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Deceit and the enforceability of Exclusion Clauses
Posted in Commercial

It is common for contracts to contain exclusion clauses limiting the liability of one party in the event of a breach.  Professional service providers often seek to limit their liability to the fees paid to them.  Movers limit their exposure to the value of the goods transported.  Contracts for the sale of land generally cap a purchaser’s remedy for breach to the return of the deposit.  When, if ever, do courts disregard exclusion clauses?

Not so long ago, the Supreme Court of Canada set out the general legal principles on the enforceability of exclusion clauses.  As a general rule, exclusion clauses are enforceable unless it can be shown they are “unconscionable” at the time the contract was signed or are otherwise contrary to “public policy.”

The first question, therefore, becomes what is “unconscionable” and how do you prove it?  To establish unconscionability, you must prove two things: first, an inequality of position between the contracting parties; and, second, the existence of a “substantial unfairness in the bargain obtained by the stronger person.”

The second question is, if an exclusion clause is not “unconscionable,” is it contrary to “an overriding public policy.”

One instance where exclusion clauses will likely be found unenforceable is if there has been deceit.  Deceit is a knowingly making a false representation for the purpose of inducing another to act to their detriment.  The false statement does not need to be the sole inducement but must be a material factor in the subsequent conduct of the innocent party.  Is deceitful behavior sufficient to vitiate an exclusion clause?

The answer is: it depends.  Fortunately, the B.C. Court of Appeal recently gave reasons that, arguably, makes it easier to avoid exclusion clauses in cases involving deceit.  The case also provides a good example of occasions when corporate principals are precluded from hiding behind a corporate veil to avoid personal liability for their conduct.

Roy v. Kretschmer (a case with a tortured judicial history) is an illustration of the type of deceitful conduct that will vitiate an exclusion clause.  In this case, the conduct was post-contractual deceit by the principal of a real estate development company from whom the Roys thought they purchased some land.  The Roys were to get their lot once the subdivision was registered.  Matters were delayed.  Mr. Kretschmer kept telling the Roys this was because the authorities would not approve the subdivision.  The Roys did not learn the truth until a year later.  In fact, the Roys’ lot had been sold to another person who sued Mr. Kretschmer to get title to the land.  The delay in conveying the lot to the Roys was because of this, not because of any dispute over the subdivision.

For the Roys, this meant they did not get their lot and, given the rising real estate market, could not now afford to buy another property.  The Roys sued the development company for breach of contract and Mr. Kretschmer for deceit.

At trial, Mr. Kretschmer was found liable to the Roys in deceit and his company was found liable in breach of contract.  However, the trial judge held that the exclusion clause was not “unconscionable”.  Further, the trial judge found Mr. Krestschmer’s conduct, though deceitful, was not the type of “criminal behavior or  . . . egregious fraud” necessary to find an overriding public policy reason.  As a result, the exclusion clause remained valid and the Roys were limited to recovering their deposit, despite Mr. Krestschmer’s deceit.

The Court of Appeal disagreed.  Like the trial judge, they held Mr. Kretschmer’s conduct was unconscionable.  However, they refused to enforce the exclusion clause on the grounds of public policy.  As the agent of his company, Mr. Kretschmer’s deceitful conduct was also that of his company.  In order to vitiate an exclusion clause on public policy grounds, the conduct need not “approach criminal behavior or egregious fraud.”  The trial judge had set the bar too high.  The Court of Appeal found that it was contrary to public policy to allow a vendor to “hide behind the exclusion clause to avoid the effect of fraudulent conduct that masked its breach of contract and caused injury.”

Based on this case, any post-contract conduct that is fraudulent and deceives another, causing injury, will likely be sufficient to vitiate an exclusion clause.  Though the decision in Roy v. Kretschmer came out just before the Supreme Court of Canada’s ruling in Bhasin v. Hrynew, it is a good example of the newly articulated duty of honesty in contractual performance created by the Bhasin decision.  Deceit in the performance of a contract will expose you to a claim in damages that an exclusion clause cannot prevent.

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This blog is authored by members of the Litigation and Dispute Resolution Department. We follow new and interesting issues emerging in the legal and business communities. The wide range of experience among the members of our litigation group will provide a diverse and insightful examination of current legal trends and topics. Our goal is to provide a source of valuable information and insight on a wide variety of matters for our readers.

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