party must have breached one or more of its obligations stipulated in the contract, and as a result of such breach, damage must have been suffered by the other party.
Accordingly, contractual liability arises only when the following conditions are fulfilled, and it cannot exist in the absence of any of these conditions:
1.An unlawful act by the defaulting party, such as non-performance, violation of the contract terms, or delay in fulfilling any of the obligations specified in the contract.
2. Actual damage suffered by the other party to the contract.
3. A causal relationship between the unlawful act committed by the defaulting party (i.e., breach of the contractual obligations, which is usually determined by the court on a case-by-case basis) and the damage suffered by the other party. This means that the damages incurred must be a direct consequence of the contractual breach.
The legal principle of freedom of contract provides that the parties have absolute freedom to draft their contracts in the manner they see fit, without governmental or other restrictions, since the parties themselves are best positioned to determine what serves their interests. However, this freedom is conditioned on the contract not violating the law, moral standards, or public order in the country.
Based on this principle, contracting parties may agree to expand or limit their obligations in any contract and in various ways. This includes pre-determining the amount of compensation that the defaulting party must pay, either by stating it in the contract itself or in a subsequent agreement, provided that this occurs before the damage takes place.
However, there are certain exceptions or restrictions to the principle of “freedom of contract,” which many contracting parties attempt to rely upon to limit their obligations in all types of contracts. These include:
1. At the request of either party, the court may assess the compensation contrary to the parties’ agreement so that the compensation equals the actual losses incurred. Any agreement to the contrary is void. However, if the parties agree—after the breach and damage occur—on the amount of compensation payable to the injured party, such agreement is considered a new settlement. In that case, the court will not intervene, as the agreement was made after the breach and resulting damage.
2. The court may intervene if it is proven that performance became impossible or the damage resulted from an external cause beyond the control of the contracting parties (for example, a natural disaster, unavoidable accident, force majeure, pandemic, an act of a third party, or an act of the injured party itself). In such cases, the burden of proving that the failure was due to an external cause lies with the contracting party.
Determining tortious liability or whether a party has breached its contractual obligations is subject to the discretion of the courts. Nevertheless, the injured party remains responsible for proving the occurrence of the breach, the damage suffered, and the causal relationship between the breach and the damage.
3. If the injured party contributed through its own actions to causing or aggravating the damage, the court may reduce the level of compensation required, or even rule that no compensation is due.
4. In cases of fraud or gross negligence by one of the contracting parties, the court has the right to intervene.
In reality, limitation of liability clauses are always subject to the laws of the Sultanate of Oman and to the interpretation of Omani courts. Moreover, the nature of some contracts subjects them to specific regulations, exempting them from the general rules on limitation of liability.
Given that these limitation of liability provisions can be of critical importance in certain contracts, contracting parties should always seek proper legal advice on the validity and enforceability of such clauses, as well as the contracts and agreements in general, before relying on them.
Furthermore, the invalidity of such clauses can affect the validity of the entire contract if these clauses conflict with local laws or public policy, or if the contract depends entirely on them.
Conclusion
In conclusion, we ask Almighty Allah for success and prosperity in our work to achieve our aspirations on the path of glory and honor. We also pray that this effort and work will be purely for His sake and that everyone benefits from this study and applies it. Indeed, He is All-Hearing and Responsive.
Prepared by: Dr. Mohammed Gharbawi
Al-Alawi & Co – Lawyers and Legal Consultants
Muscat, Sultanate of Oman