Limitations of Liability: Do they work?

In Canada, many contracts contain “limitation of liability” clauses – in the intellectual property context, this can include technology licenses, software development contracts, outsourcing agreements and so on. For example, a typical clause may indicate that, regardless of the cause of the breach, the liability of one party is limited to a certain dollar amount.

Can these clauses actually limit liability? Generally, if the clause is well-drafted, clear, and isn’t buried in the fine-print then yes, a limitation of liability will be upheld by courts in Canada. There are exceptions: A court will refuse to uphold a limitation of liability clause if there has been a “fundamental breach” of the contract; in other words, a breach which goes to the very heart of the contract, and one party is deprived of the whole benefit of the contract. Courts will also look at whether the parties are in an equal bargaining position. And whether the limitation will result in an “unfair and unreasonable result”.
Here are a few examples, from the internet law context and also from general commercial law:

Zhu v. Merrill Lynch HSBC, 2002 BCPC 535 (CanLII) : this is an interesting internet law case in which Mr. Zhu first placed, then cancelled, an online sell order for shares on Merrill Lynch HSBC’s NetTrader system. He then placed a second sell order. The first sell order was never cancelled, with the result that two sell orders were processed, leaving Mr. Zhu in a short position. He claimed losses of $9,000 for having to make up the shortfall. Merrill Lynch HSBC sought to rely on the limitation of liability clause in its terms of service, but the court refused to uphold it. Two significant factors were the lack of evidence that Mr. Zhu ever assented to the terms, and also the higher degree of care required when handling financial investments.

Whighton v. Integrity Inspections Incorporated, 2007 ABQB 175 : a recent Alberta case where a house inspection failed to disclose the extent of repairs required; the house inspector sought to rely on a $10,000 limitation of liability. The court pointed to unequal bargaining power and relied on the “unfair and unreasonable result” argument to deny the limitation clause.

Fraser Jewellers (1982) Ltd. v. Dominion Electric Protection Co., 1997 CanLII 4452 (ON C.A.): in this Ontario case, the Court of Appeal upheld a limitation of liability clause on behalf of a security company whose security system failed during an armed robbery of a jewelry store. The store sued after losing $50,000 in diamonds, and the security firm pointed to its contract which limited liability to “a sum not exceeding the annual service charge of $890”. The court upheld the limitation clause.

Calgary – 21: 35

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