6362222 Canada inc. Appellant v. Prelco inc., 2021 SCC 39

SUPREME COURT OF CANADA Citation: 6362222 Canada inc. v. Prelco inc., 2021 SCC 39 Appeal Heard: December 3, 2020 Judgment Rendered: October 15, 2021 Docket: 38904 Between: 6362222 Canada inc. Appellant and Prelco inc. Respondent Official English Translation Coram: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ. Joint Reasons for Judgment: (paras. 1 to 104) Wagner C.J. and Kasirer J. (Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe and Martin JJ. concurring) Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports .

6362222 Canada inc. Appellant v. Prelco inc. Respondent Indexed as: 6362222 Canada inc. v. Prelco inc. 2021 SCC 39 File No.: 38904. 2020: December 3; 2021: October 15.

Present: Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ. on appeal from the court of appeal of quebec Contract ⸺ Nonperformance ⸺ Non-liability clause ⸺ Doctrine of breach of fundamental obligation ⸺ Public order ⸺ Objective cause of obligation ⸺ Contract by mutual agreement including non-liability clause entered into between manufacturing company and consulting firm specialized in evaluation and implementation of integrated management computer systems ⸺ Action in damages brought by company against consulting firm for breach of its contractual obligations because of fault committed in implementing computer system ⸺ Whether doctrine of breach of fundamental obligation can render inoperative non-liability clause that was freely negotiated by legal persons ⸺ Civil Code of Québec , arts. 1371, 1437, 1474. 6362222 Canada inc. (“Createch”) is a consulting firm specialized in performance improvement and in the implementation of integrated management systems.

Prelco inc. is a manufacturing company that makes and transforms flat glass. In 2008, Prelco asked Createch for advice regarding its computer systems. A draft contract prepared by Createch under which it was to supply software and professional services in order to implement an integrated management system at Prelco was then submitted to Prelco. Prelco did not ask for any changes to the proposed general conditions, which included provisions concerning the parties’ general responsibilities.

One of the provisions, cl. 7, entitled [ translation ] “Limited Liability”, stipulated that Createch’s liability to Prelco for damages that could be attributed to any cause whatsoever would be limited to amounts paid to Createch under the contract and that if such damages resulted from the delivery of unsatisfactory services, Createch’s liability would be limited to the amount of any fees paid in relation to the unsatisfactory services.

A further stipulation was that Createch could not be held liable for any damages resulting from the loss of data, profits or revenue or from the use of products or for any other special, consequential or indirect damages relating to services and/or material provided pursuant to the contract. The parties signed the contract in April 2008. When the system was implemented, numerous problems arose, and Prelco decided to terminate its contractual relationship with Createch in the spring of 2010. Another firm was then engaged to make the integrated management system functional.

Prelco brought an action against Createch for $6,246,648.94 in damages for the reimbursement of an overpayment, costs for restoring the system, claims from customers, and loss of profits. Createch in turn filed a cross-application for $331,134.42, the unpaid balance for the project. The Superior Court granted Prelco’s application and ordered Createch to pay Prelco $2,203,400 in damages. It also granted Createch’s cross-application.

It concluded that cl. 7 of the contract was inoperative on the basis of the doctrine of breach of a fundamental obligation, according to which an exoneration clause or limitation of liability clause is without effect if it relates to the very essence of an obligation. The court found that Createch, having misunderstood the scale and complexity of Prelco’s operations, had committed a fault in its initial choice as to the approach to take in implementing the management system and had as a result breached its fundamental obligation.

The Court of Appeal dismissed Createch’s appeal, which concerned the limitation of liability clause, and Prelco’s cross-appeal, which concerned the calculation of damages and the amount representing lost sales. Held : The appeal should be allowed. The doctrine of breach of a fundamental obligation does not apply to the fault committed by Createch so as to negate cl. 7 of the contract. Neither of the possible legal bases for this doctrine — (

a) validity of the clause having regard to public order and (

b) validity of the clause having regard to the requirement relating to the cause of the obligation — applies in this case. The rule that non-liability clauses are valid in principle has been settled law since The Glengoil Steamship Co. v. Pilkington (1897), 1897 CanLII 77 (SCC) , 28 S.C.R. 146, and it was subsequently accepted in Quebec positive law. This rule derives from autonomy of the will and its corollary, freedom of contract, both of which are general principles of the general law of obligations in Quebec civil law.

However, the rule is limited by legislative and judicial public order, respect for which is set up in private law as a mandatory rule of general application on the basis of arts. 8 and 9 of the Civil Code of Québec (“ C.C.Q. ” ). Although art. 1474 C.C.Q. implicitly confirms the validity in principle of non-liability clauses, it sets limits in the name of public order of direction that necessitate the absolute nullity of incompatible clauses.

First of all, the first paragraph of art. 1474 C.C.Q. , by prohibiting non-liability clauses where there is gross or intentional fault, discourages recklessness, fraud, negligence and deliberate faults, including in contracts by mutual agreement. Next, the legislature made it clear in the second paragraph that, regardless of the seriousness of the fault and despite the principle of freedom of contract, no one may exclude or limit his or her liability for bodily or

moral injury. As for art. 1437 C.C.Q., it sets a limit that is of public order of protection, that is, one the purpose of which is to protect acontracting party who is presumed to be economically weaker. This

article expressly recognizes the application of the doctrine of breachof a fundamental obligation in Quebec civil law where there is an abusive contract clause, but limits it to consumer contracts (defined inart. 1384 C.C.Q.) and contracts of adhesion (art. 1379 C.C.Q.), which are characterized by an imbalance between the parties. A clausethat departs from the fundamental obligations of a contract to such an extent that it changes the nature of the contract is considered to beabusive, and therefore null.

Although the validity of a non-liability clause is also open to challenge in other cases specified by thelegislature in relation to nominate contracts, the Code provides for no rule of general application that falls under public order ofprotection, including one relating to a breach of a fundamental obligation. Public order does not have the effect, generally, of rendering a non-liability clause relating to a fundamental obligation in acontract by mutual agreement inoperative.

At the time of the reform of the Civil Code, the legislature spoke directly to the purpose of theconcept of public order and intervened to validate the use of non-liability clauses in cases to which art. 1437 C.C.Q. does not apply.Subject to the constraints provided for in art. 1474 C.C.Q., a person may exclude or limit his or her liability for material injury caused toanother through a fault that is neither intentional nor gross.

Everything suggests that the legislature deliberately chose not to include sucha mandatory rule to regulate such clauses in the Civil Code of Québec, preferring to leave it to sophisticated parties to themselves managethe risks of nonperformance. As for the second legal basis for the doctrine, total absence of cause, it stems from the requirement, spoken to in art. 1371C.C.Q., to the effect that it is of the essence of an obligation arising out of a juridical act that there be a cause which justifies itsexistence.

What is in question here is the concept of the objective cause, that is, the logical, impersonal and abstract reason that justifiesa party’s acceptance of his or her obligations, or the performance of the correlative obligation in the synallagmatic contract. Thus, somecontract clauses that deprive the correlative obligation of its cause within the meaning of art. 1371 C.C.Q. may affect the validity of theobligation, because the reciprocal nature of the contractual relationship is called into question.

This is true, for example, of certain noobligation clauses that exclude all prestations that would normally be owed by the debtor, with the result that the creditor’s obligationslack reciprocal prestations. Two competing views are advanced by authors on the question whether a non-liability clause relating to thefundamental obligation of a contract has the effect of depriving the obligation of its cause.

The first is that an exoneration clause orlimitation of liability clause cannot deprive the correlative obligation of its cause, as a debtor’s obligation does not cease to exist simplybecause a clause limits or excludes his or her liability in the event of nonperformance. Moreover, because art. 1474 para. 1 C.C.Q. bars adebtor from relying on a non-liability clause in a case of gross or intentional fault, the debtor cannot arbitrarily refuse to perform anobligation.

There are other authors who maintain that a non-liability clause that is akin to a no claims clause, one that deprives thecreditor of the obligation of any remedy to sanction nonperformance, can in fact deprive an obligation of its cause. The disagreementamong the authors is not in issue in this case. This is not a situation in which the counterprestation is insignificant, and even less one inwhich it is non-existent. The sanction for nonperformance of the fundamental obligation remains, and it cannot be said that theobligation is deprived of its objective cause.

It would therefore be more prudent to refrain from answering the question in relation to thedisagreement among the authors in the abstract without taking account of practical difficulties that could arise in the future. In this case, on the basis of the rule stated by the Court in Glengoil and reaffirmed under the auspices of the Civil Code ofQuébec, cl. 7 is valid and the parties were free to include it in their contract.

From the perspective of art. 1474 C.C.Q., Createch’s breachof an obligation of means was a simple fault and not a gross or intentional fault, one that caused material injury and not bodily or moralinjury. Furthermore, there is no authority for presenting breach of a fundamental obligation as a separate category of fault, one that ismore serious than or qualitatively different from a simple fault.

The clause on which Createch relies is in a contract by mutual agreementthat was negotiated by two sophisticated legal persons and not in a contract of adhesion or a consumer contract as under art. 1437 C.C.Q.The clause is not ambiguous, and the trial judge could not annul it. The will of the parties had to be respected. Clause 7 does not violateany rule of legislative or judicial public order, nor is there any specific rule relating to nominate contracts that applies to the facts of thiscase.

There is nothing in the case that would require the courts to intervene to protect a party who is weak or at a disadvantageeconomically. Nor could the concept of cause of an obligation justify the decision of the courts below in this case. Clause 7 is not a noobligation clause that would exclude the reciprocity of obligations, as Createch owed substantial obligations to Prelco, which Prelco doesnot deny. Regardless of whether the position of the authors in whose opinion a no claims clause can deprive an obligation of its causewere accepted, the clause at issue in this case could not be so characterized.

The first paragraph of the clause can be equated to anauthorization of specific performance by replacement. The clause permits Prelco both to keep the integrated management system and toobtain damages for unsatisfactory services, as well as to be compensated for necessary costs for specific performance by replacement.This clause excludes any reparation for loss of profits arising from a simple fault. Because Createch’s work was found to be useful, theclause barred a claim based on an overpayment for the services provided by Createch. There is therefore a cause.

Moreover, the clausedoes not exclude all sanctions, given that, from the moment the contract was formed, specific performance was possible, and indeedcontemplated, in the event of nonperformance. This contract is therefore not one that has no counterprestation whatsoever. The cause ofthe obligation does not permit a court to create a scheme for lesion between unprotected persons of full age; such a scheme has in factbeen rejected by the legislature. Cases Cited Referred to: Tercon Contractors Ltd. v.

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Pratte and Stéphane Richer , for the appellant. Catherine Cloutier and André Johnson , for the respondent.

English version of the judgment of the Court delivered by The Chief Justice and Kasirer J. — I. Introduction [1] This appeal raises the question whether a non-liability clause in a contract is valid in respect of a breach of afundamental obligation in Quebec civil law.

The Superior Court declared (2016 QCCS 4086), on the basis that an exoneration clause orlimitation of liability clause is without effect if it relates to the very essence of an obligation — the [translation] “doctrine of breach of afundamental obligation” — that a limitation of liability clause in a freely negotiated contract for services between the appellant, 6362222Canada inc. (“Createch”), and the respondent, Prelco inc., was inoperative. [2] In this case, Createch breached its fundamental obligation under the contract, namely to inquire into Prelco’sspecific operating needs and requirements and to propose an approach to implementing an integrated management system that would becapable of satisfying them.

The trial judge concluded that Createch could not rely on the clause in question in order to limit its liabilityfor material injury it had caused to Prelco. The Court of Appeal confirmed that conclusion, explaining that the doctrine accepted by thetrial judge exists in Quebec law and that it applied in this case (2019 QCCA 1457). [3] There are two possible legal bases for the existence of the doctrine and for applying it to this case, and they do nothave the same justification.

The first is that a non-liability clause relating to a fundamental obligation is inoperative if it is contrary to arule of public order that limits freedom of contract. The second is that a non-liability clause is inoperative if it releases the debtor from allobligations to the creditor, because the clause thereby deprives the creditor’s correlative obligation of its cause and is thereforeincompatible with the very existence of the fundamental obligation flowing from the contract as a synallagmatic act.

These two bases —public order and absence of an objective cause of the obligation — are central to the dispute between the parties. [4] Although the Court of Appeal was right to refer to public order and absence of a cause in support of its analysis ofthe validity of the clause at issue, we nonetheless conclude that the appeal should be allowed.

Respectfully stated, neither of the legalbases for the doctrine suffices to negate the non-liability clause to which the parties freely consented in the case at bar, as neither publicorder nor the non-existence of the obligation can be successfully argued in this appeal. [5] While it is true that the first basis for the doctrine does apply in certain specific situations provided for in the CivilCode of Québec (“C.C.Q.” or “Code”), public order does not have the effect, generally, of rendering a non-liability clause relating to afundamental obligation in a contract by mutual agreement inoperative.

The opposite conclusion would be contrary to the scheme of theCode. The legislature, by addressing clauses that are inconsistent with higher values it intentionally associated with public order, hasallowed sophisticated parties to agree to the allocation of risk in contexts to which the Code does not explicitly refer. As to the secondbasis, the clause at issue does not deprive the obligation of its objective cause. It is common ground that the prestation agreed to is duefrom the debtor, Createch, even if the sanctions for nonperformance of the agreement are undermined by the effect of the non-liabilityclause.

The creditor, Prelco, in fact concedes that it gave Createch a [translation] “chance to correct its errors and make specificperformance” (R.F., at para. 121). An effective sanction, namely specific performance and agreed damages for unsatisfactory services, isstill possible. This sanction reflects an obligation that has a cause — Createch’s contractual counterprestation — an obligation whoseexistence is not open to question. II. Background [6] The business relationship between Createch and Prelco began in 2007.

Createch is a consulting firm specialized inperformance improvement and in the implementation of integrated management systems. Prelco is a large manufacturing company thatmakes and transforms flat glass for various architectural and industrial uses. Its production operations are conducted in several plants ―all of them interconnected ― that are located in Rivière-du-Loup, in Montréal and in Edmundston, New Brunswick. [7] Prelco engaged Createch to improve the company’s business processes relating to customer service.

A number ofprojects for that purpose were carried out in 2007 and 2008, and all of them met Prelco’s expectations. While doing this work, Createchinformed Prelco that its computer systems were not particularly efficient, as they were composed of a large number of programs whosedatabases functioned autonomously. Prelco asked Createch’s advice on this. [8] Createch agreed to conduct a

summary analysis of the systems in question. Upon the completion of that analysis,Prelco invited Createch, in late February or early March 2008, to present a proposal for the supply of software and professional servicesin order to implement an integrated management system in its business. [9] A draft contract prepared by Createch in 2008 was thus submitted to Prelco. Negotiations then took place. Prelcodid not ask for any changes to the proposed general conditions (Sup.

Ct. reasons, at paras. 20-22 ), which included provisionsconcerning the parties’ general responsibilities. [10] According to the provisions in question, responsibility for [translation] “implementation and deliverables” was insome instances said to be “shared” by the parties, whereas in others it amounted, for Createch only, to a “limited” responsibility thatconsisted in providing “ad hoc support as well as advice” (joint sch., vol. I, at p. 244). Finally there were some tasks for which Prelcowas to be fully responsible.

The draft contract also included an estimate of the time each of the parties was to spend on the project. [11] The other clauses of the proposed general conditions included cl. 7 entitled [translation] “Limited Liability”, which iscentral to this case:

[ translation ] Createch’s liability to the client for damages that can be attributed to any cause whatsoever, regardless of the nature of the action, whether provided for in the agreement or delictual, shall be limited to amounts paid to Createch under the Agreement unless such damages result from gross negligence or wilful misconduct on Createch’s part. If such damages result from the delivery of unsatisfactory services, Createch’s liability shall be limited to the amount of any fees paid in relation to the said unsatisfactory services.

Createch may not be held liable for any damages resulting from the loss of data, profits or revenue or from the use of products or for any other special, consequential or indirect damages relating to services and/or material provided pursuant to the Agreement unless such damages result from gross negligence or wilful misconduct on Createch’s part. (joint sch., vol.

I, at p. 227) [ 12 ] There were nonetheless discussions about the sharing of risks relating to cost overruns for services, and these resulted in Createch accepting a reduced hourly rate of 50 percent for the “contingency of the project” portion. [ 13 ] In April 2008, the parties signed an agreement (“Contract”) for the implementation at Prelco of a Microsoft Dynamics NAV integrated management solution, a prestation whose estimated value was $650,574.

The amount payable to Createch was approximate, because a monthly billing method [ translation ] “on a time and materials basis in accordance with hours used and payable upon receipt of the invoice” was provided for (joint sch., vol. I, at p. 246). Clause 7 quoted above ultimately appeared verbatim in the Contract. [ 14 ] When the system was implemented, numerous problems arose: inconsistent invoices sent to customers, errors in putting orders into production, shipping delays, and inefficiency of the planning and production system, which was slow.

Faced with these recurring problems, Prelco terminated its contractual relationship with Createch in the spring of 2010 and then engaged another firm, Irisco, to make the integrated management system functional. After Irisco had resolved the problems, the integrated management system functioned properly. Prelco was able to use the system and to manage its production, although it did not benefit from all the expected advantages. [ 15 ] Prelco brought an action against Createch for $6,246,648.94 in damages.

This amount related to the reimbursement of an overpayment, costs for restoring the system, the reimbursement of claims from customers, and loss of profits. Createch in turn filed a cross-application for $331,134.42, the unpaid balance for the project. III. Judicial History A. Quebec Superior Court, 2016 QCCS 4086 (Ouellet J.) [ 16 ] The trial judge found that the integrated management system’s performance problems could be attributed to an erroneous approach adopted by Createch on beginning the project.

Rather than personalizing the NAV software, Createch should have integrated into it [ translation ] “proven programs that were available on the market” (para. 169). [ 17 ] In the trial judge’s view, because Createch’s conduct [ translation ] “did not show gross recklessness, gross carelessness or gross negligence”, this mistake could not be characterized as an intentional fault (para. 207).

He added that the “particular structure of the [C]ontract, [which required] extensive involvement of both the service provider and the client in implementing the . . . system”, meant that a gross fault could not be attributed to Createch (para. 208). [ 18 ] He also found that the Contract, having resulted from discussions between the parties, could not be characterized as a contract of adhesion. It was a synallagmatic contract ― more precisely a time and materials contract for services ― under which Createch had an obligation of means.

Having been negotiated by mutual agreement between sophisticated legal persons, the Contract was not subject to consumer protection legislation. [ 19 ] The limitation of liability clause in the Contract was nevertheless inoperative, because Createch had breached its fundamental obligation, that is, [ translation ] “to properly identify and propose management software and a development approach suited to Prelco’s situation such that the integrated management system would be fully operational” (paras. 213 and 220-25).

Having misunderstood “the scale and complexity of Prelco’s operations”, Createch had committed a fault in its initial choice as to the approach to take in implementing the management system and had as a result breached its fundamental obligation (para. 215).

Because of this erroneous initial choice, Createch had not understood that the system required indexes, which was a “fundamental error” whose effect had been to cause the system to freeze for several minutes when tables were being consulted (para. 225). [ 20 ] Citing certain academic commentary and judicial decisions in this regard, the trial judge explained that [ translation ] “there is now a view in our civil law that a non-liability clause becomes inoperative in the event of a breach of a fundamental obligation by the party who benefits from that clause” (para. 210).

He added, in a comment he himself described as being in obiter , that the obligation of good faith flowing from arts. 6, 7 and 1375 C.C.Q. could also serve as a basis for his conclusion that the doctrine applies to the facts of this case (para. 226). [ 21 ] The trial judge nevertheless found that liability for the damages claimed by Prelco could not lie completely with Createch, although the latter did bear the greatest share of that liability.

Prelco had had human resource problems and, like Createch, had minimized the risk related to its employees’ lack of training and preparation when they had jointly decided to launch the system. The trial judge therefore apportioned liability between them, ascribing 60 percent to Createch and 40 percent to Prelco. [ 22 ] Regarding Prelco’s claims, the trial judge began by rejecting the one for an overpayment of $1,567,325, finding that Prelco had not paid unnecessarily for the software and services provided by Createch.

After the work done by Irisco, he observed, [ translation ] “the NAV system functioned and was used by Prelco” (para. 233). If the items “software” and “maintenance” were excluded, he stated, Prelco had not shown “what portion of the $1,520,000 represented unnecessary work from which Prelco does not now benefit” ( ibid. ). However, the trial judge accepted Prelco’s claim for $79,200 for fees paid to Irisco. Because those fees resulted

from Createch’s error in its choice for the approach to implementation, he did not apportion liability. [23] As to the claims from customers and loss of profits on sales made and lost by Prelco, the trial judge apportionedliability and fixed the amounts payable to that company at $189,200 and $1,935,000 respectively. Because he had found that theintegrated management system functioned and was being used by Prelco, he rejected Prelco’s principal argument and granted Createch’scross-application. [24] The trial judge ultimately ordered Createch to pay Prelco $2,203,400 in damages.

However, because he was grantingCreatech’s cross-application in the amount of $331,134, he effected compensation between the two claims. The result of compensationwas that the amount Createch owed Prelco was $1,872,266. B. Quebec Court of Appeal, 2019 QCCA 1457 (Chamberland, Bélanger and Rancourt JJ.A.) [25] Createch appealed the Superior Court’s judgment. In Createch’s view, the trial judge had erred in finding that thelimitation of liability clause in the Contract was inoperative because it had breached a fundamental obligation.

Prelco initiated anincidental appeal, submitting that the trial judge had made several errors in calculating the damages related to its share of liability, thevalue of the services delivered by Createch and the amount representing lost sales. [26] The Court of Appeal dismissed Createch’s appeal, holding unanimously that the mere fact that a breach relates to afundamental obligation can suffice for the doctrine of breach of a fundamental obligation to neutralize an exoneration clause or limitationof liability clause. It concluded that the doctrine applies in a case such as the one before it.

The court began by noting that exonerationclauses and limitation of liability clauses relating to material injury caused to another are valid in Quebec civil law, but that, in the wordsof the first paragraph of art. 1474 C.C.Q., no one may rely on such a clause to exclude or limit his or her liability “for material injurycaused to another through an intentional or gross fault”. [27] Furthermore, the Court of Appeal did not accept Createch’s argument that the rejection of the common law doctrine of“fundamental breach” in Tercon Contractors Ltd. v.

British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69,barred Prelco’s claim. In the Court of Appeal’s view, the doctrine of breach of a fundamental obligation is not solely a common law rule,but is also a creation of the Quebec courts drawn from civil law commentary and jurisprudence. Tercon is therefore of no consequence inthe case at bar, because this means of neutralizing non-liability clauses has an independent legal basis that is proper to the civil law.

Nordoes this development represent [translation] “an isolated case of judicial creation” (C.A. reasons, at para. 25 ), as it brings tomind principles developed by this Court in other contexts, such as in National Bank of Canada (Canadian National Bank) v. Soucisse, (SCC), [1981] 2 S.C.R. 339, at pp. 359-63, and Montréal (Ville) v. Lonardi, 2018 SCC 29, [2018] 2 S.C.R. 103, atpara. 85. [28] The Court of Appeal noted that the Quebec courts and several authors have recognized that the doctrine applies in acommercial context such as this.

It referred to a number of principles to justify the existence of what it described as the [translation] “ruleof . . . fundamental obligation” for finding that the clause is invalid, including “commutative justice”, flexible application of gross fault,“reciprocity of obligations” and “total absence of cause of the obligation” (para. 39, citing D. Lluelles and B.

Moore, Droit desobligations (3rd ed. 2018), at No. 2980). [29] The Court of Appeal therefore concluded that the trial judge had not erred in finding that the non-liability clause wasinoperative for the purposes of art. 1438 C.C.Q., as the clause affected a fundamental obligation of the Contract (para. 41). The courtexplained that the question was whether the clause [translation] “drains the contract of its essential effect or paralyzes the fundamentalobligation” (para. 45).

To apply the clause in the instant case would, when all is said and done, amount to allowing Createch “to freeitself from its fundamental obligation and would strip the [C]ontract of its essential effect” (para. 49). The Court of Appeal dismissed theincidental appeal on the basis that the trial judge had made no palpable and overriding error with respect to the three grounds that wereraised. IV. Issue [30] The issue in this case is a question of law: Can Createch’s failure to perform a fundamental obligation of the Contractrender cl. 7 of this contract inoperative?

This question cannot be dissociated from the legal context of the case: Createch’s breach of anobligation of means was a simple fault and not a gross or intentional fault. This contractual fault caused material injury and not bodily ormoral injury. The clause on which Createch relies is in a contract by mutual agreement that was negotiated by two sophisticated legalpersons and not in a contract of adhesion or a consumer contract.

Does the doctrine of breach of a fundamental obligation — whichunquestionably forms part of Quebec law in certain legal contexts — apply to the fault committed by Createch so as to negate cl. 7 of theContract? [31] It bears noting that we will be using the generic term “non-liability clause” to refer to a clause “by which the partiesagree in advance to exclude or limit the debtor’s liability resulting from the non-performance of an obligation” (Private Law Dictionaryand Bilingual Lexicons (2nd ed. 1991), by P.-A. Crépeau, ed., at p. 288).

To distinguish a clause that excludes liability from one thatlimits it, we will use, for the former, “exoneration clause” and, for the latter, “limitation of liability clause”; where the distinctionbetween the two is of no consequence for our purposes, we will use the term “non-liability clause”. Although theoretically distinct, theseclauses are often dealt with together both in legislation and by judges and academic commentators (see, e.g., art. 1474 C.C.Q., and theexplanations in J. E. C. Brierley and R. A. Macdonald, eds., Quebec Civil Law: An Introduction to Quebec Private Law (1993), atNo. 523). V.

Arguments of the Parties [32] Createch argues that the doctrine of breach of a fundamental obligation cannot apply in the context of a contract bymutual agreement, submitting that [translation] “it would be inconsistent to disallow an exoneration clause merely because it affects the‘essence of the contract’” (A.F., at para. 38 (emphasis in original)). Although the doctrine is relevant in certain cases of abuse ofbargaining power or imbalance between contracting parties that have been identified by the legislature, Createch asserts that it cannot

apply in this case and that the opposite conclusion would be contrary to the scheme of the Code. Even though its fault in this case relatesto a fundamental obligation, Createch points out that the Contract contains a limitation of liability clause and that such clauses have beenconsidered valid in Quebec law since the end of the 19th century.

The legislature has thus left the parties free to limit, or even tocompletely exclude, contractual liability in the name of autonomy of the will, a principle that was retained in the Civil Code of Québec,provided that such limitation or exclusion is not otherwise prohibited by law.

To exclude one’s liability for a simple fault by contract “isnot contrary to public order” (A.F., at para. 37, fn. 52) where what is at issue is the apportionment of risk in a complex commercialcontract that has been negotiated freely, because there is no inequality or unfairness to correct. [33] Createch adds that the clause in question does not deprive the obligation of its cause.

Quoting various academiccommentators, Createch submits that the concept of cause of the obligation [translation] “would be relevant only if the clause denied thecreditor any remedy in the event of nonperformance” (A.F., at para. 64 (emphasis deleted), quoting Lluelles and Moore, at No. 2980).What is more, to relax the concept of gross fault would be contrary to the definition set out in art. 1474 C.C.Q., and such a conclusionwould at any rate be inconsistent with the trial judge’s findings of fact. [34] Prelco counters that the doctrine justifies the trial judge’s conclusion that a non-liability clause that applies to afundamental obligation is inoperative for that reason alone.

Prelco proposes, citing, among others, Cie Immobilière Viger Ltée v. GiguèreInc., (SCC), [1977] 2 S.C.R. 67, that despite the Code’s apparent silence, this rule drawn from the decided cases and theacademic literature applies to contracts by mutual agreement as much as to contracts of adhesion or consumer contracts. There wasnothing wrong with the conclusion of the courts below, as a contract clause cannot be used to [translation] “change the nature of thecontract” by removing “its entire substance” (transcript, at p. 69).

Not only is there nothing in the Code to bar this rule developed by thecourts and authors, but a number of its provisions in fact represent a basis for the doctrine on which the trial judge and the Court ofAppeal relied in the instant case. [35] First, Prelco argues that the justification for the doctrine according to which a non-liability clause is invalid in theevent of a breach of a fundamental obligation can be found in the foundations of the Quebec law of obligations, including the duty tohonour one’s contractual undertakings (art. 1458 C.C.Q.).

Second, it submits that various concepts of our civil law confirm that thedoctrine exists and is legitimate, including the principle of reciprocity of obligations (arts. 1378, 1380 and 1381 C.C.Q.), those of goodfaith and equity in contractual relations (arts. 6, 7, 1375 and 1434 C.C.Q.), and the concept of cause of the obligation (art. 1371 C.C.Q.).Third, it argues that coherence in contracting, one of the principles on which the doctrine is based, requires that any non-liability clausewhose effect would be to strip the contract of its purpose be annulled (art. 1427 C.C.Q.). VI.

Applicable Legal Framework [36] For the reasons that follow, and with respect, we are of the view that the clause should be found to be valid despite thebreach of a fundamental obligation alleged against Createch. First, clauses like this one are permitted by the Code, and none of thecircumstances in which the legislature has provided that such a clause would be invalid on the basis of public order — what is known as“legislative” or “formal” public order — apply in this case.

Although the general law does allow for the evolution of the concept ofpublic order through judicial action — what is known as “judicial” or “virtual” public order — there is every reason to believe that thescheme of the Code excludes such an innovation for the clause at issue here (on the distinction between legislative public order andjudicial public order, see Lluelles and Moore, at No. 1905).

Second, it is true that certain clauses, such as a no obligation clause (clausede non-obligation) that negates or excludes all of the debtor’s obligations, can have the effect of depriving an obligation of its cause andimpairing its validity. However, a non-liability clause does not by its nature have the effect of negating obligations.

It is noteworthy thatthere are authors who argue that an exoneration clause can in some cases be likened to a no obligation clause that deprives the obligationof its cause if the effect of the clause is not only to exclude damages claims, but also to release the debtor from any obligation to thecreditor. This position certainly does not lack a theoretical basis, but it is not exempt from criticism either.

In any event, as we will see, itdoes not apply in this case, because that is not the effect of the non-liability clause at issue here. [37] We propose to consider the various arguments raised by the parties with respect to the two possible legal bases for thedoctrine of breach of a fundamental obligation in two steps: (

a) validity of the clause having regard to public order; and (

b) validity of theclause having regard to the requirement relating to the cause of the obligation. A. The Non-liability Clause Is Inoperative Because It Violates a Rule of Public Order [38] It is not disputed that the doctrine of breach of a fundamental obligation applies in Quebec positive law, in relation toconsumer contracts and contracts of adhesion in particular as is expressly provided for in art. 1437 C.C.Q.

In specific contexts in whichone or the other of these types of contracts is involved, the legislature has departed from the principle of autonomy of the will in order toneutralize “abusive” clauses that are excessively and unreasonably detrimental to the other party, a consumer or adhering party.Article 1437 para. 2 C.C.Q. characterizes as abusive a clause which so departs from the fundamental obligations that it changes thenature of the contract.

However, this appeal is instead concerned with determining the scope of the doctrine in a context other than that ofconsumer contracts, in relation to a contract whose clauses were negotiated freely and could accordingly be the subject of mutualconcessions by the parties. [39] It is common ground that non-liability clauses are valid in principle. This rule, originally stated by this Court in obiterin The Glengoil Steamship Co. v.

Pilkington (1897), 1897 CanLII 77 (SCC), 28 S.C.R. 146, was subsequently, despite some hesitation,accepted in positive law, with the effect that its place is now certain (Lluelles and Moore, at No. 2969). The validity in principle ofnon-liability clauses is based on autonomy of the will and its corollary, freedom of contract, both of which are general principles of thegeneral law of obligations.

It is clear that the principle of freedom of contract itself [translation] “is not expressed as such in the CivilCode”, but that it has, as a basis and also as its principal limit, the free exercise of civil rights circumscribed by public order (J. Pineau,D. Burman and S. Gaudet, Théorie des obligations (4th ed. 2001), by J. Pineau and S. Gaudet, at No. 156, inferring the principle fromart. 9 C.C.Q.).

In our view, the modern principle that freedom of contract is subject to public order informs the general law of obligationsas a general principle of law within the meaning of the preliminary provision of the Code (see J. Pineau, “La philosophie générale duCode civil”, in Le nouveau Code civil: interprétation et application — Les journées Maximilien-Caron 1992 (1993), 269, at p. 285).

[40] The validity in principle of non-liability clauses is subject to the same limits established in the Civil Code of Québecwith respect to public order. Although the principles from Glengoil are not explicitly stated in the Code either, they might be thought tohave been reaffirmed in it through the modern principle of freedom of contract even though their scope has been limited further by thebroader role conferred on mandatory rules in contract matters (Lluelles and Moore, at Nos. 1809 and 2969).

It might also be said that thevalidity in principle of such clauses is implicitly recognized by the effect of arts. 1474 and 1475 C.C.Q. (see J.-L. Baudouin andP.-G. Jobin, Les obligations (7th ed. 2013), by P.-G. Jobin and N. Vézina, at No. 868; P.-A. Crépeau, “La fonction du droit desobligations” (1998), 43 McGill L.J. 729, at pp. 759-62). [41] In Glengoil, Taschereau J., while noting that such clauses are not, in principle, contrary to public order, held that theymust be construed strictly (pp. 158-59).

Any ambiguity must be resolved in favour of the exercise of the right to exact performance byequivalence as reparation for an injury (see Lluelles and Moore, at Nos. 2969 and 2986; C. Masse, “Civil Liability (Law of ObligationsIII)”, in Reform of the Civil Code, vol. 2-B, Obligations III, V, VI (1993), at No. 94; Jobin and Vézina, at No. 875; F. Levesque, Précisde droit québécois des obligations: contrat, responsabilité, exécution et extinction (2014), at No. 493).

Parties are thus free to stipulatenon-liability clauses, provided of course that the other conditions relating to the validity of the contractual obligation are satisfied. [42] The validity in principle of non-liability clauses is, however, limited by legislative and judicial public order (asidefrom Glengoil, at p. 158, see, e.g., Bruker v. Marcovitz, 2007 SCC 54, [2007] 3 S.C.R. 607, at paras. 61-62; Goulet v. Transamerica LifeInsurance Co. of Canada, 2002 SCC 21, [2002] 1 S.C.R. 719, at paras. 43-46; Garcia Transport Ltée v.

Royal Trust Co., (SCC), [1992] 2 S.C.R. 499; Lluelles and Moore, at Nos. 1907-8 and 1914). In private law, respect for public order is set up as amandatory rule of general application (see arts. 8 and 9 C.C.Q.). [43] In the context in question here, the principle of freedom of contract as a basis for the validity in principle ofnon-liability clauses is confirmed implicitly in art. 1474 C.C.Q.: 1474.

A person may not exclude or limit his liability for material injury caused to another through an intentional or grossfault; a gross fault is a fault which shows gross recklessness, gross carelessness or gross negligence. He may not in any way exclude or limit his liability for bodily or moral injury caused to another. [44] The legislature has set out exceptions to the modern conception of this principle.

Taking a cautious attitude, itprovided that a notice stipulating exclusion from or limitation of contractual liability has effect with respect to the creditor only if theparty who invokes the notice proves that the other party was aware of its existence at the time the contract was formed (art. 1475C.C.Q.).

Article 1474 C.C.Q., a provision for which there was no equivalent in the Civil Code of Lower Canada (J. Pineau, “Theory ofObligations”, in Reform of the Civil Code, vol. 2-A, Obligations I, II, at No. 176), also sets limits in the name of public order, but it doesnot refer to the fundamental obligation concept. [45] First of all, the first paragraph of art. 1474 C.C.Q., by prohibiting non-liability clauses where there is gross orintentional fault, discourages recklessness, fraud, negligence and deliberate faults (see Lluelles and Moore, at No. 2975; Jobin andVézina, at No. 870; Djamad v.

Banque Royale du Canada, 2021 QCCA 371, at paras. 46-49 ; Audet v. Transamerica LifeCanada, 2012 QCCA 1746, [2012] R.J.Q. 1844, at paras. 90-91). This paragraph codifies a well-established moralizing trend in thejurisprudence that relates to the nature of the debtor’s conduct rather than directly to the creditor’s vulnerability (Lluelles and Moore, atNos. 2975 and 2976; Jobin and Vézina, at No. 870). We would add that the paragraph’s wording suggests that this limit on freedom ofcontract applies even in contracts by mutual agreement such as the one at issue in the case at bar.

Even in a freely negotiated agreement,the parties cannot circumvent it. This means that the debtor cannot rely on a non-liability clause after deliberately refusing to perform hisor her obligation (Lluelles and Moore, at No. 2975). [46] Next, the second paragraph of art. 1474 C.C.Q. relates to the nature of the injury, reflecting a legislative policy ofpublic order that is distinct from the one being applied in the first paragraph and is focused on protecting the human person (Lluelles andMoore, at No. 2971; É.

Cossette-Lefebvre, “Chronique — Plaidoyer en faveur du rejet de la ‘théorie de l’obligation essentielle’ en droitcivil québécois: critique de l’arrêt 6362222 Canada inc. c. Prelco inc., 2019 QCCA 1457, à la lueur du droit comparé”, Repères,November 2020 (available on La référence), at No. 14; N. Vézina, “Préjudice matériel, corporel et moral: variations sur la classificationtripartite du préjudice dans le nouveau droit de la responsabilité” (1993), 24 R.D.U.S. 161, at p. 171; Pineau, “La philosophie générale duCode civil”, at p. 284).

The legislature thus made it clear that, regardless of the seriousness of the fault and despite the principle offreedom of contract, no one may exclude or limit his or her liability for bodily or moral injury. These are examples that come withinpublic order of direction — a principle “the purpose of which is to regulate the economy in the general interest of society either byrestricting contractual freedom or, less frequently, by reinstating it” — and necessitate the absolute nullity of incompatible clauses(Private Law Dictionary and Bilingual Lexicons — Obligations (2003), by P.-A.

Crépeau, ed., at p. 246, “public order of direction”). [47] As for art. 1437 C.C.Q., it sets a limit that is of public order of protection, that is, one the purpose of which is toprotect a contracting party who is presumed to be economically weaker: 1437. An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may bereduced.

An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party andis therefore contrary to the requirements of good faith; in particular, a clause which so departs from the fundamental obligations arisingfrom the rules normally governing the contract that it changes the nature of the contract is an abusive clause. [48] This

article expressly recognizes the application of the doctrine of breach of a fundamental obligation in Quebec civillaw where there is an abusive contract clause, but limits it to consumer contracts (defined in art. 1384 C.C.Q.) and contracts of adhesion(art. 1379 C.C.Q.), which are characterized by an imbalance between the parties. In accordance with this legislative basis for thedoctrine, which falls under public order of protection, an exoneration clause or limitation of liability clause that would otherwise bepermitted will be invalid if it relates to a fundamental obligation (see, e.g., V.

Karim, Les obligations (5th ed. 2020), vol. 1, atNos. 2315-19, 2288 and 3909; Masse, at No. 96; S. Ghozlan, “La notion d’obligation essentielle dans le cadre du contrôle des clauses

abusives: Étude des systèmes juridiques français et québécois” (2015), 49 R.J.T.U.M. 399, at pp. 413-16 and 434-40; Cossette-Lefebvre,at No. 39; Ferme Franky 2004 inc. v.

Gestions Pierre Saint-Cyr inc. (Centrale de contrôle d’alarmes du Québec), 2014 QCCA 848, atpara. 3 ). [49] The existence of the rule of nullity of abusive clauses in consumer contracts and contracts of adhesion indicates — outof a concern for protecting contracting parties who are considered to be at a disadvantage — that these two types of contractualrelationships do not fully favour the realization of the ideal of contractual fairness based on absolute autonomy of the will.

In accordancewith this exceptional treatment of consumer contracts and contracts of adhesion, a clause that departs from the fundamental obligationsof a contract to such an extent that it changes the nature of the contract is considered to be abusive, and therefore null. This limit on thevalidity of non-liability clauses is in addition to art. 1474 C.C.Q., the effects of which are not confined to the specific context ofconsumer contracts or contracts of adhesion (S. Grammond, A.-F. Debruche and Y.

Campagnolo, Quebec Contract Law (3rd ed. 2020),at No. 361). [50] The validity or effectiveness of a non-liability clause is also open to challenge in other cases specified by thelegislature in relation to nominate contracts (Jobin and Vézina, at No. 868; Lluelles and Moore, at No. 2970; Levesque, at No. 488;P.-G. Jobin and M. Cumyn, La vente (4th ed. 2017), at No. 201). This is true of, among others, a contract of lease in the residentialcontext (arts. 1863, 1893 and 1900 para. 1 C.C.Q.; Karrum Realties Inc. v.

Ama Investments Inc., 2007 QCCA 880, at para. 35 ;9092-3335 Québec inc. v. 4364856 Canada inc., 2019 QCCS 3666, at para. 35 ), a contract of sale (arts. 1732 and 1733 C.C.Q.;Association pour la protection des automobilistes inc. v. Toyota Canada inc., 2008 QCCA 761, [2008] R.J.Q. 918, at para. 34), carriage(art. 2070 C.C.Q.) or employment (art. 2092 C.C.Q.; Quebec (Commission des normes du travail) v. Asphalte Desjardins inc., 2014 SCC51, [2014] 2 S.C.R. 514, at para. 53), or a deposit with an innkeeper (art. 2298 C.C.Q.).

It is also true of a consumer contract as a result ofs. 10 of the Consumer Protection Act, CQLR, c. P-40.1 (N. L’Heureux and M. Lacoursière, Droit de la consommation (6th ed. 2011), atNos. 60 and 71).

But these provisions constitute specific rules adopted by the legislature to govern certain nominate contracts, and notthe implementation of a rule of general application. [51] Because these various legislative provisions are each tailor-made to apply to the needs of a specific nominate contract,their effect is often to render all non-liability clauses inoperative, but some of them instead regulate the extent to which one may resort tosuch clauses. In all these cases, however, the purpose of the limit placed on freedom of contract is to protect parties who are weak or at adisadvantage economically.

We would reiterate that the Code provides for no like rule of general application that falls under public orderof protection, including one relating to a breach of a fundamental obligation. In other words, if an impugned clause has been freelynegotiated, is compatible with the constraints provided for in arts. 1474 and 1475 C.C.Q. and is not specifically regulated, it cannot beexcluded on the basis of legislative public order. The legislature also set out mandatory rules of liability that parties cannot avoid bycontract (see, e.g., art. 2118 C.C.Q.; J.-L. Baudouin, P. Deslauriers and B.

Moore, La responsabilité civile, vol. 2, Responsabilitéprofessionnelle (9th ed. 2020), at No. 2-257; J. Deslauriers, Vente, louage, contrat d’entreprise ou de services (2nd ed. 2013), atNos. 2475-77; V.

Karim, Contrats d’entreprise (ouvrages mobiliers et immobiliers: construction et rénovation), contrat de prestation deservices (obligations et responsabilité des professionnels) et l’hypothèque légale (4th ed. 2020), at No. 1639). [52] Furthermore, the policy adopted in Quebec civil law with respect to lesion, as codified in the reform of the Civil Codeof Québec, which came into force in 1994, confirms the importance attached to autonomy of the will in this context. The restrictionsimposed on freedom of contract in the case of lesion, like those set out in art. 1437 C.C.Q., have only a targeted purpose.

Article 1405C.C.Q. provides that lesion vitiates consent only with respect to minors and protected persons of full age (see P.-G. Jobin, “L’étonnantedestinée de la lésion et de l’imprévision dans la réforme du code civil au Québec”, [2004] R.T.D. civ. 693). Although the Civil CodeRevision Office proposed the enactment of a provision of general application with respect to lesion, the Code’s provisions instead givepreference to the principle of autonomy of the will and to the [translation] “stability of business relations” when it comes to contractualrelationships between unprotected persons of full age (J.

Pineau, “La philosophie générale du nouveau Code civil du Québec” (1992), 71Can. Bar Rev. 423, at pp. 438-39; Lluelles and Moore, at No. 880; M. Lemieux, “Les clauses abusives dans les contrats d’adhésion”(2000), 41 C. de D. 61, at pp. 64 and 76-82). [53] In other words, the principle of freedom of contract ensures, for the general law of contracts, contractual fairnessabsent express exceptions.

In rare circumstances, an unprotected person of full age may invoke lesion where that is permitted by law(e.g., with respect to partition of the family patrimony (art. 424 C.C.Q.) or to a loan of money (art. 2332 C.C.Q.)). At first blush,therefore, we remain in the [translation] “free zone” in which freedom of contract is not limited by public order (Pineau, “La philosophiegénérale du nouveau Code civil du Québec”, at p. 439). As the Court explained in Churchill Falls (Labrador) Corp. v.

Hydro-Québec,2018 SCC 46, [2018] 3 S.C.R. 101, “restrictions on consensualism generally take the form of exceptions and specific rules” (para. 102). [54] We accept Createch’s view that this permissive approach in Quebec law to the validity of a non-liability clause wherethere is a breach of a fundamental obligation is to some extent echoed in this Court’s decisions in cases originating in the common lawprovinces.

Createch points in particular to how the courts have treated the analogous concept, the doctrine of “fundamental breach”, ajudge-made criterion that was formerly used as a substantive rule to be applied in order to declare that a non-liability clause wasinoperative (Tercon, at para. 106, citing Karsales (Harrow) Ltd. v. Wallis, [1956] 1 W.L.R. 936 (C.A.)). Developments in the commonlaw are of course not determinative of our analysis, given that any answer to the question raised in this appeal must be based on theprinciples of Quebec civil law (see, e.g., ABB Inc. v.

Domtar Inc., 2007 SCC 50, [2007] 3 S.C.R. 461, at para. 85). We would add that theCourt of Appeal was right to suggest that, where the sources of the law are concerned, the civil law doctrine of breach of a fundamentalobligation has a history of its own that is shaped by Quebec’s legislation, jurisprudence and academic commentary and is not dictated bysources from other jurisdictions (paras. 24-25).

Nevertheless, this consideration of the common law remains relevant to Quebec law forthe purpose of determining how the civil law doctrine gives way to freedom of contract, while at the same time abiding by principleswhose purpose is to protect vulnerable parties. [55] As long ago as 1989, in Hunter Engineering Co. v. Syncrude Canada Ltd., (SCC), [1989] 1 S.C.R.426, Dickson C.J. had referred to the principle drawn from the academic commentary that not all exclusion clauses are unreasonable, andstressed that the common law doctrine of fundamental breach must take this reality into account.

Dickson C.J. noted that in thecommercial context, such clauses “are negotiated as part of the general contract” (p. 461) and that they can therefore reflect gains orconcessions that sophisticated parties considered fair in the circumstances. Rather than systematically attacking such clauses, he wrote,

“there is much to be gained by addressing directly the protection of the weak from over-reaching by the strong” (p. 462). In Tercon, theCourt laid “to rest” the generalized application of this common law doctrine of fundamental breach (paras. 62 and 81).

Binnie J., writingfor the Court on this point, broke the new analytical approach for non-liability clauses down into three distinct stages: (1) the clause mustbe interpreted in order to determine whether it applies to the circumstances established in evidence; (2) it must be asked whether “the . . .clause was unconscionable at the time the contract was made, ‘as might arise from situations of unequal bargaining power between theparties’”; and (3) if the clause is held to be applicable and valid, it must be asked whether it is nonetheless inoperative “because of theexistence of an overriding public policy” (paras. 122-23, quoting Hunter, at p. 462; see also J.

D. McCamus, The Law of Contracts (3rded. 2020), at pp. 893-94).

Thus, to repeat the principle stated in Hunter, “[e]xplicitly addressing concerns of unconscionability andinequality of bargaining power allows the courts to focus expressly on the real grounds for refusing to give force to a contractual termsaid to have been agreed to by the parties” (p. 462). [56] While we will go no further in attempting to reconcile the different approaches of the two traditions, it thus followsthat at common law, as in civil law, there is a concern with specific situations of abuse and contractual imbalance as well as with othercases that are contrary to public order, or are matters of “public policy”, but at the same time an acceptance that a non-liability clause in afreely negotiated contract can be a fair solution having regard to the context of the negotiations.

It can therefore be said that neither of thetwo legal traditions has a rule of general application that totally prohibits non-liability clauses relating to fundamental obligations incontracts between sophisticated parties (see S. Grammond, “La règle sur les clauses abusives sous l’éclairage du droit comparé” (2010),51 C. de D. 83, at p. 109). [57] Is it nonetheless possible that the general law of obligations includes limits based on public order that are not set outin the Civil Code of Québec?

In other words, is there a [translation] “new restriction” (Lluelles and Moore, at No. 2978) on the principleof autonomy of the will — one that is imperative — that concerns breaches of fundamental obligations and whose purpose is to protectthe general interest of society or economically weaker contracting parties? As we explained above, it is not for the legislature alone toarticulate rules of public order that limit freedom of contract.

The development of judicial public order is of course a matter for thecourts: in some circumstances a court might hold that a provision enacted by the legislature is mandatory, while in others it mightarticulate a new legal principle as a rule of public order (Godbout v. Longueuil (Ville de), (QC CA), [1995] R.J.Q.2561 (C.A.), at p. 2570 (per Baudouin J.A.), aff’d (SCC), [1997] 3 S.C.R. 844; Jobin and Vézina, at No. 100; Lluellesand Moore, at No. 1922).

Given that the rule that non-liability clauses are valid in principle is itself not explicitly stated in the Code, thequestion whether or not a rule regarding breaches of fundamental obligations exists is equally relevant. [58] As the parties agree, it is a well-known fact that innovations by judges and authors are not unknown in the civil law,and as Beetz J. put it in a comment that has been repeated many times, “[t]he Civil Code does not contain the whole of civil law” (Viger,at p. 76; see, e.g., Bank of Montreal v. Kuet Leong Ng, (SCC), [1989] 2 S.C.R. 429, at p. 442; Ostiguy v.

Allie, 2017SCC 22, [2017] 1 S.C.R. 402, at para. 73; P.-G. Jobin, “La Cour suprême et la réforme du Code civil” (2000), 79 Can. Bar Rev. 27, atp. 36). Under the former Code, the bulk of the general law with respect to non-liability clauses consisted of principles created by thecourts and by authors (J.-L. Baudouin and P. Deslauriers, La responsabilité civile, vol. 1, Principes généraux (7th ed. 2007), atNo. 1-1375). At that time, the enactment of provisions relating to such clauses in certain specific contexts did not deprive the courts oftheir power to intervene in this regard (B.

Moore, “Les clauses abusives: Dix ans après” (2003), 63 R. du B. 59, at pp. 63-64). [59] But does the principle stated in Viger authorize the judiciary to extend the application of the doctrine of breach of afundamental obligation to freely negotiated contracts by mutual agreement between sophisticated legal persons on the basis of publicorder in the case at bar?

In our view, the answer to this question must be no. [60] It should be mentioned that certain authors cited by the Court of Appeal in its reasons in this case have expressedreservations regarding such an extension of the doctrine through judicial public order. Lluelles and Moore are of the opinion that theprovisions of legislative public order are sufficient in this regard (Nos. 2978-79). They note that art. 1437 C.C.Q. and art. 1474 C.C.Q.can be used to remedy abuse (ibid.).

In the latter case, although the characterization of gross fault must be focused on the debtor’sconduct (Lluelles and Moore, at No. 2976; Jobin and Vézina, at No. 870), nonperformance of a fundamental obligation could be relevantto the analysis on characterization of the debtor’s fault (see, e.g., Poissonnerie Bari v. Gestion Inter-parc Inc. (National Tilden), (Que. Sup. Ct.), at paras. 20-23; C.

Deslauriers-Goulet, “L’obligation essentielle dans le contrat” (2014), 55 C. de D. 923, atp. 947). [61] Furthermore, Lluelles and Moore stress that extending the doctrine would — on the basis of the concept of cause ofthe obligation, to which we will return below, and not, strictly speaking, on the basis of public order — be relevant [translation] “if theclause denied . . . any remedy” (No. 2980; see also No. 1831).

Moreover, a number of authors note that the legislature’s rejection of ruleswith respect to lesion between unprotected persons of full age and unforeseeability show that its intention was to bar the courts fromintervening on the basis of [translation] “substantive unfairness” (Grammond, at p. 98; see also Lluelles and Moore, at No. 1064.5;Cossette-Lefebvre, at No. 41).

They conclude that freedom of contract should continue to apply, absent a gross or intentional fault, to anycontract that is neither a contract of adhesion nor a consumer contract (Lluelles and Moore, at No. 2981). [62] It might be thought that the legislature spoke directly to the purpose of the concept of public order — both ofdirection and of protection — and intervened to validate the use of non-liability clauses in cases to which art. 1437 C.C.Q. does notapply.

Indeed, at the time of the reform of the Civil Code, the legislature chose to target contracts of adhesion and consumer contractsand to disregard contracts by mutual agreement, an approach that has led to some criticism; for example, Professor Jobin and ProfessorVézina write that [translation] “consumer contracts and contracts of adhesion are not alone in having abusive clauses, and contractualfairness should in our opinion be universal” (No. 140). [63] The Civil Code Revision Office put forward an argument resembling the one advanced by these authors (Report onthe Québec Civil Code, vol.

I, Draft Civil Code (1978), at p. 343, and vol. II, t. 2, Commentaries, at p. 614). However, not only was thisconception of contractual fairness not codified in relation to freely negotiated contracts (Cossette-Lefebvre, at No. 41; É. Charpentier,“Pour une interprétation (trè

s) large de l’article 1437 du Code civil du Québec”, in B. Moore, ed., Mélanges Jean-Louis Baudouin(2012), 255, at p. 267), but the legislature deliberately indicated its preference for freedom of contract in this context throughout theCode (see P.-G. Jobin, “La révision du contrat par le juge dans le Code civil”, in E. Caparros, ed., Mélanges Germain Brière (1993), 400,

at pp. 410-11). [64] The scheme of the Code thus reveals a conscious decision by the legislature to strike a balance between the concept ofpublic order and the principle of freedom of contract. Subject to the constraints provided for in art. 1474 C.C.Q., a person may exclude orlimit his or her liability for material injury caused to another through a fault that is neither intentional nor gross.

In addition, art. 1475C.C.Q. shows that the legislature, far from being silent on the subject, has permitted the use of such clauses in the name of freedom ofcontract in the event of material injury, although it has imposed certain limits. We would reiterate that these articles draw no distinctionbetween exoneration clauses and limitation of liability clauses. The breach of a fundamental obligation is seen as a form of abuse only inthe context of consumer contracts and contracts of adhesion under art. 1437 C.C.Q.

Another basis for this freedom to agree on risksharing in contracts by mutual agreement can be found in arts. 1613 and 1622 C.C.Q., which confirm that the parties may foresee andstipulate the damages for which they will be liable in the event of nonperformance.

Regardless of whether an obligation is fundamentalor accessory, the parties can agree on damages at the time of formation of the contract, and a court can give effect to such an agreementeven if the debtor has committed a simple fault. [65] It would therefore be difficult to say that a party is acting in bad faith merely because he or she is seeking to apply anon-liability clause in a contract that was freely negotiated on equal terms.

Moreover, the presumption of good faith (art. 2805 C.C.Q.) isone more basis for asserting that a contracting party may take advantage of such a clause if he or she has not committed an intentional orgross fault. The fact that the person who takes advantage of a non-liability clause has committed a fault does not in itself justify a findingof bad faith on that person’s part. It is true that art. 1437 para. 2 C.C.Q. establishes a connection between non-liability clauses and goodfaith.

In the context in which that paragraph applies, it can be said that the creditor’s good faith is open to question because of thecontractual imbalance, as it is assumed in that exceptional situation that the clause is “excessively and unreasonably” detrimental to thecreditor (art. 1437 C.C.Q.; compare art. 7 C.C.Q.). [66] It should also be mentioned that in a different situation, one in which the non-liability clause affected only anaccessory obligation, the commercial and social utility of excluding or limiting one’s liability in a freely negotiated contract would becompromised.

From a risk management perspective, non-liability clauses take on their full significance in relation to the principalobligation to be performed.

As Carole Aubert de Vincelles points out, [translation] “[R]isk management, which is necessary to everycontracting strategy, and correlatively to every commercial management strategy, cannot be conducted without limitation of damagesclauses (clauses limitatives de réparation)” (“Plaidoyer pour un affinement réaliste du contrôle des clauses limitatives de réparationportant sur les obligations essentielles”, [2008] R.D.C. 1034, at No. 9). [67] Thus, the Code provides for a set of limits and prohibitions that are applicable to non-liability clauses in the context ofnominate contracts, but includes no analogous express restriction of general application.

The limits and prohibitions that are expresslyprovided for in the Code apply to situations of inequality between contracting parties or are based on other rules of public order deemedto be pertinent by the legislature.

Aside from these situations, and of course subject to other mandatory rules that are of no consequencehere, the general law of obligations leaves the contracting parties free to apportion the risk of nonperformance between them. [68] Although our analysis of the scheme of the Civil Code of Québec is determinative of this first ground of appeal, wenevertheless feel that it would be helpful to say a few words about the Quebec cases concerning the questions raised by this ground.Aside from the fact that the legislative context of the Civil Code of Lower Canada was very different, it should be noted that in the casesmentioned by authors and cited by the Court of Appeal in this case to justify a generalized application of the doctrine, this was discussedonly in obiter.

In most of the cases in which the doctrine has been raised, the courts reached their decisions on the basis either of therequirement of proving knowledge of the non-liability clause or of the concept of gross fault, that is, of concrete cases raising concerns ofpublic order (see Conseil des ports nationaux v. Swift Canadian Co. Ltd., [1953] B.R. 730; Southern Canada Power Co. Ltd. v.Conserverie de Napierville Ltée, [1967] B.R. 907; Western

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