Are Exclusion of Liability Clauses in a Contract of Bailment Valid?

Chapter IX of the Indian Contract Act, 1872 (“Act”) deals with bailment. Section 151 of the Act imposes an obligation on the bailee in all bailment contracts (whether gratuitous or for reward) to “take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed”. Section 152 absolves the bailee of any liability for loss or damage to the goods bailed if she has taken the requisite care as per Section 151, provided there is no special contract to the contrary.

A vexed issue which fell for consideration before several High Courts is whether the bailee can contract out of its obligations under Section 151, and there has been no unanimity in the judgments rendered on this issue. The most elaborate and lucid analysis of the issue is contained in a more-than-a-century old judgment of Sankaran Nair, J. in Mahamad Ravuther v. British India Steam Navigation Co. Ltd. where he had held that a bailee cannot contract out of its obligation under Section 151. However, he was in the minority on this aspect of the matter. Recently, the Supreme Court in Taj Mahal Hotel v. United Insurance Co. Ltd. has endorsed Nair, J.’s dissenting opinion. (The Gujarat High Court in its 1983 decision in Mahendrakumar Chanulal v. Central Bank of India had considered the entire law on this issue and followed Nair, J.’s approach. But this decision went unnoticed by the Supreme Court).

In Taj Mahal Hotel, the Court was called upon to decide upon the liability of a five-star hotel for the theft of a car parked in its premises through valet parking. The parking tag issued to the car owner stipulated that the car was being parked at the owner’s own risk and responsibility and the hotel would not be responsible for any loss, theft or damage to the car (“Exclusion of Liability Clause”). The Supreme Court inter alia held that: a) the hotel would be liable if a contract of bailment is found to subsist between the hotel and car owner; b) once a contract of bailment is found to subsist, prima facie the hotel would be liable for the theft of the car unless it can prove that it had taken the requisite care under Section 151 of the Act; and c) the bailee cannot contract out of its obligations under Section 151 and 152 of the Act, and therefore, the Exclusion of Liability Clause is invalid. In this post, I discuss as to whether the Court was justified in following Nair, J.’s opinion and the implications of Taj Mahal Hotel on exclusion of liability clauses in bailment contracts.

The Court in Taj Mahal Hotel (as did Nair, J. in Mahamad Ravuther) provided two broad bases to declare the Exclusion of Liability Clause as invalid. First, the express terms of Section 152 do not allow a bailee to exclude its liability altogether. Section 152 only permits the bailee to undertake additional liability, i.e. for loss or damage caused to the goods despite the bailee having fulfilled its duty of care as per Section 151. Second, allowing the hotel to exclude its liability for negligence by way of a contract would render the obligation under Section 151 illusory and redundant, and leave the consumers (i.e. car owners availing valet parking facility) without any remedy. In other words, this was a public policy ground (the Court does not use this phrase) which the Court relied upon to hold the Exclusion of Liability Clause as invalid.

Assessing the correctness of the Court’s reasoning would require us to look into the scheme of the Act. The Act codifies the law of contract in India. Section 1 of the Act saves inter alia the ‘incident of any contract’ which is not inconsistent with the provisions of the Act. Put simply, those aspects of a contract which are contrary to the provisions of the Act are not valid. This interpretation of Section 1 is buttressed by the fact that various provisions of the Act are expressly made applicable only in the absence of a contract to the contrary between the parties. These include Sections 43, 131, 137, 146, 163, 165, 170, 171, 174, 202, 219, 221, 230; of these, Sections 163, 165, 170, 171, 174 are in the chapter on Bailment. This overall scheme of the Act was a crucial reason behind Nair J. concluding that a bailee could not contract out of its obligation under Sections 151 and 152. Post Mahamad Ravuther, the Bombay High Court in K.R. Chitguppi v. Vinayak Kashinath Khadilkar (in the context of Section 133) and the Gujarat High Court in Mahendrakumar Chanulal v. Central Bank of India (in the context of Sections 151 and 152) have held that except for those provisions of the Act which expressly allow parties to derogate from it, all other provisions of the Act are mandatory. There cannot be any quarrel with this line of reasoning when viewed from the perspective of interpretation of statutes. This interpretation is also supported by the latin maxim expressio unius est exclusio alterius, i.e. the express mention of one is the exclusion of another (applied, for instance, in Ethiopian Airlines v. Ganesh Narain Saboo).

The argument made in support of parties’ right to contract out of their obligations under Sections 151 and 152 is two-fold: first, parties’ inherent right to agree upon the terms of their contract:

  1. First, parties have an inherent right to agree upon the terms of their contract. This formed the basis of the Bombay High Court’s decisions in Lakhaji Dolla & Co. v. Borugo Mahadeo Rajanna and Parsram Parumal Dabrai v. Air India Limited and the Punjab & Haryana High Court’s decision in S. Summan Singh v. National City Bank of New York. None these decisions, however, discussed the aspect of freedom of contract in detail and simply proceeded on the assumption that the Contract Act does not preclude parties from agreeing upon the terms of a private contract. They failed to consider that such a right cannot be absolute, for all private law rights are circumscribed by public policy limitations. Surely, it cannot be said that parties can contract out of the provisions of Section 19 of the Act, which renders agreements for which consent is obtained by fraud, coercion or misrepresentation voidable. In such circumstances, how does one determine the extent to which parties can contract out of the provisions Contract Act? The answer is provided by the Act itself, and which is precisely what has been emphasized by Nair, J. in Mahamad Ravuther and in other subsequent decisions mentioned above.
  2. Second, some courts have held that Section 152 itself allows a bailee to contract out of its obligations under Section 151 (see for eg., Fut Chong v. Maung Po Cho). However, the phraseology of Section 152 would make it clear that this argument has no merit. Section 152 reads: “The bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it described in section 151”. Section 152 supplements Section 151 and clarifies that so long as the bailee takes the degree of care prescribed in Section 151, it is not responsible for any loss or damage caused to the goods. This exoneration of liability is made subject to a contract to the contrary between the bailor and the bailee. Thus, a special contract can only increase the liability of the bailee, and not exonerate it altogether from liability despite its failure to take the requisite care under Section 151.

In view of the above, in my submission, the Court in Taj Mahal Hotel was justified in following the approach of Nair, J. in Mahamad Ravuther.

An interesting issue that arises is whether Taj Mahal Hotel would preclude bailees in all contracts of bailment from contracting out of their obligation under Sections 151 of the Act? The Court in Taj Mahal Hotel restricted the applicability of its findings to the liability of hotels as bailees for vehicles handed over to them for valet parking. It expressly refused to comment on whether the majority opinion in Mahamad Ravuther ought to be followed in other kinds of contracts.

Nonetheless, it is unlikely that a court will follow the majority opinion in Mahamad Ravuther over Taj Mahal Hotel. First, one of the fundamental reasons for the Court’s decision in Taj Mahal Hotel, i.e. that Section 152 does not allow a bailee to contract out of its obligation under Section 151 would extend to all contracts of bailment. It is not contingent on the nature of the bailment contract. Second, the fact that allowing the hotel to contract out of Section 151 would render the provision redundant and illusory would also be the case in other kinds of contracts of bailment. It may be argued that a gratuitous bailee ought to be allowed to contractually exclude all liability for loss or damage to the goods bailed. But it is well-settled that the Contract Act, unlike English common law, imposes the same obligations in a gratuitous bailment and a bailment for reward. Allowing only a gratuitous bailee to exclude liability by way of contract would be contrary to this aspect of the Act.

Published by Sharad Bansal

Advocate, Bombay High Court

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

<span>%d</span> bloggers like this: