Think Twice, Draft Once: Consequential And Special Damages In Exclusion Clauses

• Published date: 23 May 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Contracts and Commercial Law, Arbitration & Dispute Resolution, Court Procedure, Professional Negligence
• Law Firm: McMillan LLP
• Author: Mr Jeffrey Levine and Madeline Klimek (Student-at-Law)

Commercial agreements commonly include a provision for a customer's waiver of, or limitation on the right to pursue, consequential or special damages. Since such provisions are nearly ubiquitous, they may not routinely attract the attention of in-house counsel or others responsible for settling the terms of a business's contract with a service provider or other supplier. These exclusion clauses do, however, warrant real focus and attention because they may have a material impact on damages that may be recovered by the customer should the counterparty fall short on its commitments under the contract, or wrong the customer in some other way over the course of the contractual relationship.

Common language for exclusion of damages clauses

Exclusion of damages clauses appear in any number of forms. They are designed to allocate risk. As the Court of Appeal for Ontario explained in Chuang v. Toyota Canada Inc., a beneficiary of an exclusion clause "contracts out of the obligation that would normally follow from the breach of the contract and places [at least some aspect of] the risk of the breach on the other party to the contract. The extent to which the risk of breach is reallocated to the non-breaching party will depend on the language of the specific exclusion clause considered in the context of the entire agreement."¹ Here are three examples:

1. Neither party will be responsible or held liable for any consequential, indirect or special losses or damages.²
2. In no event shall the seller be liable for any incidental consequential or special damages.³
3. In the event of the termination, [Party X] shall not be liable for any losses, damages and/or expenses of any kind whatsoever, suffered or incurred by you directly or indirectly.⁴

It is essential for those negotiating commercial agreements incorporating provisions like these to have a strong understanding of what each of the terms "consequential," "indirect," "special losses or damages", "incidental" and "direct" means in the context of risk allocation.

Types of damages and their recovery under Canadian contract law and in tort

Fundamentally, damages are available to a party suffering from a breach of contract to put the party, so far as money can do, in the position the party would have been in had their rights been respected. The victim of a tort is entitled to damages that revert the victim to the position that they were in before suffering the wrong. As a starting point, damages are recoverable where they...