You have an Agreement – Now Exclude the Liability

Exclusion or limitation of liability clauses are contractual terms that limit or exclude the liability of one or more parties to an agreement. Such clauses have three important purposes. They can excuse a party from liability for a particular type of claim altogether, limit the amount that can be claimed against a party, or restrict the time period within which a claim against a party may be brought.

They are also a common way for parties to an agreement to apportion risk and are regularly included in a variety of different agreements, such as commercial leases and joint venture agreements.

An exclusion clause may be relied on as a complete defence to a legal claim or as a way of reducing the amount of damages that one party may be required to pay to another.

For example, in Felty v. Ernst & Young LLP, the British Columbia Court of Appeal found that the defendant accounting firm could rely on an exclusion clause which limited the firm’s liability for negligence to the amount of its fees. The maximum potential damages in that case was thereby reduced from $500,000 to just over $15,000. Similarly, in a 2016 Ontario Court of Appeal case, Suhaag Jewellers Ltd. v. Alarm Factory Inc., the Court held that the exclusion clause in question was a complete bar to liability and dismissed the claim entirely.

Exclusion clauses are closely scrutinized by courts. In order to effectively limit or exclude liability, the clause must be expressed clearly; where there is ambi­guity, courts will construe such clauses strictly against the party who wishes to rely on them. The Supreme Court of Canada, in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), has established the following three-part test, which courts will employ when deciding whether to uphold an exclusion clause:

1. Does the clause apply to the circum­stances of the case?
2. If the clause applies, was it unconscion­able at the time the agreement was entered into?
3. Are there any overriding public policy reasons for refusing to enforce the exclusion clause?

The first hurdle to overcome when trying to rely on an exclusion clause is establishing that the clause itself applies to the circumstances, so it is important to ensure exclusion clauses are drafted precisely, using plain language, with an eye to the types or value of claims to be excluded.

For example, it is common to see exclusion clauses that attempt to limit a party’s liability for damages or personal injuries unless they are caused by that party’s gross negligence. Parties normally use the term “gross negligence” to signal that conduct worse than simple negligence is required to bring a party outside the protection of an exclusion clause.

However, gross negligence does not have a settled meaning in Canada, and courts do not agree on what conduct constitutes gross negligence vs. negligence. As a result, exclusion clauses should either avoid refer­ring to gross negligence or the agreement should include a definition outlining the kind of conduct that will amount to gross negligence.

Before executing any agreement con­taining an exclusion clause parties should ensure that the wording of the particular clause has been closely reviewed, prefer­ably by a qualified professional, as any vagueness or uncertainty may result in the clause not being applied to the circumstances.