Will Your Limitation of Liability Clause Stand Up To Court Scrutiny?

November 10, 2021

In 6362222 Canada Inc. v Prelco Inc., 2021 SCC 39 (38904) (“Createch v Prelco“), the Supreme Court of Canada considered the issue of whether a limitation of liability clause in a contract between the two parties was invalid on the basis of the doctrine of breach of a fundamental obligation. The Court ultimately held that the parties’ free will had to be respected and thus the clause was valid.


In 2008, 6362222 Canada inc. (“Createch“) entered into a contract with Prelco inc. (“Prelco“) to supply software and professional services in order to implement an integrated management system at Prelco.  Createch proposed the contract terms between the parties, which were accepted by Prelco without any requested changes. One of the provisions was a limitation of liability clause which limited Creatch’s liability to Prelco to the amounts paid under the contract, no matter what cause the damages were attributed to. The clause also stated that Createch could not be held liable for damages arising from loss of data, profits, or revenue, or for any other special, consequential, or indirect damages.

Various problems arose with the implementation of the system and in 2010 Prelco terminated the contract. Prelco then brought an action against Createch for damages stemming from the issues with the system. Createch filed a cross-application for the unpaid balance of the project.

At trial, the Superior Court of Quebec held that the limitation of liability clause was inoperative on the basis of the doctrine of breach of a fundamental obligation and ordered Createch to pay damages to Prelco. The Québec Court of Appeal dismissed Createch’s appeal, which concerned the limitation of liability clause.

The Supreme Court’s Ruling

The Supreme Court indicated that although non-liability clauses are valid in principle, they may be limited based on the doctrine of breach of a fundamental obligation under the Civil Code of Québec (“CCQ“).

A non-liability clause may be inoperative where the clause is contrary to a rule of public order. In particular, the CCQ recognizes the doctrine of breach of a fundamental obligation for ‘abusive contract clauses’ but limits the application of the doctrine to consumer contracts and contracts of adhesion (standard form contracts where there is unequal bargaining power between the parties). The CCQ also prohibits non-liability clauses where there is gross or intentional fault, fraud, negligence, etc., even for contracts of mutual agreement.

In this case, the Court held that “public order does not have the effect, generally, of rendering a non‑liability clause relating to a fundamental obligation in a contract by mutual agreement inoperative”.[1] Notwithstanding that Createch had breached its fundamental obligation under the contract to implement an integrated management system to meet Prelco’s requirements, this did not negate the limitation of liability the two parties had freely negotiated.

The Court also indicated that a non-liability clause may be inoperative if it releases a party from all obligations to the other party, with the effect of ‘depriving the obligation of its cause’. Under the CCQ, a clause cannot invalidate the reciprocal nature of the contract, an effect which some non-liability clauses can have. However, the Court held that this did not apply in the present case as both parties had substantial obligations to one another.

Common Law Position

The Court’s ruling is aligned with the position at common law which recognizes the validity of  non-liability clauses based on the principle of autonomy of will and freedom of contract.[2] The common law doctrine of fundamental breach will consider whether a non-liability clause: applies to the circumstances established in evidence; was unconscionable at the time the contract was made (taking into consideration any unequal bargaining power between the parties); and should be considered inoperative because of the existence of an overriding public policy.[3]

Practical Effect

For suppliers of goods or services, it is prudent to include a non-liability clause in every contract signed. Negotiating a non-liability clause facilitates better value for money for your customers by not weighing down the price with risk contingencies. You should never ‘bet the company’ on a deal.

Given that there is case law indicating that the Court will respect terms that are freely negotiated between the parties, it is important to pay particular attention to the drafting of your non-liability clause. Here are some things to consider:

  • Make sure that your liability exposure is proportionate to your commercial risk (e.g., limiting liability in the aggregate to the amount paid or a specified amount) and takes into account the level of developmental work and technical risk involved
  • Give thought to any liabilities you wish to be excluded (e.g., indirect, consequential, special, punitive, or exemplary damages) and be specific about what these cover (e.g., loss of profit, loss of data, loss of reputation, etc.)
  • Be aware of the impact of any local laws that may impact the non-liability clause (e.g., consumer protection legislation that provides specific rights and remedies or laws that prohibit exclusion of liability for fraud, personal injury, or death)
  • Consider whether is it appropriate to include a time bar which may act to exclude liability if a claim is not made within a certain timeframe
  • Seek advice on how your insurance policies align with the drafting of the non-liability clause and will respond in the event of a claim
  • Document what mitigation measures you have in place to manage risks associated with any agreed areas of unlimited liability (e.g., internal processes to reduce the risk of intellectual property infringement, insurance for property damage, or employee training to protect the confidentiality of information received).


Createch v Prelco shows that the principle of freedom of contract is paramount in protecting non-liability clauses freely negotiated between sophisticated parties. It is important to bear in mind that although such clauses will generally be respected by the courts, constraints are imposed by both the CCQ and the common law.

This article was written with the assistance of Nicholas Poirier, an Articled Clerk at Cox & Palmer.

[1] Createch v Prelco at para 5.

[2] The Glengoil Steamship Co v Pilkington (1897), 28 SCR 146.

[3] Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4.

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