IAI Actuarial Core Principles · Business Management · Implied terms, exclusion of liability, contractual remedies and damages

Anita Rao Associates contracts to build a mortality model for an insurer. Clause 9 limits liability 'for breach of this agreement to the fees paid, Rs 8 lakh'. Clause 10 says nothing else about remedies. The firm delivers a model it knows is unusable and refuses to correct it, and the insurer loses Rs 60 lakh. The insurer argues the cap should not apply. Which analysis is most defensible?

The outcome depends on construction of the clause. Courts read caps strictly, and a deliberate repudiatory breach can be argued to lie outside wording aimed at ordinary breach. So the cap cannot simply be assumed to apply, nor is it automatically void as a penalty.

1. AThe cap automatically applies because the sum was agreed in advance and the clause is clear
2. BThe cap is a penalty clause, so it is void in all cases
3. CThe cap applies only if the insurer consents again after the breach
4. DThe result turns on construction: courts read caps strictly, and a deliberate repudiatory breach may be argued to fall outside wording that contemplates ordinary breach, so the cap cannot be assumed to applyCorrect
5. The cap fails because limitation clauses cannot cover contractual breaches, only torts