Contractor Liability

Contractor liability is a contractor's legal and financial responsibility for losses, damages, claims or other risks that arise from work performed under a government contract. In Canadian Crown procurement, the term describes who pays when something goes wrong, whether the loss falls on the government or on an outside party.

Federal policy states that contractors are responsible for managing risks under their control and generally keep financial responsibility for losses resulting from their contractual work, particularly third-party claims, as set out in the Treasury Board policy framework. The concept appears in federal policy, in standard acquisition clauses and in individual contracts.

How Treasury Board policy frames contractor liability

The Treasury Board's Directive on the Management of Procurement governs when the Government of Canada may limit contractor liability, indemnify a contractor, or leave liability to the general law. It replaced the former Policy on Decision Making in Limiting Contractor Liability in Crown Procurement Contracts, as shown in the Treasury Board publication record.

The approach is risk-based. Federal contracts should state that each party is responsible for risks under its control and for risks it can manage or mitigate, according to the 2026 directive. Before a department seeks to limit contractor liability or provide indemnification, the 2025 directive requires a risk assessment and consultation with relevant stakeholders, including legal services.

Related terms in liability clauses

• First-party liability: liability for losses suffered directly by the contracting government.
• Third-party liability: liability for claims by persons or organizations other than the contracting parties.
• Indemnification: a contractual obligation to compensate or protect another party against specified losses or claims.
• Limitation of liability: a contractual cap or restriction on the contractor's responsibility.
• Liquidated damages: pre-established damages payable when specified contractual failures occur.

A federal contract may also contain no limitation-of-liability or indemnification clause at all. In that case, liability is determined under applicable common or civil law, as the 2023 directive explains.

Liability in standard clauses and PSPC contracts

Government of Canada Standard Acquisition Clauses and Conditions state that the contractor is liable for damage caused by the contractor, its employees, subcontractors or agents to Canada or to a third party. The standard clauses document sets out this wording.

Operational contracts show how the concept works in practice. The terms of the PSPC solutions-based informatics professional services supply arrangement state that the contractor is not liable except as specified in the contract or in provisions establishing liquidated damages, while also identifying circumstances in which the contractor is fully liable for specified damages. The same terms require commercial general liability insurance of at least $2 million per accident or occurrence and in the annual aggregate, unless the contract provides otherwise. Both points appear in the PSPC arrangement terms.

The directive authorizes Public Services and Procurement Canada and Shared Services Canada to negotiate first- and third-party contractor liability in specified circumstances, according to the 2022 directive.

Defence procurement and contractor liability

Defence procurement receives special treatment. Under the current directive, the Defence Investment Agency may, subject to approval by the Secretary of State (Defence Procurement), limit or accept first- and third-party contractor liability or transfer risk in specified circumstances. The 2026 directive states this authority.

What contractor liability means for a supplier bidding on Canadian public contracts

Read the solicitation and the resulting contract for liability, indemnification, insurance, damage and liquidated-damages clauses before you bid. Expect to carry the risks assigned to you, especially those under your control.

• Obtain and maintain the liability insurance the solicitation or contract requires.
• Manage your employees, subcontractors and agents closely, because standard clauses can make you liable for damage they cause.
• Seek clarification or negotiate only where the procurement permits it. Federal policy treats limitations of liability and indemnification as controlled, risk-based decisions, not automatic supplier entitlements.