By: Ryan P. Krushelnitzky and Kelly E. Starrak1
A. Introduction
Contractual liability limitations are a means of managing risk in construction contracts. Depending on the type of project, the type of possible damages, and the availability (or unavailability) of insurance, liability limitations can play an important role in risk allocation. This is particularly so in situations where a small breach of contract can result in very significant damages.
Limitation of liability clauses allow parties to attempt to allocate risks, rather than transfer them wholesale to parties who are unable to bear them. Parties can limit the amounts owed by one to the other, can limit the type of damages due, or can limit the type of claims that can be brought. Contractors can avoid a "bet the farm" situation by limiting their exposure as provided for by the liability limitation clauses. And, owners can bear the additional risk, as part of the overall risk/reward allocation agreed to by the parties.
Liability limitations are only useful if they are enforceable. Enforceability turns on questions of contractual interpretation, unconscionability and public policy. This paper will explore a number of recent cases that deal with these issues, in order to highlight considerations to bear in mind when negotiating, drafting or litigating limitation of liability provisions.
B. Tercon and the Fundamentals of Liability Limitations
The Supreme Court of Canada's Tercon Contractors Ltd. v. British Columbia decision sets out the state of Canadian law generally on the issue of enforceability of liability limitations.2 There, the Court set out a three-step test concerning enforcement:3
- First, as a matter of contractual interpretation, whether the exclusion clause in fact applies to the circumstances;
- Second, whether the clause was unconscionable at the time the contract was made;
- Third, whether there is an overriding public policy reason for the court to refuse to enforce the clause.
The first part of the Tercon test looks at the contract itself, to see if it can be interpreted to apply to the situation at issue. During this stage, a court attempts "to ascertain the objective intent of the parties – a fact specific goal – through the application of the legal principles of interpretation." 4 Courts do this using "a practical, common sense approach not dominated by technical rules of construction":
The overriding concern is to determine the intent of the parties and the scope of their understanding..... To do so, a decision maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract.5
The surrounding circumstances "vary from case to case" and encompass the "objective evidence of the background facts at the time of the execution of the contract."6 They consist of "knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting."7 The context that makes up the surrounding circumstance of an agreement can include: the genesis of the transaction, the background, the context, the market in which the parties are operating, the purpose of the agreement and the nature of the relationship created by the agreement.8
Footnotes
1 Ryan Krushelnitzky and Kelly Starrak are lawyers, practicing at the firm Field LLP, www.fieldlaw.com
2 Tercon Contractors Ltd. v. British Columbia, [2010] 1 S.C.R. 69
3 Tercon at paras. 122 and 123 per Binnie J. in dissent but not on this point
4 Sattva v. Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633 at para. 49.
5 Sattva at para. 47
6 Sattva at para. 58
7 Sattva at para. 58
8 Sattva at paras 47 and 48
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