Exculpatory Clauses

• Author: John D. Mccamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 749-779

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 li ability, such as return of the purchase 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 part y in a written agreement that, for whatever reason,

is unlikely to be re ad by the 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

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various techniques for effecting some degree of judicial control over

the use of exculpatory clauses.

In this chapter, we examine the development of the doctrine of

so-called fundamental breach that has been the principal, but not the

exclusive means, for achieving this objective. Although controversy

continues as to the precise nature of the doctrine, it is widely accepted

that it is, for the most part at least, an aspect of the law of contract

interpretation. The basic idea underlying the doctrine of fundamental

breach is that there may be breaches of contract that are so severe that

exclusion clauses, however drafted, should be either narrowly inter-

preted or otherwi se conf‌i ned by the courts in such a way a s to withhold

the protection of the particular clause in such circumstances. 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 Denning played a prominent role. Over the next few decades, an

extended debate between the Court of Appeal and the House of Lords

concerning the nature of and proper role of the doctrine unfolded. The

view advanced by Lord Denning and the Court of Appeal was that the

doctrine held that in circumstances of a fundamental breach of con-

tract, an exculpatory c lause would not be permitted to protect the party

in breach from liabilit y on the basis of a “r ule of law” to this ef fect. 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

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 diff‌i culties

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 certai n doctrines w ith 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 effect control over the effects of exculpatory clauses. As

we have seen,1 the rules relating to the incorporation of written terms

in agreements have developed in such a way as to reject incorpora-

1 See Chapter 6, sect ion C.