Appeal Judgments: 1 Allowed
Civil Law: Non-liability Clauses
6362222 Canada inc. v. Prelco inc., 2019 QCCA 1457, 2021 SCC 39 (38904)
"6362222 Canada inc. (“Createch”) is a consulting firm specialized in performance improvement and in the implementation of integrated management systems. Prelco inc. is a manufacturing company that makes and transforms flat glass. In 2008, Prelco asked Createch for advice regarding its computer systems. A draft contract prepared by Createch under which it was to supply software and professional services in order to implement an integrated management system at Prelco was then submitted to Prelco. Prelco asked for no changes to the proposed general conditions, which included provisions concerning the parties’ general responsibilities. One of the provisions, cl. 7, entitled [translation] “Limited Liability”, stipulated that Createch’s liability to Prelco for damages that could be attributed to any cause whatsoever would be limited to amounts paid to Createch under the contract and that if such damages resulted from the delivery of unsatisfactory services, Createch’s liability would be limited to the amount of any fees paid in relation to the unsatisfactory services. A further stipulation was that Createch could 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 contract. The parties signed the contract in April 2008.
When the system was implemented, numerous problems arose, and Prelco decided to terminate its contractual relationship with Createch in the spring of 2010. Another firm was then engaged to make the integrated management system functional. Prelco brought an action against Createch for $6,246,648.94 in damages for the reimbursement of an overpayment, costs for restoring the system, claims from customers, and loss of profits. Createch in turn filed a cross‑application for $331,134.42, the unpaid balance for the project.
The Superior Court granted Prelco’s application and ordered Createch to pay Prelco $2,203,400 in damages. It also granted Createch’s cross‑application. It concluded that cl. 7 of the contract was inoperative on the basis of the doctrine of breach of a fundamental obligation, according to which an exoneration clause or limitation of liability clause is without effect if it relates to the very essence of an obligation. The court found that Createch, having misunderstood the scale and complexity of Prelco’s operations, had committed a fault in its initial choice as to the approach to take in implementing the management system and had as a result breached its fundamental obligation. The Court of Appeal dismissed Createch’s appeal, which concerned the limitation of liability clause, and Prelco’s cross‑appeal, which concerned the calculation of damages and the amount representing lost sales."
The SCC (9:0) allowed the appeal.
Chief Justice Wagner and Justice Kasirer wrote as follows (at paras. 2-4, 36-38, 54-56, 70-71, 77, 85-86, 103-104):
"In this case, Createch breached its fundamental obligation under the contract, namely to inquire into Prelco’s specific operating needs and requirements and to propose an approach to implementing an integrated management system that would be capable of satisfying them. The trial judge concluded that Createch could not rely on the clause in question in order to limit its liability for material injury it had caused to Prelco. The Court of Appeal confirmed that conclusion, explaining that the doctrine accepted by the trial judge exists in Quebec law and that it applied in this case (2019 QCCA 1457).
There are two possible legal bases for the existence of the doctrine and for applying it to this case, and they do not have the same justification. The first is that a non‑liability clause relating to a fundamental obligation is inoperative if it is contrary to a rule of public order that limits freedom of contract. The second is that a non‑liability clause is inoperative if it releases the debtor from all obligations to the creditor, because the clause thereby deprives the creditor’s correlative obligation of its cause and is therefore incompatible with the very existence of the fundamental obligation flowing from the contract as a synallagmatic act. These two bases — public order and absence of an objective cause of the obligation — are central to the dispute between the parties.
Although the Court of Appeal was right to refer to public order and absence of a cause in support of its analysis of the validity of the clause at issue, we nonetheless conclude that the appeal should be allowed. Respectfully stated, neither of the legal bases for the doctrine suffices to negate the non‑liability clause to which the parties freely consented in the case at bar, as neither public order nor the non‑existence of the obligation can be successfully argued in this appeal.
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For the reasons that follow, and with respect, we are of the view that the clause should be found to be valid despite the breach of a fundamental obligation alleged against Createch. First, clauses like this one are permitted by the Code, and none of the circumstances in which the legislature has provided that such a clause would be invalid on the basis of public order — what is known as “legislative” or “formal” public order — apply in this case. Although the general law does allow for the evolution of the concept of public order through judicial action — what is known as “judicial” or “virtual” public order — there is every reason to believe that the scheme of the Code excludes such an innovation for the clause at issue here (on the distinction between legislative public order and judicial public order, see Lluelles and Moore, at No. 1905). Second, it is true that certain clauses, such as a no obligation clause (clause de non‑obligation) that negates or excludes all of the debtor’s obligations, can have the effect of depriving an obligation of its cause and impairing its validity. However, a non‑liability clause does not by its nature have the effect of negating obligations. It is noteworthy that there are authors who argue that an exoneration clause can in some cases be likened to a no obligation clause that deprives the obligation of its cause if the effect of the clause is not only to exclude damages claims, but also to release the debtor from any obligation to the creditor. This position certainly does not lack a theoretical basis, but it is not exempt from criticism either. In any event, as we will see, it does not apply in this case, because that is not the effect of the non‑liability clause at issue here.
We propose to consider the various arguments raised by the parties with respect to the two possible legal bases for the doctrine of breach of a fundamental obligation in two steps: (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.
It is not disputed that the doctrine of breach of a fundamental obligation applies in Quebec positive law, in relation to consumer contracts and contracts of adhesion in particular as is expressly provided for in art. 1437 C.C.Q. In specific contexts in which one or the other of these types of contracts is involved, the legislature has departed from the principle of autonomy of the will in order to neutralize “abusive” clauses that are excessively and unreasonably detrimental to the other party, a consumer or adhering party. Article 1437 para. 2 C.C.Q. characterizes as abusive a clause which so departs from the fundamental obligations that it changes the nature of the contract. However, this appeal is instead concerned with determining the scope of the doctrine in a context other than that of consumer contracts, in relation to a contract whose clauses were negotiated freely and could accordingly be the subject of mutual concessions by the parties.
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We accept Createch’s view that this permissive approach in Quebec law to the validity of a non‑liability clause where there is a breach of a fundamental obligation is to some extent echoed in this Court’s decisions in cases originating in the common law provinces. Createch points in particular to how the courts have treated the analogous concept, the doctrine of “fundamental breach”, a judge‑made criterion that was formerly used as a substantive rule to be applied in order to declare that a non‑liability clause was inoperative (Tercon, at para. 106, citing Karsales (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936 (C.A.)). Developments in the common law are of course not determinative of our analysis, given that any answer to the question raised in this appeal must be based on the principles of Quebec civil law (see, e.g., ABB Inc. v. Domtar Inc., 2007 SCC 50, [2007] 3 S.C.R. 461, at para. 85). We would add that the Court of Appeal was right to suggest that, where the sources of the law are concerned, the civil law doctrine of breach of a fundamental obligation has a history of its own that is shaped by Quebec’s legislation, jurisprudence and academic commentary and is not dictated by sources from other jurisdictions (paras. 24‑25). Nevertheless, this consideration of the common law remains relevant to Quebec law for the purpose of determining how the civil law doctrine gives way to freedom of contract, while at the same time abiding by principles whose purpose is to protect vulnerable parties.
As long ago as 1989, in Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, Dickson C.J. had referred to the principle drawn from the academic commentary that not all exclusion clauses are unreasonable, and stressed that the common law doctrine of fundamental breach must take this reality into account. Dickson C.J. noted that in the commercial context, such clauses “are negotiated as part of the general contract” (p. 461) and that they can therefore reflect gains or concessions that sophisticated parties considered fair in the circumstances. Rather than systematically attacking such clauses, he wrote, “there is much to be gained by addressing directly the protection of the weak from over‑reaching by the strong” (p. 462). In Tercon, the Court laid “to rest” the generalized application of this common law doctrine of fundamental breach (paras. 62 and 81). Binnie J., writing for the Court on this point, broke the new analytical approach for non‑liability clauses down into three distinct stages: (1) the clause must be interpreted in order to determine whether it applies to the circumstances established in evidence; (2) it must be asked whether “the . . . clause was unconscionable at the time the contract was made, ‘as might arise from situations of unequal bargaining power between the parties’”; and (3) if the clause is held to be applicable and valid, it must be asked whether it is nonetheless inoperative “because of the existence of an overriding public policy” (paras. 122‑23, quoting Hunter, at p. 462; see also J. D. McCamus, The Law of Contracts (3rd ed. 2020), at pp. 893‑94). Thus, to repeat the principle stated in Hunter, “[e]xplicitly addressing concerns of unconscionability and inequality of bargaining power allows the courts to focus expressly on the real grounds for refusing to give force to a contractual term said to have been agreed to by the parties” (p. 462).
While we will go no further in attempting to reconcile the different approaches of the two traditions, it thus follows that at common law, as in civil law, there is a concern with specific situations of abuse and contractual imbalance as well as with other cases that are contrary to public order, or are matters of “public policy”, but at the same time an acceptance that a non‑liability clause in a freely negotiated contract can be a fair solution having regard to the context of the negotiations. It can therefore be said that neither of the two legal traditions has a rule of general application that totally prohibits non‑liability clauses relating to fundamental obligations in contracts between sophisticated parties (see S. Grammond, “La règle sur les clauses abusives sous l’éclairage du droit comparé” (2010), 51 C. de D. 83, at p. 109).
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In conclusion on this point, given the Code’s silence in this regard, the basis drawn from the cases and academic commentary that Prelco proposes in support of the existence of a rule of public order of general application that would neutralize a non‑liability clause affecting a fundamental obligation is too unsettled to be accepted. Everything suggests that the legislature deliberately chose not to include such a mandatory rule to regulate such clauses in the Civil Code of Québec, preferring to leave it to sophisticated parties to themselves manage the risks of nonperformance, and that it would be inappropriate in the circumstances to do so in their place. As we explained above, it can be concluded that the civil law does not lack other resources for dealing with situations that are truly contrary to public order (Lluelles and Moore, at Nos. 2969‑77; see also Cossette‑Lefebvre, at No. 41).
In coming to its conclusion, the Court of Appeal relied on a second basis: reciprocity of obligations and total absence of cause. This basis is distinct from public order. In the Court of Appeal’s view, allowing a debtor to rely on a non‑liability clause in order to avoid responsibility for his or her breach of a fundamental obligation is contrary to the idea that the debtor’s reciprocal prestation is owed to the creditor, without which the contractual obligation is deprived of its cause.
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The crux of the issue in this appeal is therefore as follows: Does a non‑liability clause relating to the fundamental obligation of a contract have the effect of depriving the obligation of its cause? Are there circumstances in which a non‑liability clause is akin to a no obligation clause that does not meet the requirement of art. 1371 C.C.Q.?
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In light of the foregoing, we are of the opinion that it is not necessary to address the question in the context of this appeal. Neither of these positions is without merit. It would therefore be more prudent in the circumstances of this case to refrain from resolving the disagreement in the abstract without taking account of practical difficulties that could arise in the future.
Thus, art. 1371 C.C.Q. applies to contract clauses that negate or exclude all of the debtor’s obligations and, in so doing, deprive the correlative obligation of its cause. Where a contract includes such clauses, it can be said that the reciprocal nature of the contractual relationship is called into question (arts. 1371, 1378 para. 1, 1380 para. 1, 1381 para. 1 and 1458 C.C.Q.). To apply a more exacting criterion would amount to annulling or revising a contract on assessing the equivalence rather than the existence of the debtor’s prestation and, as a result, to indirectly introducing the concept of lesion, which is narrowly delimited in the Code.
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In summary, given that neither of the bases for the doctrine of breach of a fundamental obligation applies and that none of the respondent’s arguments are accepted, it is our view that the trial judge and the Court of Appeal erred in law in finding that the limitation of liability clause in the Contract was inoperative. That clause is not ambiguous, and the trial judge could not annul it. The will of the parties had to be respected. Nor could the concept of cause of an obligation justify the decision of the courts below in this case.
For these reasons, the appeal is allowed and the judgment of the Quebec Court of Appeal is set aside in part, as is the trial judge’s decision regarding the award against Createch on Prelco’s heads of claim for claims from customers, loss of profits on sales made and loss of profits on sales lost. Createch is entitled to its costs throughout."
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