Limitation of liability clauses are a common feature of commercial agreements in Canada. Parties frequently include such provisions in an effort to allocate risk, often by excluding monetary liability for losses of certain types (e.g., consequential or indirect damages), while capping monetary liability for remaining losses to certain amounts (e.g., the price which the contract-breaker was paid under the contract). There is nothing inherently problematic about this, as Canadian courts recognize that "clauses limiting or excluding liability are negotiated as part of the general contract", and "[t]here are many valid reasons for contracting parties to use" them (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4).
Nevertheless, as with other areas in the law of contracts, the Supreme Court of Canada's decision in Bhasin v. Hrynew, 2014 SCC 71 raises questions about how far the ordinary paradigm applies where a party breaches a contractual duty of good faith. The general rule is that parties cannot "exclude" or "contract out" of mandatory good faith duties. But the contours of this rule remain unexplored, and uncertainty exists about whether it precludes parties from merely limiting their monetary liability when such duties are breached.
Against this backdrop, the recent decision of the California Supreme Court in New England Country Foods, LLC v. VanLaw Food Prods., Inc., Cal., No. S282968, 4/24/25 offers an interesting window into how other jurisdictions treat limitation of liability clauses where mandatory duties are breached. The Court inVanLawheld that a limitation of liability clause which purported to apply in cases of intentional wrongdoing was an invalid attempt to "exempt" a party from responsibility for its willful misconduct, contrary to s. 1668 of the California Civil Code. Although the case did not involve a claim for the breach of a contractual duty of good faith, but rather for intentional torts, it is notable for the equivalence the Court found between limitation of liability clauses and provisions that purport to exempt parties from legal duties.
Background: The Canadian Position
The enforceability of limitation of liability and other exemption clauses in good faith disputes is a complex issue, which is reviewed in detail in Chapter 7 of my book, Good Faith in Canadian Contract Law. By way of summary, the Supreme Court in Bhasin held that the common law duty of honest performance is a "mandatory" duty which "parties are not free to exclude", though it allowed that "parties should be free in some contexts to relax the requirements of the doctrine so long as they respect its minimum core requirements". It subsequently extended this approach to the common law duty to exercise contractual discretion reasonably, holding that this is a duty the parties cannot "cannot contract out of" in Wastech Services Ltd. v. Greater Vancouver Sewerage and Drainage District, 2021 SCC 7. The Court has taken a similar approach to the Quebec duty of good faith in arts. 6, 7 and 1375 C.C.Q., calling it a "principl[e] of public order that may not be derogated from by contract" in Quebec (Attorney General) v. Pekuakamiulnuatsh Takuhikan, 2024 SCC 39. In all three of these cases, the Court held that the applicable duty of good faith could not be excluded by an entire agreement clause.
What of the situation where a contractual provision does not purport to exclude good faith duties altogether, like an entire agreement clause, but merely narrow the remedies that are available when such duties are breached? The Supreme Court has yet to address this issue, and the available guidance is mixed.
In Quebec, it seems unlikely that a clause which either purports to exclude or limit monetary liability for breach of the duty of good faith would be enforceable. Art. 1474 C.C.Q. provides that "[a] person may not exclude or limit his liability for material injury caused to another through an intentional or gross fault; a gross fault is a fault which shows gross recklessness, gross carelessness or gross negligence" [emphasis added]. This provision "codifies a well‑established moralizing trend in the jurisprudence", by "discourag[ing] recklessness, fraud, negligence and deliberate faults... [e]ven in... freely negotiated agreement[s]": 6362222 Canada inc. v. Prelco inc., 2021 SCC 39. Since it "draw[s] no distinction between exoneration clauses and limitation of liability clauses", it applies whether a clause "excludes liability... [or] limits it": Prelco.
In common law Canada, appellate courts have similarly held that Bhasin's prohibition upon "exclud[ing]" the duty of honest performance applies to clauses which purport to exclude liability for the duty's breach, even if they do not purport to exclude the duty itself (as with an entire agreement clause): Canlanka Ventures Ltd v Capital Direct Lending Corp, 2021 ABCA 115; Berscheid v Government of Manitoba, 2022 MBCA 12. However, the jurisprudence is more fragmented with respect to clauses that do not purport to exclude liability, but merely limit it. Some lower courts have held that limitation of liability provisions cannot protect parties for breaches of the duty of honest performance or the duty to exercise contractual discretion reasonably: NEP Canada ULC v MEC OP LLC, 2021 ABQB 180; 1401380 Ontario Ltd. v. Wasaya Airways LP, 1401380 Ontario Ltd. v. Remotes One Remote Communities, 2024 ONSC 4701. However, other lower courts have left open whether a clearly worded limitation of liability clause may do so: Pure Environmental Waste Management Ltd v Lonquist Field Service (Canada), ULC, 2022 ABQB 30.
The proposition that a limitation of liability cannot apply to the duty of honest performance is arguably inconsistent with Bhasin's statement that parties may "relax" the requirements of the duty in some contexts. Indeed, pre- Bhasin decisions of the Supreme Court recognize that "a contractual limitation of liability does not impair the obligation" to which it applies, but merely narrows the remedies for its breach: Evans Products Co. Ltd. v. Crest Warehousing Co. Ltd., [1980] 1 S.C.R. 83. However, in the absence of a definitive appellate ruling on this since Bhasin, it remains uncertain whether a limitation of liability clause should be viewed as an invalid attempt to "exclude" mandatory good faith duties. The decision in VanLaw illustrates the risk that a court could equate the two types of provisions.
The Decision in VanLaw
The VanLaw case arose from a claim by New England Country Foods, LLC ("NECF"), a company that had sold its popular "TJ's Bold & Smoky Kansas City Style Barbecue Sauce" to the Trader Joe's grocery store chain for a number of years. NECF entered into a contract with the defendant, VanLaw Food Products, Inc. ("VanLaw"), in which NECF outsourced manufacturing of the barbeque sauce to VanLaw, while prohibiting VanLaw from reverse-engineering it. The contract contained a "Limitation on Liability" clause that: (a) excluded each party's liability for certain types of losses, including lost profits and consequential damages; and (b) limited each party's liability to the greater of the amount of gross revenues earned by VanLaw or NECF from the products in the 24 months prior to the events giving rise to the alleged liability. The clause was not restricted to unintentional misconduct, and applied "regardless of the form of any claim or action".
The litigation arose when NECF claimed that VanLaw had developed a secret plan to clone the barbeque sauce and sell it to Trader Joe's, causing Trader Joes to end its relationship with NECF, and to then stop selling the barbeque sauce altogether when VanLaw could not replicate it. NECF sued VanLaw in federal court, seeking damages for lost profits based on tortious interference and other claims. The claim was dismissed by the U.S. District Court due to the limitation of liability clause. On appeal, the U.S. Court of Appeals for the Ninth Circuit certified the following question to the California Supreme Court: "Is a contractual clause that substantially limits damages for an intentional wrong but does not entirely exempt a party from liability for all possible damages valid under California Civil Code Section 1668?". This provision of the California Civil Code provides:
1668. All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.
The California Supreme Court answered the certified question in the negative. In doing so, it began by affirming that s. 1668 applies to willful tortious conduct. It then held that the word "exempt" in s. 1668 should be read to encompass limitation of liability provisions. While some of the Court's reasoning for this involved considerations of statutory interpretation specific to s. 1668, it also offered a broader policy reason for its conclusion. In its view, "permitting contracts that reduce accountability for willful harm would effectively allow parties to put a price on violating our social policy against such harm". As well, the Court referred to cases from other U.S. jurisdictions which recognize that "limitations on damages are invalid in the same circumstances as full releases".
The decision in VanLaw therefore suggests that a prohibition upon contractual provisions which "exempt" parties from mandatory legal duties may be equally violated by provisions which only limit liability for their breach. However, it is also of interest that the VanLaw Court held the prohibition in s. 1668 does not apply to breaches of contract, even when willful, absent the violation of an independent duty that falls within s. 1668. In doing so, the Court drew upon s. 2719(3) of the California Uniform Commercial Code, which provides that "[c]onsequential damages may be limited or excluded unless the limitation or exclusion is unconscionable". Nonetheless, the Court did not address whether the situation may be different where the breach of contract is contrary to a duty of good faith. It also did not refer to s. 1302(b)of the California Uniform Commercial Code, which provides that "[t]he obligations of good faith, diligence, reasonableness, and care prescribed by this code may not be disclaimed by agreement", but that "[t]he parties, by agreement, may determine the standards by which the performance of those obligations is to be measured if those standards are not manifestly unreasonable". In Bhasin, the Supreme Court relied on this provision (as set out in § 1-302(b) of the Uniform Commercial Code) when holding that parties may not "exclude" the duty of good faith, but only "relax" it in some contexts provided they respect its minimum core requirements.
Takeaways
It is currently a matter of debate in Canada's common law provinces whether limitation of liability clauses are enforceable when a party breaches a mandatory duty of good faith contractual performance. As illustrated by the California Supreme Court's decision in VanLaw, arguments can be made that such a provision is equivalent to one that purports to exclude liability for breaching the duty entirely, which may render it unenforceable. At the same time, the analogy suggested by VanLaw may be inappropriate in the context of Canadian good faith, at least outside Quebec, as a distinction between contractual provisions which impair an obligation and those which merely limit liability for its breach has been recognized by our Supreme Court. Whether this distinction is one that the Court will continue to draw after Bhasin remains to be seen.
Brandon Kain is the head of the National Appellate Litigation Group at McCarthy Tétrault LLP. His book, Good Faith in Canadian Contract Law, was published by LexisNexis Canada in 2024.
To view the original article click here.
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.
