Canada: A Litigator’s View Of Pitfalls In Technology Contracting: Avoiding Common Mistakes

Technology contracting can be very different from other commercial agreements because the execution of a contract marks the beginning of a relationship meant to last years.1 In these long-term, often complex commercial relationships, it is not surprising that much can and sometimes does go wrong. When disagreements over the rights and obligations of the parties escalate to actual or threatened litigation, the contract inevitably becomes the subject of considerable scrutiny.

Technology contracts are particularly susceptible to certain common contracting problems that become evident when a dispute arises. Issues that frequently create problems are discussed below, including agreements to agree, recovery of different types of damages arising from a breach of contract, and the effectiveness (or lack thereof) of limitation of liability clauses.

Agreements To Agree

Often the parties to a technology contract are eager to begin before all aspects of the contract have been agreed upon. Making a promise to agree on some matters in the future may appear to be useful, for example, when the parties to a systems development and service agreement have not yet agreed on detailed specifications or service levels, when the parties want to begin the work called for before all the detailed requirements have been agreed on or when they want to leave open the possibility of varying the terms of a contract upon renewal.

An agreement to agree is "a conventional way of describing an undertaking of the form, 'I promise that I shall enter into a contract with you.'"2 Although it has been described as almost trite law that an agreement to agree is not enforceable,3 these types of clauses still appear in technology contracts.

Courts have traditionally refused to recognize that agreements to agree in the future give rise to enforceable obligations. These promises have been regarded as too uncertain to confer legal obligations. To enforce promises to agree in the future would be at odds with freedom of contract principles and a party's prerogative not to enter a bargain.4

Three concepts are contained within the basic principle that an agreement to agree is unenforceable:

  1. The key concept is that there can be no enforceable contract where its material terms have not been agreed upon, but rather have been left open by the parties for future agreement.5

  2. It is not enough that a contract contain all essential terms – when the provisions that have been agreed upon lack certainty, there is no enforceable contract.6

  3. There is no enforceable contract when the parties intend that a preliminary agreement is not to create a binding contract until a subsequent document is executed 7 – this type of "contract to make a contract" is not a contract at all.

These propositions were adopted by the Ontario Court of Appeal in Bawitko Investments Ltd. v. Kernels Popcorn Ltd.,8 which stated as follows:

[W]hen the original contract is incomplete because essential provisions intended to govern the contractual relationship have not been settled or agreed upon; or the contract is too general or uncertain to be valid in itself and is dependent on the making of a formal contract; or the understanding or intention of the parties, even if there is no uncertainty as to the terms of their agreement, is that their legal obligations are to be deferred until a formal contract has been approved and executed, the original or preliminary agreement cannot constitute an enforceable contract. In other words, in such circumstances the "contract to make a contract" is not a contract at all.9

Although agreements to agree will generally not be enforced if "essential provisions intended to govern the contractual relationship have not been settled or agreed upon," when the gaps in a contract are not "essential" the contract may remain binding on the parties. It is therefore necessary to ensure that all essential terms are agreed upon.

It can be difficult to determine which provisions are "essential" to the parties' contractual relationship: "[T]he difference between essential and non-essential provisions is ... rather difficult to define, and like most things in contractual interpretation in many cases can only be discerned by a close examination of the entire contractual context."10

This distinction was considered by Justice Garson in Sussexinsuranceagency.com Inc. v. ICBC.11 She stated as follows:

The key consideration appears to be whether the facts of the case show that the parties intended to be bound and merely delayed settling the details, or whether the parties only agreed to continue negotiations. In other words, only where the uncertainty relates merely to the details will the contract be enforceable; otherwise it is an agreement to agree and the courts will refuse to enforce it.12

In that case, Sussexinsuranceagency.com (Sussex.com) had claimed that the Insurance Corporation of British Columbia (ICBC) breached an oral agreement under which Sussex.com would build and operate a Web-assisted call centre to service the ICBC's clients. Relying on the alleged oral contract, Sussex.com invested in a call centre and hired staff.

Ultimately, Sussex.com claimed that ICBC failed to provide financial and technical support for the call centre and that it also reneged on its commitment to make the project exclusive, as it had contracted to do. ICBC argued that no binding agreement was formed and the project was still in the proposal stage when Sussex.com incurred its expenses. The Court agreed and dismissed Sussex.com's claim, finding that the parties had only entered into an agreement to continue negotiations. The Court concluded that "it cannot be said that the parties agreed ... on the essential terms of a contract. The intention of the parties was nothing more than to continue negotiations. These negotiations had the 'blessing' of ICBC senior management but did not amount to agreement with contractual force."13

As a general matter of contractual interpretation, courts are hesitant to void contracts for uncertainty and will usually make every effort to give meaning to their terms.14 In determining whether an enforceable agreement exists between the parties, a court will often consider the conduct of the parties subsequent to making the putative agreement. The court may look to whether the parties acted as if they had a binding agreement in order to determine whether such an agreement was in place. As Hall notes, "[C]onduct indicating a belief that one is bound will reinforce a conclusion that essential terms have been agreed or that the agreed terms are sufficiently certain or that there was no intention to delay the creation of binding obligations until execution of a formal contract document ... This approach is consistent with the principle that the parties' intentions should be given effect."15

An agreement to agree was considered in another technology case − RTO Asset Management Inc. v. Brewers Retail Inc.16 There, Granada Canada brought an action against Brewers Retail in connection with a contract to supply electronic video display units to Brewers Retail's stores across Ontario. Under the terms of the contract, 430 units were to be provided by Granada to 430 stores across Ontario. The contract stipulated that Granada retained ownership of the video display units, and Brewers Retail made monthly payments to Granada for rental, servicing and maintenance of the units. The contract provided that after the expiry of the term of the agreement, Brewers Retail had the option to acquire title and ownership of the video display units at a price of $1 per store. Schedule C of the agreement read as follows:

On completion of the Payments Schedule, set out in the terms of the Agreement, the customer has the option(s) to:

(A) Acquire title, and ownership, of the equipment. At each location upon payment of $1.00 per location. The parties agree to enter into a new maintenance agreement at rates to be negotiated.

(B) Trade in the television sets and VCR's at a trade-in allowance of $250.00 per location on condition that the customer enter into a new agreement with Granada for rental lease/purchase of new network equipment, at each of the locations described in this contract.

(C) Request Granada to remove the equipment at a mutually agreed deinstallation fee per store. [Emphasis added].

After the expiry of the term, Brewers Retail decided to exercise the option to purchase the units under clause (A), and the parties commenced negotiations regarding a new maintenance agreement. They entered into these negotiations in good faith, but were unable to agree. There was no provision in the contract for what would happen if the parties failed to agree on a new maintenance agreement. Brewers Retail decided to retain the video display units, wrote Granada a cheque for $1 per location (i.e., totalling $430) and hired another company to perform the maintenance. Granada sued for breach of contract.

Justice Wilkins allowed Granada's action and stated the following:

Unfortunately, the provisions of sub-paragraph A did not define what the maintenance agreement might be.17

...

Schedule C, paragraph (A), makes no provision for any guideline, assistance or help in ascertaining what might constitute "a new maintenance agreement". There is nothing in that subsection which makes any reference to the original contract entered into between the parties, the length of any new maintenance agreement or, for that matter, what would constitute maintenance as opposed to any other service or replacement cost that might be incurred. Similarly, that subsection also provided that the rates were to be negotiated and no guideline was given as to how one should set about attempting to calculate those rates.18

He also found the following:

[T]he parties intended that if [Brewers Retail] wished to exercise [the option], they would be required to make the $430 payment, and also it would be incumbent upon the parties to actually formulate an agreement. That is to say that this was not an agreement to agree, but rather an agreement that the parties will agree. In my view, there is a significant distinction between an agreement to agree and an agreement between two experienced businessmen to the effect that certain things would transpire when they agreed upon something in the future. In effect, the requirement that an actual agreement be reached on the terms of renewal is in and of itself, a fundamental term of the original agreement without the happening of which the contract is not complete and the option to purchase cannot be enforced.19

In addition, Justice Wilkins stated as follows:

Although such a contract would not be enforceable per se for purposes of striking the bargain in respect of the new maintenance agreement ... In the absence of an agreement with respect to a new maintenance contract, I have serious difficulty in believing that the original negotiators of the contract intended that [Brewers Retail] should have a right to enforce the passage of title to the units upon payment of $1.00.20

Justice Wilkins ordered that the video display units be returned to Granada.

On appeal, the Court of Appeal upheld the trial judge, stating:

While we do not necessarily embrace the analysis of the contract in dispute made by the trial judge, it is our opinion that he arrived at the correct conclusion. Option A was unenforceable. There is no mechanism to ensure that the parties would consummate the maintenance agreement contemplated by the option. Since the maintenance agreement is the reciprocal of the right to purchase the television sets for $1 apiece, the whole of Option A must fail and be severed from the contract as unenforceable.21

When drafting an IT agreement where all the details have not yet been agreed upon, it is critical to carefully consider the entire contractual context and ensure that the essential terms have been agreed to, and that the contract contains a mechanism for determining any material outstanding matters, such as arbitration or some other binding dispute resolution process.

Direct Versus Indirect Damages For Breach Of Contract

When faced with a breach of contract, one critical question is, What damages are recoverable? The question leads to another one, highlighting a common pitfall that arises in technology contracting − specifically, What damages are available under the contract?

One source of confusion surrounding contractual damages stems from the range of terminology commonly used to describe the various types of losses one might be entitled to. The expression "direct damages" is often used interchangeably with the following terms: "compensatory," "normal," "foreseeable," "general" and "ordinary" damages. The expression "indirect damages" has an equal number of permutations – these losses are also referred to as "consequential," "special," "incidental" and "exemplary" damages. The interchangeable and occasionally inconsistent use of these terms by legal professionals and courts in itself creates considerable uncertainty in the law regarding contractual damages.

The seminal case governing damages for breach of contract remains Hadley v. Baxendale,22 which concludes that the damages for breach of contract are ordinarily compensatory, or direct, damages.

In Hadley v. Baxendale, the Court distinguished between direct damages and indirect damages, a distinction that remains relevant today. Direct damages are recoverable to the extent that the "type of loss that has occurred was reasonably foreseeable by the parties at the time of entering the agreement."23 They are losses that flow naturally in the ordinary course from the breach and are the damages that every plaintiff in a like situation would suffer. They are for that reason foreseeable, and the parties do not require any special knowledge to reasonably contemplate these losses.

On the other hand, indirect damages are the losses that occur indirectly from non-performance under a contract. Indirect damages do not flow "directly" from the breach; they are losses unique to the circumstances of the particular plaintiff, such as lost profits or expenses incurred as a result of the breach. Unlike direct damages, these losses are only reasonably foreseeable if the breaching party had knowledge of the other party's particular circumstances.

As a result, while direct losses are deemed to be foreseeable because they are the direct, natural and probable consequence of the act causing the damage, indirect damages may or may not be foreseeable, depending on the nature and extent of the communications between the parties prior to entering into the contract. Only consequential damages that are found to be foreseeable, as a matter of fact, will be compensable. Therefore, in order for the plaintiff to recover indirect damages, it must show that these losses were foreseeable.24

Indirect damages are recoverable if the plaintiff's special circumstances giving rise to the damages were communicated to the defendant when the parties entered the contract.25 If so, the plaintiff must be able to demonstrate that the particular type of loss was reasonably foreseeable in light of the specific facts of a case.26 Courts have awarded damages that are usually characterized as indirect, such as expenses incurred in order to maintain a company's operations,27 compensation for employee wages28 or overtime work devoted to repairing damage caused by a defective good or service,29 lost profits30 or the loss of use of money invested in a property when the investment would not have been made but for the negligence of the other party.31 In other cases, courts have determined that the following types of damages were reasonably foreseeable: expenses relating to repairing equipment or products damaged through the use of defective goods,32 costs relating to the diversion of other equipment for the purposes of repairs or substitution33 and labour overhead costs.34 In fact, a recent appellate decision even contemplated that indirect damages for delay might flow from a breach of an implied duty to work with due skill and care.35

In practice, however, the expression "indirect damages" is somewhat misleading since some of the losses that are categorized by courts as indirect appear to flow "directly, naturally and immediately" from a breach of contract; the costs associated with downtime when a computer is not functional, for example, would likely be perceived by members of the computer software industry as a direct cause of a faulty computer.36 The courts' reasoning in several cases demonstrates how the distinction between direct and indirect damages is not as clear as it could be.

T.K.M. Communications Inc. v. A.T. Schindler Communications Inc.

In T.K.M. Communications,37 the defendant provided the plaintiff with wireless electronic communication equipment that did not integrate with its client's computer systems as contracted. The Court found that the failure of the defendant's communications system to function was a fundamental breach of the implied warranty under the contract that goods sold will be reasonably fit for their particular purpose. As a result of the defendant's breach, the plaintiff was entitled to reimbursement not only for the purchase price of the goods, but also for the rental cost of equipment it used to troubleshoot the problem, payments it made to a subcontractor and wages for work done on the project, in addition to other expenses resulting from the failed project.38

Syncrude Canada Ltd. v. Canadian Bechtel Ltd.

In Syncrude Canada,39 the plaintiff contracted to have the defendants build boilers to generate steam at its facilities. Following installation, the boilers malfunctioned and caused an explosion. The defendants were found in breach of the contract. The contract contained a limitation of liability clause excluding consequential (i.e., indirect) losses. It stated:

CONSEQUENTIAL DAMAGES: The Subcontractor will not be liable in any event for loss of anticipated profits, loss by reason of plant shutdown, non-operation or increased expense of operation of other equipment, or other consequential loss or damage of any nature arising from any cause whatever.

The Court awarded damages that were determined on the basis of the difference in value between what was contracted for and what was delivered, resulting in an award for the costs of not only equipment repairs but also an award for increased energy costs arising from the inefficiency of the defective equipment. The Court rejected the submission that these damages included consequential (i.e. indirect) losses that ought to be excluded by the above clause.

Ebco Industries Ltd. v. Strand Industries Ltd.

Similarly, the British Columbia Court of Appeal in Ebco40 awarded damages to the plaintiff for seemingly indirect losses under a contract that purported to exclude the defendant's liability for those damages. There, Ebco damaged Strand's steel utility poles in performing welding services under their agreement. A clause excluded Ebco's liability for indirect, consequential or special damages under the service agreement, which typically would limit its liability to the difference in value between the services rendered and the services that ought to have been rendered. The clause read as follows:

In no event shall Ebco be responsible to the Purchaser for any indirect, consequential or special damages of any nature or kind arising out of Ebco's performance or non-performance of these Terms. Furthermore, Ebco shall not be responsible to the Purchaser for any direct or general damages of any nature or kind which exceed the value of the Purchase Agreement.

However, the Court found that in the circumstances, "it is prima facie unreasonable that Ebco's responsibility should be limited to the value of the service that Ebco was to provide, when then the value of those services is much less than the value of the property that has been destroyed. Rather, the commercially sensible result is that Ebco should replace the value of the property it has destroyed through its actions."41

When applied to the technology contracting context, this reasoning may mean that costs associated with property destroyed by defective services, such as lost data, could be recoverable.42

A & W Food Services Of Canada Ltd. v. Norand Corp

In A & W Food Services,43 the plaintiff purchased a computer system from the defendant. The purchase order contained a clause that read as follows:

The software operating systems of all hardware ordered are to be considered an integral part of the hardware. Hardware will not be considered as received in good order unless it performs effectively all tasks detailed in the system specifications [provided to the defendant].

The agreement did not contain a limitation of liability clause. The computers did not function properly and failed almost daily. Eventually, the plaintiff terminated the agreement and commenced its action, claiming that the defendant had committed a fundamental breach of the contract. The Court allowed the plaintiff's action. The damages awarded to the plaintiff included direct damages for the purchase price of the machines purchased by the plaintiff. However, the damages also included indirect damages for employee wages for time spent in futile efforts to make the machines function.

Limitation Of Liability Clauses

Limitation of liability44 clauses are often used to allocate risk for certain types of damages. Such clauses may be used to limit or remove liability, often for all but direct damages. In order to account for the varied nomenclature used by courts to describe contractual damages, limitation of liability clauses are typically drafted by listing all or many of the different terms used, in order to capture all characterizations of indirect losses. Here is one example:

"In no event will either party be liable for indirect, special, consequential, incidental, punitive or exemplary losses, damages or expenses, including business interruption, lost data, lost revenue, lost profits and lost savings even if it has been advised of their possible existence or if same were reasonably foreseeable."

Limitation of liability clauses raise further significant contract interpretation problems, and their inclusion often means the parties do not spend enough time focusing on damages issues when negotiating the contract. In particular, limitation of liability clauses pose the following issues:

  • They are narrowly construed by courts.

  • There is often insufficient clarity regarding what types of damages are in each category in any particular set of circumstances.

  • Frequently, the parties have not discussed or specified the actual categories of loss anticipated in the event of a breach of contract.45

Because limitation of liability clauses may lead to harsh or unjust circumstances,46 Canadian courts have developed various techniques to strictly construe them and to limit their effect, as follows:

  • the test from Hunter Engineering Co. v. Syncrude Canada Ltd.,47 which states that interpretation of a limitation of liability clause must begin with an inquiry into whether the language chosen by the parties covers the eventuality that occurred, and if so, the clause will be enforced unless doing so would be unconscionable, unfair, unreasonable or contrary to public policy;48

  • an enhanced application of the contra proferentem rule, which involves construing a limitation of liability clause narrowly and against the interest of the drafter;49

  • a rule that where a limitation of liability is so ambiguous that it is unclear what limits on liability the parties intended to delineate, the entire clause will be invalid.50

The leading case on the interpretation and enforcement of clauses limiting liability is Hunter Engineering. There, the Supreme Court of Canada was divided on the effect of fundamental breach on the enforcement of a limitation of liability clause. Prior to the Hunter Engineering decision, Canadian courts regularly held that a limitation of liability clause does not apply in the event of a fundamental breach if its enforcement would protect the breaching party. That approach was rejected in Hunter Engineering in favour of an approach in line with the normal rules of contract interpretation, whether or not a fundamental breach had occurred. This analysis involves first determining whether the limitation of liability clause is clear and unambiguous. If not, it must be strictly construed. If the clause is clear, the court will consider whether it would be unconscionable or otherwise unreasonable to enforce it. Chief Justice Dickson (Justice La Forest concurring) held:

I am much inclined to lay the doctrine of fundamental breach to rest, and where necessary and appropriate, to deal explicitly with unconscionability ... It is preferable to interpret the terms of the contract, in an attempt to determine exactly what the parties agreed. If on its true construction the contract excludes liability for the kind of breach that occurred, the party in breach will generally be saved from liability. Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties have freely concluded.51

However, Justice Wilson (Justice L'Heureux-Dubé concurring) held that a limitation of liability clause, though prima facie enforceable, should be considered in the context of the breach that occurred in order to determine whether it would be fair and reasonable to permit the clause to operate for the benefit of the party responsible for the breach.52

Following the decision in Hunter Engineering, these two approaches have been synthesized by the courts, which have treated the question of whether a limitation of liability clause was "unconscionable", "unfair" or "unreasonable" as two sides of the same question, tending to yield the same result. As the Supreme Court of Canada subsequently stated in Guarantee Co. of North America v. Gordon Capital Corp.:

The only limitation placed upon enforcing the contract as written ... would be to refuse to enforce an exclusion of liability in circumstances where to do so would be unconscionable, according to Dickson C.J., or unfair, unreasonable or otherwise contrary to public policy, according to Wilson J.53

Aside from the synthesized test in Hunter Engineering, the courts also approach limitation of liability clauses by applying the contra proferentem rule more frequently than with other contractual provisions.54 This approach involves construing the clause "against the interest of the drafter, which almost inevitably is the party protected by the clause."55

The third, albeit somewhat unique, approach in interpreting limitation of liability clauses was applied by the British Columbia Court of Appeal in Meeker Log and Timber Ltd. v. Sea Imp VIII (The).56 The Court held that where individual portions of a clause limiting liability were so inconsistent that it was impossible to discern the parties' agreement, the entire clause is rendered invalid. The Court upheld the trial judge's reasoning that "[a] clause relied upon to obtain an exemption from liability that is not clear and unambiguous is no exemption at all. Where the parts of what purports to be an exempting clause are so inconsistent as to render unclear the actual exemption agreed, no part can be relied upon; as a whole the clause is invalid."57

The jurisprudence on the interpretation of limitation of liability clauses suggests that there is nothing inherently unreasonable about them, and that they should be applied "unless there is a compelling reason not to give effect to the words selected by the parties."58 However, in practice, the cases show that the courts will go some distance to avoid the impact of these clauses.

As mentioned, limitation of liability clauses are routinely used to restrict or remove liability for everything but direct damages under an agreement. Since the distinction between direct and indirect losses as a result of a breach of contract is often blurred, even when sophisticated parties are involved, there may be insufficient clarity regarding what losses are categorized as "direct" or "indirect" in any particular set of circumstances. Exclusion clauses limiting liability for indirect damages therefore do not always dispense with all manner of liability for indirect losses, since courts have differed on what losses will be awarded as direct damages under a technology agreement. This occurs because a whole host of losses may result from a breach of technology agreement that appear to flow directly from the breach; for instance, the costs associated with downtime, loss of data, conversion costs, time spent by staff attempting fixes and lost customers.

Limitation of liability clauses are also not always effective at limiting liability for indirect losses.

The problems with limitation of liability clauses in technology contracts are illustrated by a number of cases.

Group West Suppliers Ltd. v. Warner's Refrigeration Co.

In Group West Suppliers,59 the defendant hired the plaintiff to develop and install software and to provide the necessary support to make the system operate effectively. It was a term of the contract that neither party would be liable to the other for any indirect damages. The clause stipulated the following:

Neither party shall be liable to the other for any indirect, special or consequential damages.

After a lengthy development cycle, the defendant gave notice to the plaintiff of problems in the system and indicated a deadline for having the system in place and operative. The plaintiff failed to meet the deadline, and the defendant treated the contract as terminated. In allowing the defendant's counterclaim, the Court found that the plaintiff failed to perform the very purpose for which the contract was designed. It also found that because of the limitation of liability clause in the contract, the defendant (plaintiff by counterclaim) was not entitled to such damages. As a result, the Court dismissed the defendant's counterclaim for the costs of the hardware it purchased in executing the contract, the salaries it paid to staff and the training systems it had purchased.

Ticketnet v. Air Canada

The Court in Ticketnet v. Air Canada60 awarded damages to the plaintiff outside the scope of the limitation of liability clause in the agreement. There, Ticketnet was successful in its claim for breach of a development agreement for automated ticketing software. Under the agreement, Air Canada was obliged to develop software for Ticketnet, which would be the owner of the software. The Court found that Air Canada, by refusing to provide the completed software that it had developed to Ticketnet for no valid reason, was in breach of contract. Air Canada's breach amounted to "wilful misconduct ... to the end of completely subverting the whole being of the [agreement] and the software so that Ticketnet enjoyed none of the benefits."61 The limitation of liability clause in the agreement stated as follows:

In no event shall a party be liable under this contract to the other party in excess of $2 million [which was the contract price]. Neither party shall in any way be liable to the other for any indirect or consequential damages.

Despite this clause, the plaintiff was awarded $11 million in damages for lost profits. The Court found that Air Canada's breach was so serious that it ought not to be able to take advantage of the limitation of liability clause. Justice Farley also noted that "it is clear that indirect or consequential damages do not include loss of profits."62 This point was not challenged on appeal.

These cases highlight the uncertainty that arises when relying on general clauses, rather than discussing and specifying the actual categories of loss contemplated for breach of contract.

An example of a case where the parties specified the damages recoverable under a technology contract is Direct Cash ATM Processing Partnership v. 564024 Alberta Inc.63 There, the plaintiff, DirectCash, which provided data processing services to connect ATM machines, brought an action against the defendant, a hotel, for liquidated damages relating to a breach of contract. The Court found that the hotel was liable for breach of contract when it signed a similar processing agreement with DirectCash's competitor, contrary to a covenant that prevented it from placing third-party ATMs in the hotel.

The contract contained a clause acknowledging that in the event the hotel breached the agreement, the parties would not be capable of accurately determining DirectCash's damages as a result of the breach.64 As a result, the clause stipulated that DirectCash would be entitled to recover from the hotel an amount equal to the average monthly surcharge revenue it would otherwise have received over the remaining term of the contract. In particular, the clause stated as follows:

If Customer breaches this Agreement and DirectCash removes [an] ATM, then, in addition to such other non-monetary rights or remedies to which DirectCash may (pursuant to this Agreement, by law, in equity or otherwise) be entitled, DirectCash shall be entitled to collect from Customer, as an immediately due and payable obligation of Customer, stipulated as liquidated damages and not as a penalty in an amount equal to the average monthly surcharge revenue multiplied by the months remaining render the then-existing initial term or renewal term applicable to such location, and interchange revenue. The parties hereto agree and recognize that they cannot accurately determine DirectCash's monetary loss or damages as a result of a breach of terms hereof by Customer. For purposes hereof, a breach shall include, but not be limited to, (i) the sale or disposition of all, or a substantial part of Customer's assets or stock, (ii) the merger or acquisition of Customer where Customer is not the surviving entity, (iii) the sale of Customer's store, (iv) the closing of a Store, (v) the substantial reduction of the hours & of operation of the Store, or the occurrence of any other condition which would have an adverse affect [sic] on DirectCash's rights under this Agreement within a 12-month period, or (vi) any failure in performance of [sic] breach of performance hereof by Customer.

The Court applied the clause straightforwardly and awarded DirectCash these agreed-upon damages using historic receipts to determine the average monthly revenue it would have received but for the hotel's breach.

Conclusion

"A contract is an investment whose value becomes clear only if the relationship with the supplier becomes sour."65 The cost and time required to prepare technology contracts properly are sometimes underestimated by decision makers. Although it may appear expedient to be vague about expectations and enter into a standard contract, or drop standard clauses into a contract rather than developing and articulating more precise expectations, this practice will present problems when disputes arise.66 Often the disputes arise not over the heavily negotiated clauses setting out matters such as very detailed service level expectations, but over the more general clauses of the agreement that have not received the same attention. Special care should be taken when the parties wish to proceed with only a framework for an agreement. All essential terms ought to be agreed on, or there should be a binding mechanism to determine any outstanding matters. Similarly, standard clauses like limitation of liability clauses should be carefully considered in the context of the entire agreement, and any important types of damages should be dealt with expressly, rather than relying on vague terms.

Footnotes

1. George Kimball, "Risk allocation and management in outsourcing," Practising Law Institute – Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series (September–October 2007) at 299 (WL).

2. John Swan, Canadian Contract Law, 1st ed. (Markham, ON: LexisNexis, 2006) at 233.

3. Geoff R. Hall, Canadian Contractual Interpretation Law, 1st ed. (Markham, ON: LexisNexis, 2007) at 133.

4. See, for example, Lord Wright's comments in Hillas & Co. Ltd. v. Arcos Ltd., [1932] 43 Ll.L. ep. 359 (HL).

5. Bawitko Investments Ltd. v. Kernels Popcorn Ltd. (1991), 79 D.L.R. (4th) 97 (Ont. C.A.) [Bawitko]; L.C.D.H Audio Visual Ltd. v. I.S.T.S. Verbatim Ltd., [1988] O.J. No. 633 (Ont. H.C.J.); EdperBrascan Corp. v. 117373 Canada Ltd., [2000] O.J. No. 4012 (Ont. S.C.J.) aff'd [2002] O.J. No. 759 (Ont. C.A.). Hall, supra note 3 at 134-36.

6. Mitsui & Co. (Point Aconi) Ltd. v. Jones Power Co., [2000] N.S.J. No. 257 (N.S.C.A.), leave to appeal to S.C.C. refused [2000] S.C.C.A. No. 526; P.P. (Portage) Holdings Ltd. v. 346 Portage Avenue Inc., [1999] M.J. No. 110 (Man. Q.B.), aff'd [1999] M.J. No. 354 (Man. C.A.). Hall, supra note 3 at 136-37.

7. Calvan Consolidated Oil & Gas Co. v. Manning, [1959] S.C.J. No. 9 (S.C.C.); Mellco Developments Ltd. v. Portage la Prairie (City), [2002] M.J. No. 381 (Man. C.A.), leave to appeal to S.C.C. refused [2002] S.C.C.A. no. 502. Hall, supra note 3 at 138.

8. Bawitko, supra note 5.

9. Ibid. at 104.

10. Hall, supra note 3 at 134.

11. 2005 BCSC 58.

12. Ibid. at para 74.

13. Ibid. at para 77.

14. See, for example, Canada Square Corp. v. VS Services Ltd., [1981] O.J. No. 3125 (Ont. C.A.).

15. Hall, supra note at 138.

16. [2000] O.J. No. 4353 (S.C.J.); aff'd [2001] O.J. No. 1769 (Ont. C.A.).

17. Ibid. at para 30, (S.C.J.).

18. Ibid. at para 7 (S.C.J.).

19. Ibid. at para. 44 (S.C.J).

20. Ibid. at para. 45 (S.C.J).

21. Ibid. at para. 1 (Ont. C.A.).

22. Hadley v. Baxendale (1854), 9 Exch. 341, 156 E.R. 145.

23. John D. McCamus, The Law of Contracts (Toronto: Irwin Law Inc., 2005) at 854.

24. Gabor G.S. Takach and Leslie F. Church, "Limitation of Liability: Indirect and Consequential Damages," Ontario Bar Association Continuing Legal Education Symposium on Contract Law, October, 2007 at 6.

25. This paragraph adapted from Takach and Church, ibid.

26. See, for example, B.P.I. Resources Ltd. v. Merrill Lynch Canada Inc., [1989] A.J. No. 457 (C.A.) (in which a claim for consequential damages for loss of prospective economic advantage and damage to reputation was rejected because no quantifiable loss could be proved).

27. 1874000 Nova Scotia Ltd. v. Adams, [1996] N.S.J. No. 46 (S.C.), var'd [1997] N.S.J. No. 172 (C.A.).

28. A & W Foods Services of Canada Ltd. v. Norand Corp., [1979] B.C.J. No. 467 (S.C.) [A & W Food Services].

29. Edmonton (City) v. Lovat Tunnel Equipment Inc., [2000] A.J. No. 1435 (Q.B.).

30. Banister Pipeline Construction Co. v. TransCanada Pipelines Ltd., [2003] A.J. No. 1008 (Q.B.).

31. Canson Enterprises Ltd. v. Boughton & Co., [1995] B.C.J. No. 1935 (C.A.), leave to appeal to S.C.C. refused, [1995] S.C.C.A. No. 486; see also Toronto Industrial Leaseholds Ltd. v. Posesorski (1994), 21 O.R. (3d) 1 (C.A.) and Topnotch Developments Ltd. v. Welldone Ventures Canada Inc., [1991] B.C.J. No. 3407 (S.C.) (in which the Court permitted recovery for consequential losses including taxes, insurance and maintenance expenses in relation to a purchased property).

32. Ibid.

33. Miller Dredging Ltd. v. Dorothy MacKenzie (The), [1995] 1 W.W.R. 270 (B.C.C.A.).

34. Ibid.

35. Husky Oil Operations Ltd. v. Ledcor Industries Ltd., [2006] A.J. No. 408 (C.A.).

36. Takach and Church, supra note 24 at 5.

37. [1998] O.J. No. 1745 (Gen. Div.) [T.K.M. Communications].

38. Ibid. at para. 18.

39. [1997] A.J. No. 503 (C.A.) [Syncrude Canada].

40. [1995] B.C.J. No. 739 (C.A.) [Ebco].

41. Ibid. at para. 34.

42. See Takach and Church, supra note 24 at 10.

43. Supra note 28.

44. Similar to the issue identified in the previous section on damages, a range of terms are commonly used to describe these clauses. Specifically, they are frequently referred to as "exclusion," "limitation of liability" and "exemption" clauses. Again, this contributes to some of the uncertainty surrounding their application. For consistency, the term "limitation of liability" will be used to describe these clauses below.

45. The breach of some types of obligations would normally only give rise to indirect damages, such as confidentiality obligations, yet these obligations are not always excluded from the limitations of liability clause.

46. See McCamus, supra note 23 at 749-50.

47. (1989), 57 D.L.R. (4th) 321 (S.C.C.) [Hunter Engineering].

48. Hall, supra note 3 at 239.

49. Ibid. at 246.

50. Ibid. at 247.

51. Ibid. at para. 59.

52. Ibid. at para. 152.

53. Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423 at para. 52; see also Shelanu Inc. v. Print Three Franchising Corp, [2004] O.J. No. 1919 (C.A.) at para. 35 [Shelanu].

54. See, for example, Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., [1997] S.C.J. No. 111 (S.C.C.) at para 28; Shelanu, ibid. at para 32.

55. Hall, supra note 3 at 246.

56. [1996] B.C.J. No. 1411 (B.C.C.A.), leave to appeal to S.C.C. refused [1996] S.C.C.A. No. 396 (S.C.C.).

57. Ibid. at para 5.

58. Hall, supra note 3 at 239 and 244.

59. [1988] A.J. No. 142 (Q.B.) [Group West Suppliers].

60. [1993] O.J. No. 289 (Gen. Div.), var'd as to amounts (1997), 154 D.L.R. (4th) 271, leave to appeal to S.C.C. dismissed [1998] S.C.C.A. No. 4.

61. Ibid. at para 161.

62. Ibid. at paras. 157-161.

63. [2006] A.J. No. 608.

64. Ibid. at para. 5.

65. Jerome Barthelemy, "The Hidden Costs of IT Outsourcing" (2001) Sloan Management Review 60 at 63.

66. See ibid.

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