Supreme Court of Canada Upholds the Applicability of a Non-liability Clause under Québec Law

On October 15, 2021, the Supreme Court of Canada (the Supreme Court) issued its decision in 6362222 Canada inc. v. Prelco inc., 2021 SCC 39, finding that, under the Civil Code of Québec (the Code), the doctrine of fundamental breach did not render a non-liability clause (i.e., a limitation of liability clause) inoperative. 

In 6362222 Canada inc. v. Prelco inc., 6362222 Canada inc. (Createch) was engaged by Prelco inc. (Prelco) to implement an integrated management system. In connection with this project, Createch prepared an agreement (the Contract), and Prelco made no changes to the general conditions. After the Contract was signed and once the system was implemented, numerous problems arose as Createch did not implement the system correctly.  Due to recurring problems, Prelco terminated the Contract, and engaged another service provider who resolved the problems with the system.  Prelco then brought an action against Createch for $6,246,648.94 in damages. In response, Createch filed a cross-application for the unpaid balance of the project.

At issue for the courts was the validity of the non-liability clause found in the Contract, which: (a) limited Createch’s liability to the fees paid by Prelco to Createch under the Contract, and (b) excluded “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 Agreement unless such damages result from gross negligence or wilful misconduct on Createch’s part.”

At the trial level, the trial judge found that:

1. The problems with the system were attributable to an erroneous approach adopted by Createch at the beginning the project;
2. Createch’s conduct “did not show gross recklessness, gross carelessness or gross negligence”, and its “mistake could not be characterized as an intentional fault”; and
3. The Contract was negotiated between sophisticated parties and was not subject to consumer protection legislation.

The trial judge determined that the non-liability clause was “inoperative, because Createch had breached its fundamental obligation” and awarded Prelco $1,872,266 in damages (which was the net amount after the trial judge granted Createch’s cross- application for $331,134 in unpaid fees).  The trial judge’s decision was reaffirmed on appeal.

The Supreme Court set aside, in part, the decision of the trial judge and the Québec Court of Appeal and found that the non-liability clause “should be found to be valid despite the breach of a fundamental obligation alleged against Createch.” In accepting the findings of the trial judge (as outlined in (1) – (3) above), the Supreme Court determined that:

1. The Code does not prohibit non-liability clauses “relating to fundamental obligations in contracts between sophisticated parties”;
2. There is no authority that establishes a breach of a fundamental obligation “as a separate category of fault, one that is more serious than or qualitatively different from a simple fault”; and
3. The non-liability clause was not ambiguous.

Ultimately, the Supreme Court limited Createch’s liability to the amount of the fees paid by Prelco, and set aside 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.”

Summary By: Olalekan (Wole) Akinremi