Exculpatory Clauses

• Author: John D. McCamus
• Pages: 796-834

796

CHAPTER 20

EXCULPATORY CLAUSES

A. INTRODUCTION

The use of exculpatory clauses in written agreements is a pervasive

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 assumed. Other clauses

may impose strictures on the manner in which losses resulting from

breach are to be claimed by imposing, for example, a short period of

notice within which claims are to be advanced. Exculpatory clauses

are referred to by a variety of labels, such as disclaimers, limitation 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 party or the other, they

perform a valuable function. On the other hand, where they have been

inserted by one party 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 that party and lead to what may be considered to be harsh

and unjust consequences. Such problems are most likely to arise, 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 lauses797

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 that has been the principal, but not the exclusive

means for achieving this objective. Although controversy as to the doc-

trine’s precise nature has persisted for several decades, 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 essentially vanished from the English 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 Canadian version of the doctrine, thereby bringing

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 doctrine 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 doctrine 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 middle 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 extended

debate between the Court of Appeal and the House of Lords concern-

ing the nature of and proper role of the doctrine unfolded. The view

advanced by Lord Denning and the Court of Appeal was that the doc-

trine held that in circumstances of a fundamental breach of contract,

an exculpatory clause would not be permitted to protect the party in

breach from liability on the basis of a “rule of law” to this effect. The

view advanced by the House of Lords was that the proper approach

to the judicial control of exculpatory clauses is merely one of narrow

1Tercon Contractors Ltd. v. British Columbia (Transportation a nd Highways), 2010

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 clauses against the interests of those relying upon

them. Unsurprisingly, 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 doctrine. As a preliminary matter, however,

it is useful to identif y and distinguish certain doct rines with which the

doctrine of fundamental breach may be confused.

B.RELATED 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 has been applied in the context of both signed agreements

and unsigned documents forming the basis of a contractual relation-

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 doctrine of fun-

damental breach. The effect of the two doctrines is, however, quite dis-

tinct. If the rules of incorporation 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 that an

otherwise enforceable clause does not protect the party in breach from

liability for a fundamental breach of contract.

Two further devices that may have the effect of controlling reliance

on exculpatory clauses arise in the context of the parol evidence rule.5

That rule precludes reliance on prior representations or undertakings

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

4See Chapter 6, Sect ion C. Compare Delaney v. Cascade River Holidays Ltd. (1983),

44 B.C.L.R. 24 (C.A.).

5See Chapter 6(D).