Limitation of Liability (LOL)

Limitation of Liability (LOL) means establishing by contract a predetermined financial cap on a contractor's responsibility for loss or damage. The cap may be higher or lower than the liability that would otherwise apply under law. CanadaBuys uses this definition in its guidance on contractor liability.

In Canadian federal procurement, the cap is a fixed maximum that the buyer and supplier agree to in the contract. The amount may be the contract price at the time of the damage, or another predetermined amount selected for the commodity grouping that applies to the requirement. A limitation of liability is a deliberate way for Canada to allocate risk between itself and the contractor.

How the liability cap amount is set

CanadaBuys identifies two possible bases for the applicable liability amount. The first is the contract price at the time the damage occurs. The second is a predetermined dollar amount established by the commodity grouping. The buyer selects the amount that fits the requirement, so the cap is not a single figure that applies across all federal contracts.

When limitation of liability applies to a requirement, additional clauses may be included in the contract to address it. These clauses are where a supplier will find the specific terms of the cap, so they deserve close reading before a bid is submitted. The CanadaBuys buyer's guide sets out these planning considerations.

The risk review behind a federal liability limit

A federal buyer cannot simply decide to cap a contractor's liability. Treasury Board guidance states that the decision to limit contractor liability, or to indemnify a contractor, can be made only after a risk review or assessment. The Treasury Board implementation guide sets out this requirement.

CanadaBuys adds that buyers and clients must analyze the procurement risks and demonstrate that the proposed limitation adequately protects Canada before limiting a contractor's liability. In practice, a cap in a solicitation reflects an assessment of the risks of that specific procurement.

Treasury Board policy on risk allocation

The Treasury Board's Directive on the Management of Procurement contains mandatory procedures for limitation of contractor liability and indemnification in contracts. Contracting authorities, in consultation with business owners, must confirm that contracts include standard risk-allocation language.

Treasury Board guidance states that this standard language should provide that each party is responsible for the risks under its control and accepts responsibility for the risks it can manage or mitigate. The related Treasury Board policy instrument supports the same principle.

Limitation of liability compared with related clauses

A liability cap is distinct from several other risk tools that appear in the same contracts:

• Indemnification: one party agrees to compensate another for specified losses or claims.
• Insurance requirements: these may be set alongside a liability cap but do not themselves establish the cap.
• Exclusions of liability: for example, exclusions for consequential or indirect loss.
• Overall or individual liability caps: alternative ways of structuring liability limits in defence contracts.

Other governments treat the cap as a risk decision too. Australia's Defence procurement policy requires officials to conduct a risk assessment of a proposed limitation of liability, including its implications and the potential exposure for the Commonwealth, as set out in the Defence Procurement Policy Manual.

What a liability cap means for a bidding supplier

Read the solicitation and the resulting contract for the liability cap before you bid. Check its scope, any exceptions, and how the amount is calculated. Confirm whether the cap is tied to the contract price at the time of damage or to a predetermined amount.

Review the indemnification obligations, the insurance requirements and any standard clauses incorporated by reference. These terms work together with the cap to determine your total exposure. Once the contract is awarded, you must comply with its specified risk-allocation and liability provisions.