In brief: limiting contractual liability in Canada

Limiting liability

What liabilities cannot be excluded or limited by a supplier in a contract?

In the common law provinces, limitation and exclusion clauses are enforceable according to their terms unless they are unconscionable or run contrary to public policy; these exceptions are narrow. In commercial contracts, parties should not attempt to limit or exclude liability for their own fraud or dishonesty or wilful misconduct as these exclusions or limitations are not enforceable. While liability for breach of contract itself can be limited via a financial cap, a total exclusion of liability for this may not be enforceable as it would leave the other contracting party without a meaningful remedy.

In Quebec, commercial parties generally cannot exclude liability for an intentional or gross fault; punitive or exemplary damages; or bodily or moral damages.

Are there any statutory controls on using financial caps to limit liability for breach of contract?

No, there are no statutory controls on using financial caps to limit liability for breach of contract. Commercial contracting parties are free to include financial caps to limit liability in their agreements, unless they are unconscionable or run contrary to public policy.

Are there any statutory controls on indemnities used to cover liability risks in contracts?

No, there are no statutory controls on indemnities used to cover liability risks in commercial contracts. Indemnification clauses are interpreted under the normal interpretation rules related to contracts and effect is generally given to the parties’ intentions.

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Yes, liquidated damages provisions that operate as a genuine pre-estimate of damages are enforceable and commonly used in Canada. Liquidated damages clauses should not be oppressive, unreasonable or unconscionable or the courts may intervene on equitable grounds. Historically, penalty clauses (ie, stipulated remedy clauses that are not liquidated damages provisions) have been unenforceable in Canada. However, in recent years, there has been waning judicial enthusiasm for striking them down as unenforceable since to do so interferes with parties’ freedom to contract. Penalty clauses may now be enforceable so long as they are not unconscionable. A determination of unconscionability is context-specific, but several factors may be considered by the courts including, but not limited to:

• instances of inequality of bargaining power (generally not applicable in the commercial context);
• a substantially unfair bargain;
• the relative sophistication of the parties;
• the existence of bona fide negotiations;
• the nature of the relationship between the parties;
• the gravity of the breach; and
• the conduct of the parties.