Exclusion and Limitation of Liability Clauses
Our Associate Habiba Mokhtar examines the enforceability of exclusion & limitation of liability clauses under Bahraini law, with reference to key legislative provisions and judicial interpretations.
Habiba Mokhtar ([email protected]) – Associate
Exclusion and limitation of liability clauses serve as essential mechanisms for allocating risk between contracting parties and promoting commercial certainty. Nevertheless, the doctrine of freedom of contract must be reconciled with considerations of public order, as enshrined in applicable legal provisions. Under Bahraini law, the general rule permits parties to exclude or limit the liability of the debtor through contractual agreement, except where otherwise restricted by law and subject to specific conditions set forth therein. It is important to note that numerous exceptions to this principle exist, scattered across Decree Law No. 19/2001 Issuing the Civil Code (the “Civil Code”) and various sector-specific legislations. Accordingly, the validity and enforceability of such clauses must be evaluated on a case-by-case basis. This article aims to examine the legal distinction between exclusion and limitation of liability clauses, along with the requisite conditions for their enforceability, supported by practical considerations.
The Distinction Between Exclusion and Limitation of Liability
The distinction between exclusion and limitation of liability is, in essence, a matter of degree rather than substance. An exclusion of liability operates as a complete discharge from liability in respect of a particular contractual obligation, whereas a limitation of liability serves to cap or reduce the extent of liability arising from the obligations governed by the relevant clause. Consequently, this differentiation is one of scope and does not give rise to any substantive divergence in legal effect. The legal consequences of both types of clauses are functionally equivalent, and the same legal principles govern the validity and enforceability of each.
Enforceability of Exclusion and Limitation of Liability Clauses
Civil liability includes both contractual liability, which arises when a party fails or refuses to fulfill contractual obligations, and tortious liability, which results from a wrongful act or a breach of a legal duty that exists independently of any contract. The exemption from liability in each case is governed by separate provisions of the Civil Code and carries distinct legal implications.
Pursuant to Article 219 of the Civil Code, the parties may agree to exempt the debtor from liability for non-performance or delay in performance, provided that such failure is not caused by fraud or gross negligence. On the other hand, Article 181 of the Civil Code provides that any agreement seeking to exclude liability for a tortious act, if entered into before the occurrence of the wrongful act, is null and void. Therefore, exemption clauses may be contractually enforceable as long as they do not involve fraud or gross fault and do not pertain to tortious liability.
In addition to the above, Challenge No. 415 J.Y. 2005 establishes that an exemption clause shall not be enforceable where it relates to a fundamental obligation of the contract, as such an exemption would fall within the scope of gross fault, by stipulating “While, according to general legal principles, it is permissible to agree on exempting the debtor from any liability arising from the non-performance of their contractual obligation, except in cases of fraud or gross fault, such an exemption is invalid if it applies to the primary obligation that constitutes the cornerstone and essence of the contract. This would render the exemption void, as it contradicts the very essence of the contract by relieving one party of any obligation while still requiring the full performance of the reciprocal duty, which is considered a form of gross fault.”
In the above judgment, the lessor and lessee had entered into a lease agreement for the purpose of constructing worker housing. The agreement included a clause exempting the lessor from liability in the event that the public authorities denied construction permission, while maintaining the lessee’s obligation to pay rent. The court found this exemption clause unenforceable, reasoning that enabling the lessee to use the premises for the intended purpose constituted a fundamental obligation of the contract.
On the other hand, enforceable exemption clauses are frequently found in liquidated damages provisions within commercial contracts, particularly in the construction sector. Liquidated damages, which serve to limit liability by establishing a predetermined sum for breach, are governed by Article 225 of the Civil Code and are subject to judicial scrutiny. In private contracts, courts may enforce such provisions but reserve the right to reduce or reject the stipulated amount if no actual loss is demonstrated or if the amount is deemed excessive. In contrast, liquidated damages clauses in administrative contracts generally face minimal judicial interference. These clauses are typically upheld unless the creditor can establish force majeure or prove fault on the part of the other party, both of which require a high evidentiary standard, rendering liquidated damages in administrative contracts effectively enforceable in most cases
Concluding Remarks
Exclusion and limitation of liability clauses are generally enforceable under Bahraini law unless otherwise stipulated in the law, except in cases of fraud, gross fault, violations of fundamental obligations, or tortious liability. Bahraini law strikes a balance between considerations of public order and the principle of freedom of contract, ensuring that the parties’ intentions at the time of contract formation are respected while upholding public order concerns. It is crucial for parties to carefully draft these clauses to align with legal requirements and ensure enforceability.
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