Limitation of Liability Clauses in RFx Documents

The procurement was completed, a contract was awarded, and the municipality moved on. Months later, a bidder who had been trying unsuccessfully to contact the RFQ contact person for the results finally got through. The supplier wanted to know who won. The internal contact had never seen this bidder’s bid.

After some digging, they discovered that the emailed submission had actually been received by the municipality’s IT system but had been redirected to a quarantine account. The bid was never opened.

And, as luck would have it, it was the lowest compliant bid. Not surprisingly, a demand letter from a lawyer followed.

The bidder alleged that the municipality had breached its Contract A obligations and was entitled to a few hundred thousands of dollars in lost profits. Fortunately for the municipality, the RFQ contained a limitation of liability clause.

Because litigation is not my area of practice, I brought in a commercial litigator from a national law firm who had been recommended as someone familiar with public procurement law. When I explained the situation in front of my client and the value of the limitation of liability clause in the RFQ, the litigation lawyer essentially said: “Oh, those clauses aren’t really enforceable.” That surprised me because I’ve been keeping an eye on this for the last 10 years and my understanding, which I confirmed after this meeting, is that Canadian procurement law tells a very different story. This is what prompted me to write this article.

Courts Have Frequently Enforced These Clauses

It’s true that courts are not fans of limitation of liability clauses as they deny a plaintiff compensation for what is usually a wrong committed against them. For this reason, it’s true that no limitation of liability clause is guaranteed to be enforceable and courts do sometimes find ways around them. That said, in the procurement context, Canadian courts have generally and repeatedly upheld limitation and exclusion clauses when they are properly drafted. Here are a few examples.

2708266 Ontario Inc. v. City of Toronto (2023)

This is a particularly noteworthy case. The court found that the City had breached its Contract A obligations during the procurement process. Despite that finding, the court still enforced the limitation of liability clause and restricted the bidder’s recovery in accordance with the contractual terms agreed to in the procurement document.

Mega Reporting Inc. v. Yukon (Government) (2018)

In this case, the Yukon Court of Appeal enforced a limitation of liability clause contained in a government procurement process. Even though the bidder challenged the fairness of the procurement, the court upheld the contractual allocation of risk that the parties had agreed to when participating in the process.

Rankin Construction Inc. v. Ontario (2014)

The Ontario Court of Appeal recognized that limitation of liability provisions contained in procurement documents form part of the Contract A relationship and can limit or bar claims arising from the procurement process.

Tercon Contractors Ltd. v. British Columbia (2010)

Tercon is often cited as the case where an exclusion clause failed. That’s true but only partly. The majority of the Supreme Court did not refuse to enforce the clause because exclusion clauses are inherently invalid. Instead, the majority concluded that the particular clause before the court did not apply to the conduct in question. In fact, 4 Supreme Court judges would have enforced the clause entirely. The real lesson from Tercon is not that limitation or exclusion clauses don’t work.

Is Limiting Exposure for Breaches of Fairness Actually a Good Thing?

When I first read the decision in Mega Reporting, I have to admit I was not a fan and hoped this would be overturned by a higher court. Like many procurement lawyers at the time, I was concerned about the idea that a public-sector organization could effectively contract out of its Contract A responsibilities by hiding behind a limitation of liability clause. After all, isn’t Contract A supposed to hold public buyers to standards of fairness, integrity, and transparency? Does it now mean public entities can simply ignore those obligations by hiding behind limitation clauses?

Over time, I’ve come to a different view. I now think the courts have largely gotten this right, both as a matter of contract law and public policy.

Let’s take the example I started with. The issue wasn’t bad faith. It was an unfortunate administrative failure involving an email quarantine system. Could better controls have prevented it? Was it arguably negligent? You could say so. But should taxpayers be exposed to hundreds of thousands of dollars in damages because of an innocent mistake? I’m not convinced they should be and that allowing plaintiffs broad rights of compensation when inadvertent mistakes are made undermines the value for money that a public procurement process is supposed to ensure. I’m not sure it’s a good thing for the taxpayer.

Different story if the underlying conduct involved bad faith or deliberate misconduct. In such cases, I suspect a court would have a much harder time enforcing a limitation clause.

Why This Matters

If you’re using a binding RFx process, a properly drafted limitation of liability clause can be one of the most important risk-management provisions in your procurement documents.

Will it prevent a lawsuit from being filed? Probably not. But it can dramatically change the economics of litigation. A bidder who learns that recovery is capped at a nominal amount may think twice before investing significant resources into a lawsuit. Even if litigation proceeds, the difference between an enforceable limitation clause and no clause at all could be the difference between a six-figure damages award and a nominal recovery.

The Takeaway

Canadian courts have repeatedly demonstrated a willingness to enforce properly drafted limitation and exclusion clauses in procurement documents. If a lawyer tells you that limitation of liability clauses in procurement documents are generally unenforceable, ask which cases they are relying on. If they can’t point to any, it may be worth seeking a second opinion, or another lawyer!