Validity of limitation of liability clauses: The Supreme Court of Canada changes the rules and rejects the application of the notion of "fundamental breach" in Quebec civil law

On October 15, 2021, the Supreme Court of Canada handed down a very important decision regarding the rules governing the validity of limitation of liability clauses in Quebec civil law. In 6362222 Canada inc. v. Prelco inc., 2021 SCC 39, the Supreme Court concluded that a court could not set aside the application of such a clause solely on the ground that the defendant had committed a fundamental breach of the contract.

Factual context

Prelco inc. and 6362222 Canada inc. (Créatech) had entered into a contract under which Créatech was to implement an integrated management system for Prelco’s operations. Executing the contract was nevertheless difficult and Prelco brought an action in damages against Créatech. In defence, Créatech relied, among other things, on the limitation of liability clause provided for in the contract. 

The Superior Court of Québec disallowed the application of the limitation of liability clause on the ground that such a clause could not be invoked when the alleged fault constituted nonperformance of a "fundamental obligation" of the contract. The Court of Appeal of Quebec subsequently confirmed the merits of that decision by referring to a number of academic authorities asserting that the concept of "fundamental breach" developed by the common law courts had a solid foundation in Quebec civil law. 

Supreme Court decision

The Supreme Court of Canada rejected the approach adopted by the Superior Court and the Quebec Court of Appeal. According to the Supreme Court, the application of the concept of "fundamental breach" in Quebec civil law could be based only on two arguments, i.e., (i) that the application of a limitation of liability clause in the event of a breach of a fundamental obligation of the contract was contrary to public order, or (ii) that the application of such a clause in similar circumstances had the effect of negating the cause of the contract. However, according to the Supreme Court, none of these arguments were valid in this case. 

The Court emphasized that the considerations related to public order were codified by the Quebec legislature at the time of adoption of Article 1474 of the Civil Code of Quebec that provides that a person may not exclude or limit his liability for the bodily or moral injury caused to another, nor for the material injury arising from an intentional or gross fault. Regarding the argument based on absence of cause, the Supreme Court concluded that the mere fact that a party limits its liability does not negate the cause of the contract. Nevertheless, the Court pointed out that it could be otherwise in the presence of a clause totally excluding any recourse against the defendant.  

Practical consequences 

The Supreme Court’s decision limits the arguments likely to be invoked by the plaintiff in order to challenge the validity of a limitation of liability clause provided in a business contract governed by Quebec civil law. It is no longer possible to argue that such a clause is invalid or unenforceable in respect of a breach of a fundamental obligation. As the Court pointed out, it is exactly in the case of a failure to perform a fundamental obligation of the contract that a limitation of liability clause can be useful in limiting the legal and financial risks relating to the contract.