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
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
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
*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
This article first appeared in Business in Vancouver,
April 9-15 2013 issue.
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.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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