Sunday, 11 December 2011

Unconscionability in Post-Tercon Analysis of Exclusion Clauses

In Roy v. 1216393 Ontario Inc., 2011 BCCA 500, the court confirmed that, in the wake of  Tercon Contractors Ltd. v. B.C., 2010 SCC 4, the fundamental breach doctrine is dead and the following three-step approach is applicable to liability exclusion clauses:
  1. interpret the contract to determine whether, as a matter of construction, the exclusion clause applies to the situation at hand;
  2. if it does apply, determine whether the clause was unconscionable at the time the contract was made; and
  3. if it was not unconscionable, determine if there is an overriding public policy against enforcing the particular clause that outweighs the very strong public interest in the enforcement of contracts.
Perhaps more importantly, the court also explained that, with the death of the fundamental breach doctrine, proof of unconscionability at the second stage of the inquiry requires proof of two elements:
  1. "inequality in the position of the parties arising out of some factor such as ignorance, need or distress of the weaker, which leaves him or her in the power of the stronger", and
  2. "substantial unfairness in the bargain obtained by the stronger person."
The court allowed the appeal on the basis that the trial judge only found the second element - unfair bargain, but did not consider the relative position of the parties.  Accordingly, the court sent the matter back for a new trial to fully apply the above approach.