Home > Regions > North America > The Supreme Court Rules on the Validity of Non-Liability Clauses in Commercial Contracts

The Supreme Court Rules on the Validity of Non-Liability Clauses in Commercial Contracts

By Catherine Cloutier, from our Insurance Law Practice Group

PDF

October 27, 2021 – The Supreme Court of Canada recently rendered an important decision which may have a significant impact on commercial contracts concluded under Quebec law. In the case of 6362222 Canada inc. v. Prelco inc., 2021 SCC 39, the Court was called upon to decide whether a limitation of liability clause could be set aside in virtue of the doctrine of breach of fundamental obligation.

The root of the problem: A poorly executed contract

In 2008, Prelco, a manufacturing company, retained the services of Créatech, a consulting firm, for the supply of software and professional services to improve its operating processes. The contract between the parties contained a limitation of liability clause:

Créatech’s liability to the client for damages that can be attributed to any cause whatsoever, regardless of the nature of the action, whether provided for in the agreement or delictual, shall be limited to amounts paid to Créatech under the Agreement unless such damages result from gross negligence or willful misconduct on Créatech’s part. If such damages result from the delivery of unsatisfactory services, Créatech’s liability shall be limited to the amount of any fees paid in relation to the said unsatisfactory services.

Createch may not be held liable for any damages resulting from the loss of data, profits or revenue or from the use of products or for any other special, consequential or indirect damages relating to services and/or material provided pursuant to the Agreement unless such damages result from gross negligence or wilful misconduct on Createch’s part. [par 11; Court’s translation]

The implementation of the system developed by Créatech contained numerous flaws. Prelco wearily terminated the contract in 2010 and entrusted another firm with the creation of a functional system.

Prelco took legal action against Créatech, claiming more than 6.2 million dollars for, amongst others, costs incurred to restore the system, and lost profits. Créatech invoked the above-mentioned clause in its defence.

Applicable law

Prelco argued that the limitation of liability clause was invalid, based on the doctrine of breach of a fundamental obligation in virtue of which a clause that exonerates or limits the liability of a party is ineffective if it sets aside the very essence of the obligation.

Non-liability clauses are in principle valid as they are based on the parties’ freedom to contract. However, in certain circumstances they are inoperative as a result of public order. One may not limit liability arising from intentional acts, gross negligence, bodily injury, or moral damages, pursuant to Article 1474 of the Civil Code of Québec [CCQ]. Similarly, according to Article 1437 CCQ, such clauses are inoperative in contracts of adhesion or consumer contracts.

In this case, the contract was freely negotiated by two at arms’ length sophisticated parties. A clause limiting a party’s liability could be stipulated.

The Court also addressed the argument of the requirement of reciprocity of obligations based on the premise that if a party is liberated from all of its obligations, the reciprocal nature of a contract is breached, contrary to the fundamental principle enshrined in Article 1371 CCQ.

The Court concluded that while the obligations of each party under the contract were unbalanced, the clause did not preclude reciprocity. Prelco was still entitled to keep the integrated system and to claim certain damages.

However, since the clause was valid, allowing Créatech to exclude some of its liability, Prelco could not be compensated for claims from customers, loss of profits on sales made and loss of profits on sales lost [par 104].

This case will certainly have an impact on commercial contracts, and on the freedom to negotiate clauses limiting liability and providing for damages which may claimed in case of non-performance.