By Richard Stobbe
Let’s consider that contract you’re about to sign. Does it contain a limitation of liability? And if so, are those even enforceable? It’s been several years since we last wrote about limitations of liability and exclusion clauses (See: Limitations of Liability: Do they work?) and it’s time for another look.
A limitation of liability seeks to reduce or cap one party’s liability to a certain dollar amount – usually a nominal amount. An exclusion clause is a bit different – the exclusion clause seeks to preclude any contractual claim whatsoever.
To understand the current state of the law, we have to look at the decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 (CanLII), 315 D.L.R. (4th) 385, where the Supreme Court of Canada laid down a three-part framework. This test requires the court to determine:
(a) whether, as a matter of interpretation, the exclusion clause applies to the circumstances established in the evidence;
(b) if the exclusion clause applies, whether the clause was unconscionable and therefore invalid, at the time the contract was made; and
(c) if the clause is held to be valid under (b), whether the Court should nevertheless refuse to enforce the exclusion clause, because of an “overriding public policy, proof of which lies on the other party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts”.
We can illustrate this if we apply these concepts to a recent Alberta case. In this case, the court considered a limitation of liability in the context of a standard form industry contract, the terms of which were negotiated between the Canadian Association of Oilwell Drilling Contractors and the Canadian Association of Petroleum Producers. Anyone doing business in the Alberta oilpatch will have seen one of these agreements, or something similar.
The court describes this agreement as a bilateral no-fault contract, where one party takes responsibility for damage or loss of its own equipment, regardless of how that damage or loss was caused. Precision Drilling Canada Limited Partnership v Yangarra Resources Ltd., 2015 ABQB 433 (CanLII) dealt with a situation where one of Precision’s employees caused damage to Yangarra’s well. In the end Yangarra lost $300,000 worth of equipment down the well, which was abandoned. Add the cost of fishing operations to retrieve the lost equipment (about $720,000), and add the cost of drilling a relief well (about $2.5 million). All of this could be traced to the conduct of one of Precision’s employees – ouch.
Despite all of this, the court decided that the bilateral risk allocation (exclusion of liability) clauses in the contract between Yangarra and Precision applied to allocate these costs to Yangarra, regardless of who caused the losses. The court decided that enforcing this limitation of liability clause was neither unconscionable nor contrary to public policy. The clause was upheld, and Precision escaped liability.
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