Supreme Court of Canada provides guidance on limited clauses

A limitation clause places a limit on the amount that can be claimed for a breach of contract, regardless of the actual loss. Although such clauses are found in many standard contracts, courts have traditionally been reluctant to enforce them.

This reluctance arises because the application of a limitation clause can often lead to a result that is perceived as unjust. Limitation clauses can be perceived as unjust because they strip away an injured party’s right to collect real losses from the party that injured it.

While that reluctance remains, recent authority from the Supreme Court of Canada provides that limitation clauses are enforceable where the following test is met.

  1. Does the exclusion clause apply to the specific circumstances established in the evidence?
  2. If the exclusion clause applies, is the exclusion clause unconscionable and thus invalid at the time it was made?
  3. If the exclusion clause is held to be valid at the time of contract formation and is applicable to the facts of the case, should the court refuse to enforce the exclusion clause because of an overriding public policy?

The following are some tips for drafting enforceable limitation clauses.

Avoid ambiguity. Limitation clauses are interpreted in such a manner as to limit their effect to the narrow meaning of the words employed. The clause itself must clearly cover the exact circumstances that have arisen in order to afford protection to the party claiming the benefit.
Furthermore, limitation clauses will be construed against the party benefitting from the exemption and this rule applies to an even greater extent to standard form contracts.

In order to avoid ambiguity, a limitation clause, at a minimum, should have the following essential components. It should have identification of the parties receiving the benefit; identification of the parties agreeing to limit their rights; and specification of the types of liabilities being excluded.

Use plain language. Jargon should be avoided at all costs. For instance, the term “indirect damages” is often found in clauses and yet, there is no clearly defined meaning of “indirect damages” in the case law. “Consequential losses” is another term often used in exclusion clauses; yet, it too has no established meaning in the case law. If the intention is to exclude “loss of profits” or “delay damages” or “loss of business opportunity” in the event of breach, the clause should simply say so.

Specify what is being excluded. If certain types of claims are to be excluded, such as claims in negligence, that too should be specifically spelled out in the clause. Often one sees language such as the contracting party “shall not be liable in any capacity whatsoever” in limitation clauses. Such language has an appearance of inclusivity and while the intention of the drafter may have been to exclude claims in negligence, as the clause does not specifically refer to negligence it may not be interpreted in the manner expected by its drafter.

Bring it to the attention of the other party. Always ensure that the limitation of liability clause has been clearly brought to the attention of the other party. Best practice is to have the other party initial the limiting language. Alternatively, you should consider using a larger font for the clause or bold print or some other method of ensuring its prominence within the contract.

Given the reluctance of courts to enforce them, limitation clauses have been fertile grounds for challenge. If you regularly rely on limitation clauses in your contracts, some considered forethought as to how they
may be interpreted by a court may avoid an unpleasant surprise once your clause gets there. If there is enough money at stake, your clause will eventually find its way before a judge who will almost certainly be reluctant to enforce it.

Norm Streu is the president and chief operating officer of the LMS Reinforcing Steel Group. Christopher Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin + Lang LLP.