Limitation of liability clauses are common in IT service contracts, and are well accepted under Québec civil law. In 6362222 Canada inc. v Prelco inc., 2021 SCC 39, the Supreme Court of Canada unanimously held that such a clause could not be nullified based on the doctrine of breach of fundamental obligation, and therefore served to limit the service provider’s liability.
Prelco inc. (“Prelco”) contracted 6362222 Canada (“Createch”) to supply software and professional services for the implementation of an integrated management system. A limitation of liability clause stipulated that Createch’s liability would be limited to the amount of fees paid for any damages resulting from the delivery of these services. The clause specifically limited liability for damages due to loss of data profits or revenue, or 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. The relevant provisions of the limitation of liability were quoted by the court as follows:
[translation] Createch’s liability to the client for damages that can be attributed to any cause whatsoever, regardless of the nature of the action, whether provided for in the agreement or delictual, shall be limited to amounts paid to Createch under the Agreement unless such damages result from gross negligence or wilful misconduct on Createch’s part. If such damages result from the delivery of unsatisfactory services, Createch’s liability shall be limited to the amount of any fees paid in relation to the said unsatisfactory services.
Createch may not be held liable for any damages resulting from the loss of data, profits or revenue or from the use of products or for any other special, consequential or indirect damages relating to services and/or material provided pursuant to the Agreement unless such damages result from gross negligence or wilful misconduct on Createch’s part.
As Prelco considered the system delivered by Createch unusable, Prelco terminated the contract and hired another company to fix the problems. In the end, Prelco was able to use the system but lost some of the benefits originally expected. Prelco brought an action against Createch for reimbursement of an overpayment, costs for restoring the system, claims from customers, and loss of profits.
Prelco alleged that the limitation of liability clause was inoperative in this case, relying on the doctrine of breach of a fundamental obligation (“Théorie du manquement à une obligation essentielle”). The Supreme Court considered two possible legal bases in its application: (a) validity of the clause having regard to public order, and (b) validity of the clause having regard to the requirement relating to the cause of the obligation.
For the first legal basis, the validity of a limitation of liability clause is subject to the same limits established in the Civil Code of Québec with respect to public order. Article 1474 (absolute nullity of incompatible clauses) limits the validity of non-liability to gross or intentional fault; but Createch’s breach was a simple fault. Then, Article 1437 (abusive contract clause) limits the validity of non-liability to consumer contracts and contracts of adhesion; however, the B2B contract was a contract by mutual agreement (“Contrat de gré à gré”) between two sophisticated parties of equal power. Therefore, the first legal basis does not apply in this case.
For the second legal basis, the Civil Code speaks to the requirement of the objective cause of obligation (“Cause objective de l’obligation”) in Article 1371. In common law, the objective cause of contract is often referred to as the “consideration”. Clauses that challenge the consideration of a contract may be inoperative according to the doctrine of breach of a fundamental obligation. For example, a clause that excludes all liability for performance delivery (“prestation”) may render the contract without reciprocal consideration. The issue then is whether a limitation of liability clause relating to the fundamental obligation one of these clauses deprives the obligation of its cause.
The court decided that the limitation of liability clause in the contract did not exclude all remedies for Prelco. If Createch failed to deliver, Prelco could seek specific performance by replacement. In addition, the clause allows Prelco to keep the integrated management system, obtain damages for unsatisfactory services, and be compensated for necessary costs for specific performance by replacement. The clause excluded the loss of profit and other consequential damages due to a simple fault. As such, Createch still owes the substantial obligation to Prelco.
Absent these two potential legal bases (public order or objective cause), the limitation of liability clause was operative in respect of the simple fault committed by Createch. The significance of this decision is that, for a B2B contract negotiated by sophisticated parties of equal power, a limitation of liability clause that does not exclude all remedies for the contracting party is likely to be valid, even if a fundamental obligation is breached resulting from a simple fault.