Limitation of Liability (LOL)

When you're responding to federal RFPs, you'll encounter clauses that cap how much financial exposure the contractor accepts for things going wrong. These provisions protect suppliers from unlimited liability while still holding them accountable for their work. The government has to balance protecting Crown interests against keeping competitions attractive enough that qualified firms will actually bid.

How It Works

The Government of Canada previously operated under the Policy on Decision Making in Limiting Contractor Liability in Crown Procurement Contracts, which was rescinded on May 13, 2022. Before that rescission, the policy established four distinct Models intended to encompass all federal procurement situations subject to the Government Contract Regulations and Contracting Policies. Here's the thing: except for procurement under Model 3, Treasury Board approval was required for all decisions dealing with contractor third-party liabilities.

These clauses typically exclude indirect, consequential, punitive, and exemplary damages while capping the maximum liability amount. You might see caps expressed as multiples of contract value—say, two times the total contract price—or as fixed dollar amounts. Before finalizing these terms, the government requires risk reviews that involve financial, technical, legal, and program experts working through the scenarios together. Your proposal needs to explicitly acknowledge and accept whatever liability framework appears in the solicitation documents, and you'll often need to demonstrate adequate insurance coverage to back up those limits.

Different procuring entities handle this differently. PSPC tends to use standardized clauses across similar contract types, while departments like DND or SSC may have specialized requirements tied to their operational risks. The Government of Canada Supply Manual provides the current framework for how contracting authorities should approach these provisions, though specific application varies by circumstance and contract complexity.

Key Considerations

• The liability cap works both ways—it limits what you pay, but it also defines the government's expectations about worst-case scenarios. A $10 million cap on a $500K contract signals they're worried about significant third-party exposure.

• Insurance requirements and liability limits must align. If the cap is $5 million, expect to show proof of coverage at that level. Shopping for that insurance after you win the contract creates unnecessary stress and potential standing offer complications.

• Professional liability versus general liability matters here. IT services contracts typically need errors and omissions coverage, while construction or facilities work requires different insurance products entirely.

• Even with rescission of the formal policy in 2022, the underlying principles about risk allocation and Treasury Board oversight haven't disappeared—they've just been folded into broader contracting policy frameworks.

Related Terms

Indemnification, Insurance Requirements, General Terms and Conditions, Risk Allocation

Sources

• Government of Canada Supply Manual - Treasury Board of Canada Secretariat

• Policy on Decision Making in Limiting Contractor Liability in Crown Procurement Contracts (rescinded May 13, 2022) - Treasury Board of Canada Secretariat

• Limitation of Contractor Liability Training Manual - Treasury Board of Canada Secretariat

Before you sign anything, have your legal and insurance advisors review the liability provisions alongside your actual coverage. What looks reasonable in a solicitation document can become expensive when you're trying to secure the required policies.