6362222 Canada inc. v Prelco inc: Limitation of Liability Clause Upheld

In the unanimous decision 6362222 Canada inc. v Prelco inc., 2021 SCC 39 [Createch v Prelco], the Supreme Court of Canada (“SCC” or “the Court”) held that Québec law permits contracting parties engaging in a freely negotiated non-consumer contract to limit or exclude their liability. 

 

Facts of the Case

6362222 Canada inc. (“Createch”) is a consulting firm specialized in performance improvement and the implementation of integrated management systems. Prelco inc. (“Prelco”) is a manufacturing company that makes and transforms flat glass. Prelco asked Createch for advice about its computer systems in 2008. A draft contract prepared by Createch under which it was to supply software and professional services to implement an integrated management system at Prelco was submitted to Prelco. Prelco did not ask for any changes to the proposed general conditions, which included provisions concerning the parties’ general responsibilities (Createch v Prelco, paras 6-10). One of the provisions in the contract, which was a limitation of liability clause in the contract, stipulated that Createch’s liability to Prelco for damages that could be attributed to any cause would be limited to amounts paid to Createch under the contract. If such damages resulted from the delivery of unsatisfactory services, Createch’s liability would be limited to the amount of any fees paid in relation to the unsatisfactory services. A further stipulation was that Createch could not be held liable for any damages resulting from the loss of data, profits or revenue from the use of products or for any other special, consequential or indirect damages relating to services and/or material provided pursuant to the contract (Createch v Prelco, para 11). Both parties signed the contract in April 2008. (Createch v Prelco, para 13).

Several problems arose when the system was implemented, and Prelco decided to terminate its contractual relationship with Createch in the spring of 2010. Prelco hired another firm to assist with their integrated management system (Createch v Prelco, para 14). Prelco brought an action against Createch for $6,246,648.94 in damages for the reimbursement of an overpayment, costs for restoring the system, claims from customers, and loss of profits. Createch in turn filed a cross‑application for $331,134.42, the unpaid balance for the project (Createch v Prelco, para 15). 

 

Procedural History

The Superior Court of Québec granted Prelco’s application and ordered Createch to pay Prelco $2,203,400 in damages (6362222 Canada inc. v Prelco inc., 2016 QCCS 4086). It held that clause 7 of the contract was inoperative on the basis of the doctrine of breach of a fundamental obligation, according to which an exoneration clause or limitation of liability clause is without effect if it relates to the very essence of an obligation. The Superior Court  of Québec found that Createch, having misunderstood the scale and complexity of Prelco’s operations, had committed a fault in its initial approach in implementing the management system and breached its fundamental obligation as a result. The Superior Court of Québec also granted Createch’s cross‑application. 

The Québec Court of Appeal dismissed Createch’s appeal, which concerned the limitation of liability clause, and Prelco’s cross‑appeal, which concerned the calculation of damages and the amount representing lost sales (6362222 Canada inc. v Prelco inc., 2019 QCCA 1457) . The Québec Court of Appeal ruled that the limitation of liability clause was inoperative as a result of the doctrine of breach of a fundamental obligation. 

 

The Doctrine of Breach of a Fundamental Obligation (Québec Law)

According to the doctrine of breach of a fundamental obligation, a limitation of liability clause is inoperative when it overrides the very essence of an obligation. The doctrine of breach of a fundamental obligation is founded on two legal bases: (1) validity of the clause having regard to public order, and (2) validity of the clause having regard to the requirement relating to the cause of the obligation (Createch v Prelco, para 37). 

Under the first legal basis, a limitation of liability clause in relation to a fundamental obligation is inoperative if it goes against the rule of public order that limits the principles of freedom of contract. The second argument is found on the basis of  reciprocity of obligations and total absence of cause, where “allowing a debtor to rely on a non‑liability clause in order to avoid responsibility for his or her breach of a fundamental obligation is contrary to the idea that the debtor’s reciprocal prestation is owed to the creditor, without which the contractual obligation is deprived of its cause” (Createch v Prelco, para 71). 

 

The Supreme Court of Canada’s Decision

In a unanimous decision delivered by Chief Justice Wagner and Justice Kasirer, the Court allowed Createch’s appeal, ruling that the limitation of liability clause was valid and operational. In its reasoning, the Court held that neither of the two legal bases for the doctrine of breach of a fundamental obligation in Québec Law applied, namely (1) validity of the clause having regard to public order, and (2) validity of the clause having regard to the requirement relating to the cause of the obligation (Createch v Prelco, paras 103-104).

For the first basis for the doctrine of breach of a fundamental obligation, the SCC ruled that public order does not render a limitation of liability clause between two sophisticated parties to be null and void. The Québec legislature has set out various situations where freedom of contract can be limited with respect to limitation of liability clauses, including instances of “gross or intentional fault, discourages recklessness, fraud, negligence and deliberate faults” (Createch v Prelco, paras 42-45). Abusive clauses are also nullified, which is defined as a “clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract” (Createch v Prelco, para 47). Given that the Court clarified that the doctrine is restricted to these situations, and that the sophisticated parties were freely entering into a contractual relationship with equal bargaining power, the first legislative basis for the doctrine did not apply to the case at bar (Createch v Prelco, para 70). 

For the second basis for the doctrine of breach of a fundamental obligation, there must be a cause which justifies a party’s acceptance of their respective obligations. The contract must have a logical, impersonal and abstract reason that justifies a party’s acceptance of their obligations, or the performance of the correlative obligation in the reciprocal contract (Createch v Prelco, paras 71-74). The SCC was dealing with the issue of whether “a non‑liability clause relating to the fundamental obligation of a contract has the effect of depriving the obligation of its cause” (Createch v Prelco, para 77). The Court held that the limitation of liability clause did not restrict reciprocity in the contract because Createch owed obligations to Prelco. Prelco was able to keep the integrated management system and was awarded damages. Prelco was also able to pursue action for Createch’s non-performance, so the contract between the parties did not prevent reciprocity (Createch v Prelco, paras 96-99).

 

Commentary

The decision of Createch v Prelco means that under Québec law, sophisticated parties are permitted to limit their liability in a freely negotiated non-consumer contract. The Court’s decision reinforces the principles of autonomy and freedom of contract in commercial situations between sophisticated parties with equal bargaining power. The decision cautioned that it would not be appropriate to invalidate limitation of liability clauses between sophisticated parties, unless they fall within the situations laid out in the first basis for the doctrine of breach of a fundamental obligation. 

The Court’s ruling means that the doctrine of breach of a fundamental obligation does not take precedence over long standing principles of contract law, such as the principles underlying autonomy and freedom of contract between two sophisticated commercial parties. Given the result of this decision, this means that sophisticated commercial parties should use caution when entering into contracts with limitation of liability clauses under Québec law. 

 

Image can be found here.

Chanpreet Shokar

Chanpreet Shokar

Chanpreet Shokar is a second-year law student at Osgoode Hall Law School. Prior to law school, Chanpreet obtained a B.Sc from the University of Waterloo. In his first year of law school, Chanpreet developed a passion for reading and analyzing decisions by the Supreme Court of Canada.

You may also like...

Join the conversation

Loading Facebook Comments ...