Liability
Whenever, parties get into an agreement or partnership, there are various clauses mentioned which on signing of the contract makes them enforceable for both the parties, or as provided. One of these clauses mentions liability.
Liability means in its basic sense as being responsible legally for something. Which in contracts would mean being legally responsible for the purpose of the contract, for enforcing the contract, for carrying out activities to fulfill the contract, etc. Contractual Liability is often more than not about agreeing to pay for any breach, damages of losses that could be caused to the other contracting party.
E.g. There is a company ‘Mota’ which manufactures certain machines which are required in running the engines of ships that sail across the seas for transporting goods. There is another company ‘Rola’ who have ships and boats that transport goods and other items from one country to other. In the agreement it was written that in any of case of default, ‘Mota’ shall be liable. Now these two parties contracted for providing machines to the transporting ships. ‘Rola’ would then transport the materials of a company ‘Nova’, producing silk which is also enforced through a contract. The material is to be transported within a week from Rola’s ship.
Supposedly, ‘Mota’ fails to provide working machines on time, ‘Rola’ would face a huge loss as he wouldn’t be able to deliver the silk on time. Who is then liable for the huge losses? Here liability comes into action. As the contract already mentioned ‘Mota’s’ liability, that company shall have to incur the losses and pay compensation to ‘Rola.’
Limited Liability Contracts
In case of limited liability, the parties can specify in the terms of the contract that they shall be held liable for paying damages for breach only in certain circumstances or that there will a cap on the damages. In case of limited liability, the party can very well mention that they will pay compensation in case of defect only till a certain sum of money. This is done in order to reduce the exposure to the risk.
Limitation is not always for money. At times liability is also limited on certain actions done by another party, or any actions done without taking the consent. In such cases liability is limited in order to protect from risks that one isn’t aware off. If an action is taken with due and prior consent of both the parties, it means that both are very well aware of the consequences that can possibly happen. However, when a party is not aware of something, it would want to protect self from any undue consequences.
E.g. There is a company ‘Gog’, distributing ball bearing to car manufacturers. These bearing are then used by the manufacturers and installed in their cars. There is a car manufacturing company ‘Bob Cars’. While contracting for supply of 100 bearing per month, the clause mentions that ‘Gog’ shall be liable only upto a sum of Rs. 1 crore, in case some default occurs in the cars.
By this example it is clear the liability of ‘Gog’ is limited only upto Rs. 1 crore in case of defaults and defects and not more than that.
Unlimited Liability Contracts
In case of Unlimited Liability, the liability of the parties in case of default in the contract or when anything goes wrong shall not be capped. Which means that the parties will have to do every possible thing to pay the compensation for breach of contract or pay the damages in case of defaults.
E.g. A person has boutique, wherein she sells traditional Indian dresses. To start the business, she asked her friend to be her partner so that she can get more investments. This is therefore a partnership for the business of boutique. They received an order for dresses from a famous celebrity worth Rs. 15,00,000 for her wedding. These dresses were to be made and delivered in three months with proper fittings and designs. However, a day prior to the delivery several rats entered the boutique and damaged the dresses. Unfortunately, they couldn’t deliver the dresses and faced huge loss. The celebrity aggrieved by the same sued the boutique partners for breach of contract and asked for compensation of Rs. 15,00,000.
In this case the liability on the boutique partners is unlimited. They will have to repay the damages to the celebrity anyhow. They can sell the store, asked for loans or will have to use their personal assets too, if required.
Partnerships often have unlimited liability, which means that in order to pay the debts, the partner may have to use his personal assets as well. The property of the partners can also be sold to pay such loans.
In case of Sole Trader, a business structure is set up whereby an individual runs the business and owns the whole business. Therefore, in this the sole trader is legally responsible for everything that happens in the business. In case of non-fulfillment of contracts or breach of contract, that personal shall have unlimited liability. They may have to repay the debts and loans from their personal assets when required.
Also read- The Dilemma of Legal Representatives Liability in a Partnership
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