Limitation of liability clauses are a common feature of commercial agreements in Canada. Parties frequently include such provisions in an effort to allocate risk, often by excluding monetary liability for losses of certain types (e.g., consequential or indirect damages), while capping monetary liability for remaining losses to certain amounts (e.g., the price which the contract-breaker was paid under the contract). There is nothing inherently problematic about this, as Canadian courts recognize that "clauses limiting or excluding liability are negotiated as part of the general contract", and "[t]here are many valid reasons for contracting parties to use" them (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4).
Nevertheless, as with other areas in the law of contracts, the Supreme Court of Canada's decision in Bhasin v. Hrynew, 2014 SCC 71 raises questions about how far the ordinary paradigm applies where a party breaches a contractual duty of good faith. The general rule is that parties cannot "exclude" or "contract out" of mandatory good faith duties. But the contours of this rule remain unexplored, and uncertainty exists about whether it precludes parties from merely limiting their monetary liability when such duties are breached.
Against this backdrop, the recent decision of the California Supreme Court in New England Country Foods, LLC v. VanLaw Food Prods., Inc., Cal., No. S282968, 4/24/25 offers an interesting window into how other jurisdictions treat limitation of liability clauses where mandatory duties are breached. The Court inVanLawheld that a limitation of liability clause which purported to apply in cases of intentional wrongdoing was an invalid attempt to "exempt" a party from responsibility for its willful misconduct, contrary to s. 1668 of the California Civil Code. Although the case did not involve a claim for the breach of a contractual duty of good faith, but rather for intentional torts, it is notable for the equivalence the Court found between limitation of liability clauses and provisions that purport to exempt parties from legal duties.
Background: The Canadian Position
The enforceability of limitation of liability and other exemption clauses in good faith disputes is a complex issue, which is reviewed in detail in Chapter 7 of my book, Good Faith in Canadian Contract Law. By way of summary, the Supreme Court in Bhasin held that the common law duty of honest performance is a "mandatory" duty which "parties are not free to exclude", though it allowed that "parties should be free in some contexts to relax the requirements of the doctrine so long as they...
