Exculpatory Clauses
Author | John D. McCamus |
Pages | 796-834 |
796
CHAP TER 20
EXCULPATORY CLAUSES
A. I NTRODUC TION
The use of exculpatory clauses in w ritten agreements is a per vasive
practice in both commercial and consumer transactions. Exculpatory
clauses are used to limit the potential liability of a party for breach of
contract. Such clauses may completely preclude liability for breaches
of certain stipulated kinds. Others may concede liability but impose a
limitation on the extent of liabi lity, such as return of the purchas e price
or a numerical cap on the extent of liability a ssumed. Other clauses
may impose strictures on the manner in which losses result ing from
breach are to be claimed by imposing, for example, a short period of
notice within which clai ms are to be advanced. Exculpatory clauses
are referred to by a variety of labels, such a s disclaimers, li mitation of
liability clauses and exclusion, exceptions or exemption clauses. When
such clauses are used deliberately by the parties to consciously allo-
cate the risk of certain kinds of losses to one par ty or the other, they
perform a valuable function. On the other h and, where they have been
inserted by one part y in a written agreement that, for whatever reason,
is unlikely to be read by t he other party, the use of such provisions may
surprise t hat party and lead to wh at may be considered to be harsh
and unjust consequences. Such problems are most likely to ar ise, of
course, in the context of transactions involving the supply of goods
and services to consumers on the basis of standard forms drafted by
the supplier. Understandably, then, the courts have attempted to devise
Exculpatory C lauses 797
various techniques for effecting some degree of judicia l control over the
use of exculpatory clauses.
In this chapter, we examine the development of the doctrine of
fundamental breach t hat has been the principal, but not the exclusive
means for achieving th is objective. Although controversy as to the doc-
trine’s precise nature h as persisted for several decade s, it is widely ac-
cepted that the doctrine is, in part at least, an aspect of the law of
contract interpretation. As we shall see, this doctrine emerged in Eng-
lish law but has now essent ially vanished from the Engl ish legal land-
scape. It al so has had an un settled c areer in Ca nadian l aw. In its rece nt
and leading decision in Tercon Contractors Ltd.v. British Colum bia (Min-
istry of Transportation),1 however, the Supreme Court of Canada pre-
served a unique Canad ian version of the doctrine, thereby br inging
long-awaited stability to this important aspect of contract law. On the
same occasion, though, the Court pronounced that it was time to “shut
the coffin on the jargon associated w ith ‘fundamental breach’”2 and “lay
this doctr ine to rest.”3 The Court did not, however, articulate a label
for the new Canadian version of the doctrine (a terminological point
we shall return to at the conclusion of this chapter). In the meantime,
we will continue to refer to the doctrine by its traditional label in this
account of the emergence and current status of the doctr ine in English
and Canadian law.
The basic idea underlying the doctrine of fundamental breach is
that there may be breaches of contract that are so severe that exclu-
sion clauses, however drafted, should be either narrowly interpreted
or otherwise confined by the courts in such a way as to withhold the
prote ction of t he part icula r claus e in such circum stance s. The doc trine
of fundamental breach emerged in the m iddle of the last century from
a series of decisions by the English Court of Appeal in which Lord Den-
ning played a prominent role. Over the next few decades, an ex tended
debate between the Court of Appeal and the House of Lords concern-
ing the nature of and proper role of the doctrine un folded. The view
advanced by Lord Denning and the Court of Appeal wa s that the doc-
trine held that in circumstance s of a fundamental breach of contract,
an exculpatory clause would not be permitted to protect the par ty in
breach from liability on the basi s of a “rule of law” to this effect. The
view advanced by the House of Lords was th at the proper approach
to the judicial control of exculpatory claus es is merely one of narrow
SCC 4 [Tercon Contractors].
2Ibid. at para. 82, Cromwel l J.
3Ibid. at para. 62, Bin nie J.
THE LAW OF CONTR ACTS798
construction of the clause s against the interest s of those relying upon
them. Unsurprisi ngly, the views of the House of Lords were to prevail.
The course of the debate, however, reveals a number of the difficulties
involved in fashioning a doctrine of this kind. Accordingly, the leading
English cases w ill be reviewed here before turning to an account of the
Canadian reception of the doctr ine. As a prelimina ry matter, however,
it is useful to identif y and distinguish certain doct rines with which the
doctrine of fundament al breach may be confused.
B. REL ATED DOCTRINES
The doctrine of fundamental breach is not the only device devised by
the courts to affect control over the effects of exculpatory clauses. As
we have seen,4 the rules relating to the incorporation of written terms
in agreements have developed in such a way as to reject incorporation
of unfair exculpatory cl auses in circumstances where t he affected party
has not had adequate notice of the inclusion of the clause in the w ritten
document. The requirement of special notice of unduly harsh exculpa-
tory clauses ha s been applied in the context of both signed agreements
and unsigned documents formi ng the basis of a contractual rel ation-
ship. It is often the case that the party not in breach will want to rely
both on the rules relating to incorporation and on the doctri ne of fun-
damental breach. The effect of the two doctrines is, however, quite dis-
tinct. If the rules of incor poration apply to prevent inclusion of the
ter m in the agreem ent, th e provi sion shou ld, in t heory a t least , be of no
force and effect whatsoever. The doctrine of fundamental breach comes
into play, however, only i f the exculpatory clause is included within the
agreement and thus appears to be potentially capable of shielding the
party in breach from liability. If the doctrine applies, it holds th at an
otherwise enforceable clause does not protect the party in breach from
liability for a fundament al breach of contract.
Two further devices that may have the effect of controlling reliance
on exculpatory clauses ar ise in the context of the parol evidence rule.5
That rule precludes reliance on prior representations or underta kings
to supplement, vary, or contradict the terms of a written agreement
that is intended to be the full expression of the agreement between the
parties. There are a number of exceptions to t his rule, two of which are
4 See Chapter 6, Sect ion C. Compare Delaney v. Cascade River Holidays Ltd. (1983),
44 B.C.L.R. 24 (C.A.).
5 See Chapter 6(D).
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