Tell them early, tell them often

originally published in the Nov 2009 issue of Insurancewest, November 2009

It is a common misperception that contractual limitations of liability for breaches of contract or negligence are difficult to enforce. The truth is that they can be enforceable if appropriate steps are taken to ensure that early and effective notice of these clauses is provided.  

Limitation of liability clauses are most often found in consumer contracts whereby the potential damages that can reasonably flow from a breach of contract, or a finding of negligence, can easily be more than the economic benefits resulting from the transaction.   There are two common types of contractual limitations of liability. The first type is unsigned contracts, commonly referred to as "ticket" cases. A good example is a ski hill where a written notice of a limitation of liability is on the back of your lift pass and on signs where you buy your lift pass. The second type is written contracts signed between two individuals.  

The Supreme Court of Canada has repeatedly emphasized that there is nothing inherently offensive about a contractual limitation of liability, and that it ought to be enforced in the absence of a "fundamental breach." Even when it is a "fundamental breach," the limitation of liability will still be enforced, provided it is not un conscionable (according to one judge) or unfair, unreasonable or otherwise contrary to public policy (according to another judge).  

The most easily understandable definition of "fundamental breach" appears to be where there is no value whatsoever in the work provided and as a result a party is entitled to treat the contract as at an end. This is not necessarily an easy test to satisfy, and if there is no "fundamental breach" then the limitation of liability is to be enforced.  

Presuming that a "fundamental breach" test can be satisfied, the question then becomes whether enforcing the limitation of liability would be unconscionable or unfair. Most often, this question will turn on whether the party seeking to enforce the contractual limitation of liability adequately brought that limitation to the attention of the person against whom the contractual term will be enforced.  

If someone wishes to effectively enforce a contractual limitation of liability it is critical that they deal with the notice issue as soon as possible in the transaction. This means that in ticket-type situations there is adequate signage and, if possible, documented verbal explanations.  

In signed contract situations it is important that the individual signing the contract is aware the contract impacts their legal rights, has the limitation of liability brought specifically to their attention, either verbally or by requiring initials at the operative paragraph of the written contract, and has an opportunity to ask questions or back out of the transaction before completion of the work in question. It is also helpful if there are written or verbal reminders of a limitation of liability throughout the transaction.  

If these steps are taken, the likelihood of an enforceable contractual limitation of liability will increase significantly and risk will be effectively transferred.  

Nigel L. Trevethan is a partner with Harper Grey LLP and chair of its Insurance Law Practice Group. Aaron Atkinson is an articled student at the firm. Questions about this topic should be directed to Mr. Trevethan at 604-895-2821 or by e-mail at ntrevethan@harpergrey.com.