Enforceability of Exclusion Clauses: Two Cases of Interest

Practical Law Canada Legal Update 6-624-0109 (Approx. 6 pages)

Enforceability of Exclusion Clauses: Two Cases of Interest

by Practical Law Canada Commercial Transactions

Introduction

Two recent decisions by the Ontario Court of Appeal and the Alberta Provincial Court support the enforcement of exclusion clauses as a means of limiting the liability of a supplier or service provider. Both provide useful insights into the risks associated with such clauses, and circumstances in which they might not be enforced.

Background

One of the most important contractual provisions for a seller, supplier or service provider is the exclusion clause (also known as a limitation of liability or exemption clause).

The exclusion clause operates to exclude or cap the liability of a party for direct and indirect damages. For the seller (whether a product seller or a service provider), an exclusion clause reduces the risk that its liability will exceed the amount of fees received. As such, the exclusion clause is one of the principal tools available to counsel to allocate risk between buyer and seller.

Because of the significant implications of an exclusion clause, the party drafting such a provision must be careful to use clear and precise language.

Suhaag Jewellers Ltd. v. Alarm Factory Inc.,

In Suhaag Jewellers Ltd. v. Alarm Factory Inc., 2015 CarswellOnt 8530 (Ont. S.C.J.), the Ontario Superior Court of Justice applies the three-part analysis set out by the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 CarswellBC 296 (S.C.C.) in determining the enforceability of an exclusion clause. The Ontario Court of Appeal upheld the judgment of the lower court on January 6, 2016, in Suhaag Jewellers Ltd. v. Alarm Factory Inc., 2016 CarswellOnt 203 (Ont. C.A.).

The Facts

Alarm Factory entered into an agreement with Suhaag Jewellers in 2004 to provide security and alarm monitoring services. In August 2012, Suhaag Jewellers claimed jewelry had been stolen from its premises, and that the alarm system provided by Alarm Factory had failed. It initiated a claim against Alarm Factory, seeking damages. Suhaag had not insured its premises to cover property loss in the event of a robbery.

While there was some dispute as to the ability of the principal of Suhaag Jewellers to read English, and which provisions were discussed by the parties, Suhaag Jewellers did not dispute the validity of the contract as a whole, instead focusing on the validity of the exclusion clause.

The contract was Alarm Factory's standard service agreement: a pre-printed, single page, double-sided, legal size document in English. The exclusion clause (Clause 2), was located in a box at the very bottom of the front page, and included:

A statement noting the possibility of a system failure:
"Both the Customer and The Alarm Factory Inc. recognize that no matter how good the system is or how carefully it is installed and serviced the possibility of failure still exists."
Recognition that Alarm Factory was not acting as insurer of Suhaag Jewellers:
"In respect to this the Customer and The Alarm Factory Inc. agree that The Alarm Factory Inc. is not an insurer. The annual Customer payment is for rental/monitoring and service only, and must not be construed as an insurance premium."
A recommendation that Suhaag Jewellers obtain insurance to cover any property loss or damage:
"It is The Alarm Factory Inc.'s recommendation that the Customer obtain a separate insurance policy to cover personal injury, property loss or damage in this regard."
Traditional language stating that Alarm Factory would not be liable for losses arising from the provision of products and services under the contract.

Following the filing of its Statement of Defence, Alarm Factory moved for summary judgment, arguing that the plaintiff's claim was barred by virtue of the terms and scope of the exclusion clause.

Analysis of the Court

The motion judge applied the three-part analysis set out by the Supreme Court of Canada in Tercon:

Based upon ordinary contractual interpretation, does the exclusion clause apply to the factual circumstances established in evidence?
If the exclusion clause applies, was the clause unconscionable at the time the contract was entered into?
If the exclusion clause does apply, should the court nevertheless decline to enforce the clause because of an overriding public policy concern?

In addition, the court noted the decision of the Ontario Court of Appeal in Fraser Jewellers (1982) Ltd. v. Dominion Electric Protection Co., 1997 CarswellOnt 1894 (Ont. C.A.), a case which involved a similar set of facts.

The motion judge granted summary judgment in favour of the respondent, which judgment was upheld on appeal. In coming to his determination, the motion judge found that:

The exclusion clause was drafted in a straightforward manner, absent of legal jargon and using language understandable to a reasonable person.
The clause was not obscured, ambiguous or overly onerous.
Suhaag Jewellers was not induced to enter into the agreement by a misrepresentation.
Suhaag Jewellers had the benefit of Alarm Factory's services for eight years without incident.

Implications

The Suhaag Jewellers decision serves as a useful example of the application of Tercon to exclusion clauses.

The decision also serves as a good reminder for counsel to:

Use clear and precise language when drafting an exclusion clause.
Ensure clients never assume that the failure to read a contract means they are not bound by it.

Norseman Inc. v. Petrie

In Norseman Inc. v. Petrie, 2015 CarswellAlta 2317 (Alta. Prov. Ct.), the court enforced an exclusion clause relating to Norseman's supply of a utility structure to Petrie.

The Facts

Norseman sells tent structures consisting of metal frames with fabric covers. Two types are available: engineered structures, which are designed specifically for the customer's site by professional engineers; and non-engineered structures, which are standardized utility structures. Petrie entered into a contract with Norseman for the purchase of a non-engineered tent structure, signing back the sales quote provided by Norseman.

The sales quote included a statement that the customer's signature served as acceptance of the company's standard terms and conditions, which were e-mailed together with Norseman's quote. The terms and conditions included the following clauses:

"Warranties: Norseman shall provide its Standard Warranty ("Standard Warranty") for each structure purchased pursuant to this accepted quote. A copy of the Standard Warranty has been delivered to the customer, the receipt of which is hereby acknowledged by the customer who further acknowledges and agrees that the Standard Warranty is accepted by it in lieu of all implied warranties as to quality, material, and workmanship or fitness for any particular purpose."

"Risk and Insurance: The customer shall be responsible for and shall pay the costs of insuring the structure(s) and equipment against all risks to their full replacement value from and after the time of delivery thereof until payment in full of the total price, with loss payable endorsed in favour of Norseman."

Norseman's Standard Warranty does not cover natural hazards, including but not limited to environmental loads, such as snow and ice. In addition, a disclaimer label was attached to the structure, indicating the roof and sides must be kept clear of snow. A copy of the standard warranty was not delivered, however, until a later date (over a month after execution of the sales quote by Petrie).

Petrie took steps to keep the structure clear from snow after installation, however he failed to make arrangements for someone to do so while he was on vacation. As a result, just over one month after delivery, the structure collapsed due to snow accumulation. Petrie had not insured the structure or its contents.

Norseman brought an action against Petrie for the outstanding balance on the purchase price. Petrie asserted a right to rescission and brought a counterclaim for recovery of his deposit and damages caused to equipment and vehicles in the collapse.

Analysis of the Court

The court granted judgment in favour of Norseman and dismissed Petrie's counterclaims, including claims that statements on Norseman's website constituted collateral warranties and Norseman's personnel were negligent in their installation of the structure.

The court upheld the exclusionary clause as contained in the terms and conditions, noting that Petrie was familiar with contracts as a result of his work, and Norseman took all reasonable steps to draw his attention to the terms and conditions. As such, the court ruled that the contract negated the application of the Alberta Sale of Goods Act, R.S.A. 2000, c. S-2.

It should be noted that the court refused to permit Norseman to rely on its Standard Warranty, as it was not supplied to Petrie until more than a month after the deal was signed. Nonetheless, the court held that Petrie was aware of the limitations regarding the structure, and had accepted same.

Implications

Norseman's late delivery of the Standard Warranty resulted in the court refusing to apply it. As a result, it was left to rely on the exclusion clause in the terms and conditions. This is a good example of why all relevant terms, including any warranty terms, should be delivered at the time of (and ideally as a part of) the original contract.

The same holds true for disclaimer labels on a product (in this case, the structure). The practice of including a disclaimer on a product is useful and, in some cases, a legal requirement. Ideally, however, all such disclaimers should also be summarized in the documents comprising the original contract.

A Note on Insurance

Though not the focus of either case, it should be noted that the Alarm Factory terms and conditions expressly recommended that Suhaag Jewellers obtain insurance to cover property loss, and the Norseman terms and conditions required Petrie to insure the structure until payment in full to Norseman. In both cases, had insurance been obtained, the litigation would (presumably) have been avoided.

The insurance aspect of these cases serves as a good reminder that contractual provisions recommending or requiring a party to obtain insurance should be flagged in order that clients:

Understand the risks underlying such a provision (in other words, that the client may suffer a loss which the seller/supplier/service provider will not cover).
Make the appropriate arrangements to obtain such insurance.

Further Information

For more information on exclusion clauses, see:

End of Document

Also Found In

Resource ID 6-624-0109

Published on 01-Mar-2016

Resource Type Legal update: archive

Jurisdiction

Canada (Common Law)