Exclusion clause (Tercon test)

Buyers and sellers may meet exclusion wording in any term of a purchase agreement that limits what can be claimed after closing. The Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia, 2010 SCC 4, said the doctrine of fundamental breach should be laid to rest and set out an analysis for a party trying to escape an exclusion clause. A related clause is the consequential damages exclusion.

The three questions

• Interpretation: whether, as a matter of interpretation, the clause even applies to the circumstances. This depends on the parties’ intention as expressed in the contract.
• Unconscionability: whether the clause was unconscionable when the contract was made. In Uber v. Heller, the Court said this requires both an inequality of bargaining power and a resulting improvident bargain.
• Public policy: whether the Court should still refuse to enforce a valid, applicable clause because of an overriding public policy. Tercon puts the burden on the party seeking to avoid enforcement.

What to check

Read what the wording actually lists, since the first question turns on it. Ask your lawyer how the clause interacts with the indemnity. These are common-law rules; this entry does not describe Quebec’s civil law.