Limitation of liability

In Canadian government procurement, limitation of liability means establishing by contract a predetermined financial cap to limit the responsibility of the contractor. That is the wording used in the Treasury Board's Policy on the Planning and Management of Investments. Once a cap is in the contract, the contractor's exposure for the covered liabilities stops at that ceiling.

The cap can apply to first-party liability, meaning losses suffered by Canada, to third-party liability, or to both, depending on the contract and the risk-allocation approach approved for it. The term sits within the wider task of dividing procurement risks between Canada and the contractor, and it changes the default position by placing a contractual ceiling on specified contractor responsibility.

The default position that a cap changes

Treasury Board policy starts from the position that the Crown is to be indemnified for first- and third-party liability that is properly the contractor's responsibility. A limitation of liability is therefore an exception to that starting point, not the baseline. Departments are directed to use standard legal language stating that each party is responsible for the risks under its control and accepts responsibility for the risks it can manage or mitigate. These requirements appear in the Treasury Board's procedures on planning and managing investments.

What buyers must show before limiting liability

CanadaBuys states that when a buyer limits contractor liability, the buyer and the client department must demonstrate that procurement risks were analyzed and that the limitation adequately protects Canada. The CanadaBuys guidance on contractor liability also explains how the cap is set. The applicable dollar amount may be based on the contract price when the damage occurs, or on a predetermined amount established for the relevant commodity grouping.

Departments must also assess which party controls or can mitigate each risk, consult legal services when required, and seek Treasury Board approval for specified limitations or indemnifications.

Approvals, defence procurement and standard commercial terms

Federal procedures distinguish between standard procurements, complex development products, services or construction contracts, and procurements subject to predetermined conditions, such as government-to-government arrangements or technical or intellectual-property requirements. Treasury Board approval is required in specified circumstances to limit first- and third-party contractor liability or to indemnify a contractor against risks under the contractor's control.

Two exceptions are set out in the same procedures:

• Low-risk, low-value purchases: where appropriate, departments may accept standard commercial limitation-of-liability terms for low-risk and low-dollar-value goods and services. Examples include subscriptions, software, mobile applications, cloud services and open-source software.
• Defence procurement: subject to approval by the Secretary of State (Defence Procurement), the Defence Investment Agency may limit or accept first- and third-party contractor liability, or assume a substantive transfer of risk under the contractor's control.

The former Standard Acquisition Clauses and Conditions Manual included a section titled "N. Limitation of Liability." The manual has not been maintained since June 2023, as noted on the CanadaBuys manual page.

What it means for a supplier bidding on Canadian public contracts

A supplier must comply with the liability allocation and cap stated in the solicitation and the resulting contract. The federal sources establish that these matters are controlled by the contract and by government risk-allocation procedures. They do not prescribe one universal supplier response, so the solicitation documents are the place to look.

Before submitting an offer, review the complete solicitation, the draft contract, the applicable standard clauses and conditions, the insurance provisions and any commodity-specific liability clause. Where a limitation-of-liability clause is incorporated, identify the following:

• the liabilities the cap covers
• the exclusions
• the cap amount or the method used to calculate it
• insurance requirements
• notice obligations
• any liabilities that remain uncapped

Because the cap may be tied to the contract price when damage occurs or to a predetermined amount for the commodity grouping, pricing and risk review should happen together. Raise questions about the clause during the solicitation's question period rather than after contract award.