In 2010, the Supreme Court of Canada affected a shift in contract law when it decided the case of Tercon Contractors Ltd. v. British Columbia (Tercon). That case precipitated two major changes to the law governing exclusion clauses (clauses limiting or excluding liability). First, it eliminated the doctrine of fundamental breach in Canadian contract law, which doctrine previously barred a party that substantially breaches its contract from protection by an exclusion clause. Second, it introduced a new test to determine whether an exclusion clause should be enforced. That test requires a court to determine whether:
(i) the clause is applicable to the issue in contention;
(ii) the clause was unconscionable when the contract was made; and
(iii) there is any overriding public policy consideration that warrants not enforcing an otherwise valid exclusion clause.
The legal and commercial communities were abuzz with speculation as to how Tercon would affect contract law. In the construction industry, given the particular importance of exclusion clauses, there was uncertainty as to how Tercon would impact the tension between freedom of contract and the ability to hold others liable for unsatisfactory performance.
Nearly five years later, how has Tercon shifted Canadian courts’ approach to exclusion clauses? The short answer is that courts have largely preserved parties’ freedom to contract as they please, within some limits. Below, we briefly address what has become of the doctrine of fundamental breach and how each element of the Tercon test has been treated by other courts since the Supreme Court of Canada’s decision.
Fundamental Breach
In Tercon, the Supreme Court of Canada eliminated the doctrine of fundamental breach. Nevertheless, outside the realm of exclusion clauses, fundamental breach according to some courts remains “alive and well as an available remedy in contract law.” However, this is not universally the case, with some courts loosely citing Tercon to justify their reluctance to support fundamental breach in contexts not involving exclusion clauses.
For example, earlier this year, an Ontario court determined that “entire agreement” clauses – clauses that preclude any previous or varying terms from being included in a final written contract – should be subject to the Tercon test as well. The bottom line is that, while the doctrine of fundamental breach is no longer applicable to exclusion clauses, it may be available in other areas of contract interpretation, although the Tercon notion is creeping into other cases.
Applicability of Exclusion Clauses
In Tercon, when a construction bidder sued for damages arising from the selection of another bidder who violated bidding rules, the Supreme Court of Canada held that a clause disclaiming liability for any damages arising from participation in the bidding did not apply.
The interpretive approach taken was very narrow, although in accordance with the accepted notion that exclusion clauses should be narrowly construed. Since then, courts have continued to engage in a strict analysis as to whether or not an exclusion clause applies and have continued using usual methods of interpreting contracts to determine whether an exclusion clause covers the issue at hand.
As the Supreme Court of Canada instructed in Tercon, courts must consider exclusion clauses in light of other wording in the contract, the purpose of the contract, and the parties’ intentions.
Exclusion Clause Unconscionability
The second aspect of the Tercon test strikes down a clause if it is unconscionable. Courts have since Tercon, interpreted unconscionability using the test of unconscionability that has been used for decades.
Unconscionability is not frequently found. This does not mean that an exclusion clause will not be found unconscionable – courts still look to the fairness of an agreement and the relative bargaining power of each party in determining whether a contract should be upheld – however, the determination that an exclusion clause is unconscionable remains unusal post-Tercon.
Public Policy Considerations
Courts have rejected few exclusion clauses on the ground of some “overriding public policy”. The Supreme Court of Canada held in Tercon that this power should “rarely be exercised,” and this has certainly been the case.
Even in situations where one party has been significantly disadvantaged by another party, courts have usually declined to veto explicit contractual provisions limiting liability. Only when parties act reprehensibly, knowingly, or recklessly, do courts use this discretionary power.
Conclusion
Five years later, Tercon continues to be frequently applied. By abolishing fundamental breach for exclusion clauses and replacing it with a new test that provides “narrow exceptions” to exclusion clauses, Tercon has created a more systematic approach to the analysis of exclusion clauses, and a new discipline on the courts.
David Tupper is a partner at Blake, Cassels & Graydon LLP. He practices in litigation, and has significant trial, arbitration, and mediation experience. The focus of his practice includes construction law, insurance and securities matters, and he has provided advice on literally dozens of incidents at all stages of their existence. He would like to acknowledge the contribution of Zain Jinnah (summer student) for this article.
