Canada: Limits on Contractual Limits of Liability – Part II

While courts have declined to enforce contractual limitation of liability (LOL) clauses that are ambiguous, unconscionable or contrary to public policy, pre-contractual warranties can also undermine the effectiveness of these clauses.

In the last edition of the TLQ, we discussed the recent Supreme Court of Canada (SCC) guidance on the important exceptions that come into play to reduce the effectiveness of LOL clauses. The SCC guidance focuses on different aspects of the LOL clause itself, or the behavior of the wrongdoer under the Agreement. These exceptions are important in the context of LOL clauses in technology-related supply agreements, but they are also relevant to any other type of commercial contract that contains an LOL clause.

In addition to these exceptions to the LOL clause, counterparties to agreements (and especially those parties who will be performing the lion's share of obligations under it, typically by providing the other party with certain products or services) need to understand the parameters of a further way that the effectiveness of LOL clauses may be undermined; namely, the spectre of the "pre-contractual warranty" claim.

Pre-Contractual Warranties

An important case that illustrates graphically the danger to suppliers of the pre-contractual warranty claim is the recently released decision in the BSkyB/EDS case. This UK-based litigation involved some of the biggest claims ever brought for a "computer project gone bad," and its impact on selling and contracting in the computer industry may be significant indeed (though presumably suppliers of goods and services in other industries will pay close attention to the decision as well).

In the BSkyB case, EDS was to implement a CRM (customer relationship management) system for BSkyB (a distributor of satellite-based home entertainment signals to subscribers throughout the UK). The CRM was a critical system for BSkyB as it included billing, service provisioning, and many other indispensible features.

Very quickly after the contract was signed and work began, it became clear that EDS had grossly underestimated the time it would take to complete the project. To make a very long story (there were 110 days of court proceedings, and the decision is about 450 pages long) very short, the court found that had EDS not been deceitful in presenting relatively short delivery timelines to BSkyB, BSkyB would have gone with the solution offered by another bidder.

In effect, the court found that EDS had perpetrated a fraud on BSkyB, and therefore the damages that BSkyB could recover from EDS were not limited by the various LOL provisions of the contract. The result is that on a contract with a £47-million revenue stream, and a £30-million LOL cap, the court has awarded partial interim damages of £270 million. Ultimately, the parties settled for £318 million (about $458 million US). Kind of takes your breath away.

While the BSkyB case is not referenced in the Tercon SCC case discussed in our previous article, it is arguable that the scenario contemplated by the BSkyB case would come within the public policy exemption to the enforceability of LOL clauses under the Tercon case. That is, the court in Tercon would likely not allow the enforcement of the LOL in the BSkyB case (if it were decided in Canada), because in doing so the perpetrator of an intentional misrepresentation would be able to find refuge behind the LOL clause.

Bad Witnesses Undermine Cases

As an aside, it is worth noting that the judge in the BSkyB case found EDS's lead witness to be a teller of untruths. For example, BSkyB's lawyers confronted the key witness by pointing out that the witness had received his purported MBA degree from a "fictional online university," but the witness kept testifying about attending business school classes in person. The BSkyB lawyer, however, drove home his point when he showed the court that he had registered his dog to receive the same online MBA degree — and that the canine had successfully received it! In short, the credibility of the key witness for EDS was destroyed, and this influenced the court on the crucial question of how this individual's pre-contractual statements to BSkyB should be characterized from a legal perspective.

The impact of this devastating witness testimony is similar to that in a leading Canadian copyright software infringement case, where the key witness for the defendant stated on the record in discoveries that he had no access to the plaintiff's source code (the crown jewels of the plaintiff's software program). If this were true, the plaintiff's case would essentially evaporate, as independent creation is a full defence to a copyright claim. However, between the time of the discovery assertion of "no access" and trial, the plaintiff forensically reconstructed the computer of this witness, and — bingo — found a copy of the plaintiff's source code on it. From that point on, the outcome of the case (in favour of plaintiff) was not in doubt.

The upshot of the deceitful behaviour by the key protagonist in this copyright case is that the court made him jointly and severally liable for the infringement that was found to have occurred (in essence, the corporate vehicle used by the defendant did not shield him from personal liability). Thus, as with the finding in the BSkyB case, egregious activity on the part of individuals will often lead judges to deny defendants legal shelters, whether they are corporate structures or LOL clauses.

It's 2010: Do You Know Where Your Damages Are?

Even where an LOL clause is upheld, its protection may not extend as far as the supplier originally contemplated, given the uncertain interpretations given to the term "direct" and "indirect" damages. Consider another recent UK decision, where a computer services supplier failed to implement a new customer billing system for a gas distribution company. This billing system was critical to the very functioning of the customer's utility company. So when it didn't work properly, the customer quickly racked up large damages. The key question, however, is: Which of these damages are recoverable when the relevant contract provides that lost profits, or loss of business revenues, whether arising directly or indirectly, are not recoverable by customer from supplier (even if supplier is otherwise liable under the agreement)?

Interestingly, the court in this case concluded that: gas distribution charges (of £18.7 million), compensation paid to customers (of £8 million), additional borrowing charges (of £2 million), the cost of chasing debt (of £387,287) and the cost of additional stationery (of £107,120), were all recoverable, and would be direct damages within the first limb of the rule in the seminal common law case on damages, Hadley v. Baxendale. Presumably, the supplier was quite surprised by this result.

McCarthy Tétrault Notes

It will be interesting to follow the adjustments in procurement practices for tech-related products and services, and in resulting contract language, brought about by these two cases as well as the Tercon decision discussed in the previous edition of the TLQ. These could include the following:

  • suppliers will be much more cautious about the pre-contractual sales process, and may be much stricter on what sales people say (especially in writing);
  • customers and suppliers will try to break larger, single-phase projects into multiple smaller, independent projects. Each phase of work will then be accompanied by its own contract, including performance and payment milestones, so the parties will have reasonable expectations that are much more closely aligned (though customers will resist this approach);
  • customers and suppliers will research more carefully the types of insurance available for different sorts of risk, there will be greater emphasis on ensuring that, as between customer and supplier, responsibility for insurance rests primarily with the "least cost avoider", and,
  • in the LOL clause, more attention will be spent on enumerating which damages (by type) are recoverable (in favour of customer) and which are not (though suppliers will resist this approach).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.