Limitation of Liability Clause
A limitation of liability clause is a contract term that caps or excludes the damages one party can recover from the other if the contract goes wrong, for example by limiting total liability to the fees paid in the previous 12 months or by excluding lost profits and consequential damages. Canadian courts generally enforce these clauses between businesses. They apply the three-step test from Tercon Contractors v. British Columbia, 2010 SCC 4: does the clause cover the claim on its wording, was it unconscionable when made, and does an overriding public policy outweigh enforcing it?
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Key Takeaways
- A limitation of liability clause caps total liability, excludes categories of loss such as lost profits, or shortens the time to sue; it limits rights rather than creating them.
- Canadian courts apply the Tercon test: whether the clause applies on its wording, whether it was unconscionable when made, and whether an overriding public policy outweighs enforcing it.
- Most disputes are decided on interpretation, so clear wording that names the losses excluded, including lost profits, matters more than strong-sounding language.
- Carve-outs for fraud, confidentiality, IP and data breaches, and whether indemnities sit inside or outside the cap, decide how much protection the clause really gives.
- Consumer contracts in Ontario are different: the Consumer Protection Act, 2002 overrides contrary terms and voids attempts to exclude implied warranties of quality.
What Is a Limitation of Liability Clause?
A limitation of liability clause sets the outer edge of what a party will pay if it breaches the contract or is otherwise liable to the other side. Courts and older contracts often call it an exclusion clause or an exculpatory clause. It usually has up to three parts:
- A cap. A maximum amount of total liability, such as the fees paid in the 12 months before the claim, a fixed dollar figure, or a multiple of the contract price.
- An exclusion of categories of loss. Typically indirect, consequential, special and punitive damages, and often lost profits, lost revenue and lost data.
- A time bar. A deadline for bringing claims that is shorter than the usual limitation period.
The clause does not create a right to be paid. It limits rights that would otherwise exist. That is the key difference from an indemnification clause, which creates an obligation to cover specified losses, and from a liquidated damages clause, which fixes in advance the amount payable for a particular breach.
A shorter time bar can be valid between businesses. Section 22 of Ontario's Limitations Act, 2002 lets the parties to a business agreement, meaning one in which no party is a consumer, vary or exclude the basic two-year limitation period; that entry covers the wording a contractual deadline needs.
How Courts Decide Whether It Applies: The Tercon Test
The leading Canadian case is Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4. British Columbia ran a closed request for proposals for a highway project, limited to six eligible bidders, with a clause saying no proponent would have any claim for compensation of any kind as a result of participating in the RFP. The Province then accepted a bid that was in substance from an ineligible joint venture.
All nine judges agreed that the old doctrine of fundamental breach should be laid to rest and replaced with a three-step analysis:
- Interpretation. Does the clause, read in light of the parties' intention as expressed in the contract, actually apply to the circumstances established in the evidence? If not, the analysis ends.
- Unconscionability. If it applies, was the clause unconscionable at the time the contract was made, for example because of unequal bargaining power?
- Public policy. If it is valid and applicable, should the court still refuse to enforce it because of an overriding public policy? The party resisting the clause must prove this, and it must outweigh the very strong public interest in enforcing contracts. Conduct approaching serious criminality or egregious fraud are the Court's examples.
The Court split 5–4 on step one. The majority held that the clause, read with the rest of the RFP, did not cover the Province considering a bid from a party that was never allowed to participate, and restored Tercon's damages award. The dissent would have enforced the clause as clear and unambiguous.
The practical lesson is that most disputes are decided at step one. Courts read the clause in its commercial context, and the majority said clear language is necessary to exclude liability for breaching such a basic requirement of the tendering process, particularly in public procurement. Vague or overbroad wording invites a narrow reading.
Caps, Exclusions and Carve-Outs
Most negotiation centres on four elements:
| Element | What it does | Common positions |
|---|---|---|
| General cap | Sets maximum total liability | Fees paid or payable in the prior 12 months; a fixed dollar amount; a multiple of annual fees |
| Excluded losses | Removes categories of damages entirely | Indirect, consequential, special and punitive damages; lost profits, revenue and data |
| Carve-outs | Losses outside the cap or exclusions | Fraud, wilful misconduct, gross negligence, breach of confidentiality, IP infringement indemnities, data breaches, unpaid fees |
| Super-cap | A higher separate cap for one risk | Often used for privacy and security breaches |
Two drafting traps recur.
"Consequential" has no single fixed meaning. Lost profits are sometimes direct damages, the natural result of the breach, rather than consequential ones. A party that wants lost profits excluded should list them expressly, and a party that wants them recoverable should say so.
A cap tied to fees paid can be close to zero early in the contract. A clause limiting liability to fees paid in the prior 12 months protects the supplier almost completely in month two. A floor, such as the greater of a fixed amount and 12 months of fees, fixes this.
In a business purchase, the same tools appear as caps, baskets and survival periods on indemnity claims for breach of representations and warranties. In any contract, check whether the indemnities sit inside or outside the general cap: a broad uncapped indemnity can make the cap meaningless.
When the Clause May Not Protect You
Consumer contracts. Ontario's Consumer Protection Act, 2002 says the rights it gives apply despite any agreement or waiver to the contrary, and voids any term that tries to negate or vary the implied and deemed conditions and warranties, including those of quality, in consumer agreements. A business selling to consumers cannot use a business-to-business style exclusion to take away those statutory rights. The Consumer Protection Act, 2023 will replace the 2002 Act but was not yet in force as of October 2026.
Sales of goods between businesses. The implied conditions in Ontario's Sale of Goods Act, such as fitness for purpose and merchantable quality, can be negatived or varied by express agreement under section 53, but the wording needs to be clear.
Standard form contracts. Unconscionability is a live argument when one side had no real ability to negotiate and the clause produces an improvident result. It rarely succeeds between commercial parties of similar sophistication who had the chance to take advice.
Clauses that never became part of the contract. Terms buried in an unsigned invoice, a website link or a document sent after the deal was made may not bind the other side at all.
In ongoing service relationships the clause usually lives in the master services agreement, and every statement of work inherits it. For technology deals, our SaaS agreement checklist covers how caps interact with service levels, data and insurance. For a quick triage of whether a contract in front of you needs review, see when to have a business contract reviewed.
Practical Example
Mariana Costa runs operations for a Mississauga freight brokerage. Her company signs a three-year master services agreement with an Oakville software vendor for its dispatch platform at $4,000 a month. The vendor's form limits liability to fees paid in the prior 12 months, excludes lost profits, lost revenue and consequential damages, and carves out data breaches, which carry a separate cap of three times annual fees.
Eight months in, a faulty update takes the platform down for four days. Mariana estimates $310,000 in lost bookings and $28,000 in overtime and temporary workarounds. The vendor points to the clause: lost bookings are lost revenue, which is excluded, and the cap is $32,000, the fees paid in the prior 12 months.
Mariana's lawyer reviews the clause under Tercon. The wording clearly covers an outage, both parties are established businesses that negotiated other terms, and nothing approaches the misconduct that would engage public policy. The vendor pays the $28,000 in direct costs, which fall within the cap, and nothing for lost bookings.
The cap was not what defeated the larger claim; the exclusion was. When the agreement comes up for renewal, the brokerage negotiates service credits for outages, a carve-out letting it recover lost revenue caused by an outage, and a floor of $150,000 on the cap. With those terms at signing, part of the $310,000 would have been recoverable.
Frequently Asked Questions
Are limitation of liability clauses enforceable in Canada?+
Generally yes, especially between businesses. Since the Supreme Court's 2010 decision in Tercon, a court asks whether the clause applies to the claim on its wording, whether it was unconscionable when the contract was made, and whether some overriding public policy outweighs enforcement. Clauses that are clearly drafted and agreed between commercial parties are usually upheld. Consumer contracts and some standard form contracts are treated more strictly.
Can you limit liability for negligence in a contract?+
Yes, a contract between businesses can limit or exclude liability for negligence, but courts expect the wording to be clear enough to show the parties meant to cover that kind of loss. If the language is ambiguous, a court may read it narrowly. Liability for fraud or deliberate wrongdoing is much harder to exclude, and most negotiated contracts carve those out expressly.
What is a typical liability cap in a service contract?+
A common starting point is the fees paid or payable over the previous 12 months, though caps also appear as fixed dollar amounts or multiples of annual fees. Customers often ask for a minimum floor, a higher cap for data and security breaches, and exclusions from the cap for confidentiality breaches and IP indemnities. The right number depends on the risk, the contract value and available insurance.
Do lost profits count as consequential damages?+
Not always. Lost profits can be direct damages when they flow naturally from the breach, such as a buyer losing resale profit on goods never delivered. Whether they fall inside an exclusion of consequential damages depends on the wording and the facts. To avoid an argument later, contracts should state expressly whether lost profits and lost revenue are excluded.
What is the difference between limitation of liability and indemnity?+
They pull in opposite directions. A limitation of liability clause reduces what one party can recover from the other, by capping the amount or excluding types of loss. An indemnity creates a promise to pay for specified losses, often including claims brought by third parties. Because the two interact, check whether each indemnity is subject to the cap. If it is not, a party can be exposed to far more than the cap suggests.
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