The Ghosts of Fundamental Breach: New Developments in the Enforceability of Contractual Limitations of Liability Since Tercon

Recent years have witnessed significant developments in the law that governs the enforceability of contractual limitations of liability. These legal developments were prompted by a new, simplified and seemingly exhaustive analytical approach to determining the enforceability of limitation clauses, set forth in the 2010 decision of the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways).

This new approach was, in the graphic words of Binnie J., intended to “shut the coffin” on the “jargon” associated with the doctrine of “fundamental breach” in the context of limitation clauses. That doctrine, which was first posited by Lord Denning and applied by Canadian courts in various forms for more than 50 years, effectively provided that a party could not rely on a clause that purported to limit its liability if the party was in breach of the fundamental “core” of the contract and thereby deprived its counterparty of the very thing bargained for.

The application of the doctrine of fundamental breach tended to focus on whether a limitation clause was “unfair” or “unreasonable” at the time of breach. This conferred on courts a seemingly broad, after-the-fact discretion to depart from the terms of a valid contract “upon vague notions of ‘equity or reasonableness'”.  This led to unpredictable outcomes that cast significant doubt on the enforceability of limitation clauses.

The new approach reinforces the right to limit liability in the interests of preserving individual liberty and commercial flexibility by attempting to circumscribe a court’s ex post facto discretion. It provides that a party will only be able to avoid the effects of a limitation clause if at least one of three things is true: 1) if the clause, interpreted in context, does not apply to the liability at issue; 2) if the clause was unconscionable at the time the contract was made; or 3) if enforcement of the clause would be contrary to public policy.  According to Tercon, a court has no residual discretion beyond these cases to decline to enforce a limitation clause.

In the four years since Tercon, courts have generally applied the new approach in a consistent manner.  However, uncertainty has crept into the analysis in three key areas. First, while Tercon dealt with the doctrine of fundamental breach in the context of limitation clauses, there is some question as to the continued applicability of the doctrine in other contexts.  Second, it is unclear whether the unconscionability stage of the analysis incorporates the traditional requirement that special notice be provided of extraordinary or unusual limitation clauses. Third, the breadth of the public policy stage of the analysis remains unclear.

This article provides an overview of the legal framework established in Tercon and analyzes the three areas of continuing uncertainty.

Read the full article here: Matthew Nied (co-author), “The Ghosts of Fundamental Breach: New Developments in the Enforceability of Contractual Limitations of Liability Since Tercon” (2014) 72:5 The Advocate (Magazine of the Vancouver Bar Association) 665 [cited by the Quebec Court of Appeal in 6362222 Canada inc. c. Prelco inc., 2019 QCCA 1457 at para. 23].