Limitation of liability under Canadian law.

Limitation of liability clauses are the single most contested provision in commercial contracts, and they are also where US-drafted templates most often encounter friction in Canada. Canadian courts apply a different doctrinal framework from US courts in deciding whether to give effect to exclusion and limitation clauses, and the difference shows up most clearly in the post-Tercon line of cases.

This article summarizes the current Canadian framework, the most common drafting patterns that get tested, and practical recommendations for US drafters whose contracts may end up before a Canadian court.

The Tercon framework

The leading Canadian case on exclusion clauses is Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4. The Supreme Court of Canada laid out a three-step framework for deciding whether to give effect to an exclusion or limitation clause:

1. Interpretation: As a matter of contract interpretation, does the clause apply to the circumstances established in evidence?
2. Unconscionability: If the clause applies, was it unconscionable at the time the contract was made — i.e., was there sufficient inequality of bargaining power, plus a substantively improvident bargain?
3. Public policy: If the clause is otherwise enforceable, is there an overriding public policy reason — outweighing the strong public interest in enforcement of contracts — to refuse to enforce it?

The Tercon framework retired the older doctrine of "fundamental breach" that previously animated Canadian exclusion-clause cases. That doctrine had allowed courts to refuse to enforce an exclusion clause where the breach was so serious that it went to the root of the contract. Tercon replaced that with the structured three-step test above.

What this means in practice

1. Interpretation is the first battle

Most exclusion-clause cases turn on interpretation, not unconscionability or public policy. Canadian courts read exclusion clauses against the drafter (the contra proferentem rule) and require that the clause clearly captures the circumstances at issue. Practical drafting consequences:

• List the categories of damages excluded explicitly. "Consequential, indirect, incidental, special, and punitive damages" is better than "any damages whatsoever." But Canadian courts have read "consequential damages" narrowly — sometimes more narrowly than the US drafter intended.
• Specify whether direct damages are excluded. US contracts often exclude consequential damages and then limit direct damages to a cap. Canadian courts will enforce both — but only if the contract is clear about the distinction.
• Address the dual-cap structure carefully. A cap "in the aggregate" should say so. A super-cap for certain breach categories (data breach, IP infringement, confidentiality) should be drafted to remove any ambiguity about whether it operates as a sub-cap or a separate exposure.

2. Unconscionability has been tightened

The Supreme Court of Canada revisited unconscionability in Uber Technologies Inc. v. Heller, 2020 SCC 16, in the context of a forum-selection clause. The result was a slightly clearer test: unconscionability requires (a) inequality of bargaining power, plus (b) a substantively improvident bargain — meaning the clause is unduly advantageous to the stronger party and unduly disadvantageous to the weaker.

In B2B commercial contracts between sophisticated parties, unconscionability is rarely a winning argument. In consumer-facing contracts, contracts of adhesion, or where one party has dramatically more bargaining power, unconscionability becomes more available — and limitation-of-liability clauses in those contexts should be drafted accordingly.

3. Public policy is narrow but real

Step three of Tercon is a residual safety valve. Canadian courts have been reluctant to use it to override otherwise-enforceable exclusion clauses, but they have done so where:

• The clause would purport to exclude liability for criminal conduct, fraud, or wilful misconduct.
• The clause conflicts with a mandatory statutory provision (e.g., consumer protection legislation that nullifies exclusion clauses in specified consumer contexts).
• The clause would effectively immunize a party from its own gross negligence in a public-safety context.

For drafting purposes, this means: explicit carve-outs for fraud, wilful misconduct, gross negligence, and breach of confidentiality are conventional and prudent. Attempting to exclude liability for these is often counterproductive.

Common US-drafting patterns and how they fare

"Sole and exclusive remedy" language

US contracts often state that a refund or credit is the "sole and exclusive remedy" for a particular breach. Canadian courts will generally enforce this if the clause is clear, but they will read it strictly — and where the remedy clause is silent on a category of damage (e.g., breach of confidentiality), the court may treat that category as outside the exclusive-remedy provision.

Mutual aggregate cap tied to fees paid

The standard SaaS pattern — a mutual cap equal to fees paid in the 12 months preceding the claim — is generally enforceable in Canada between sophisticated commercial parties. Where Canadian courts have pushed back, it is usually because the cap appears in a contract of adhesion, or because the cap is so low relative to the foreseeable damage that the court reads it as commercially unreasonable.

Exclusion of consequential damages

Generally enforceable, but the definition matters. Canadian courts have sometimes interpreted "consequential damages" more narrowly than US courts. If the intent is to exclude lost profits, lost revenue, lost data, and similar categories, those should be enumerated explicitly rather than left to fall under a "consequential damages" umbrella.

Indemnity language

Broad indemnities — "X shall indemnify, defend, and hold harmless Y from any and all claims arising out of or relating to..." — are generally enforceable in commercial contracts. Canadian courts will, however, look closely at indemnities that purport to require one party to indemnify the other for the other's own negligence; clear, express language is needed.

Limitation-of-liability for gross negligence

This is one of the cleaner US/Canadian differences. Canadian courts are more likely than US courts to refuse to enforce a clause that purports to exclude liability for gross negligence — particularly outside the B2B-sophisticated-parties context. Best practice: carve out gross negligence (and wilful misconduct, and fraud) from any limitation or exclusion clause.

Practical recommendations for US drafters

1. Enumerate the categories of damages excluded. Don't rely on "consequential damages" to do all the work.
2. State the cap structure clearly. Aggregate, per-occurrence, sub-caps, super-caps — be explicit.
3. Carve out fraud, wilful misconduct, gross negligence, and confidentiality breaches. Attempting to exclude these is generally counterproductive in Canadian courts.
4. Consider the consumer-protection overlay. If the contract is B2C or has consumer-protection statute application, provincial statutes may override the clause regardless of how well-drafted it is.
5. Address the public-policy edge cases directly. Where a contract sits in a regulated space (transportation, public services, healthcare), Tercon step three is more likely to be argued.
6. If the contract will be governed by US law but performed in Canada, plan for the possibility of a Canadian forum. A Canadian court applying its own conflict-of-laws principles may treat certain Canadian-law provisions as mandatory regardless of the governing-law clause.

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This article is general information, not legal advice for any specific situation. If you would like a Canadian-law review of your limitation-of-liability or indemnity provisions, contact koby@canadianattorney.com.