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The Ontario Court of Appeal's decision in 1401380 Ontario Limited (Wilderness North Air) v. Hydro One Remote Communities Inc. provides important guidance on the application of limitation of liability clauses in cases involving breaches of contractual good faith.1 The Court confirmed that while parties cannot contract out of the duty of good faith altogether, they may limit the damages flowing from a breach of that duty through a clear and properly drafted limitation clause.
The decision offers a practical articulation of how limitation clauses should be interpreted in commercial contracts and clarifies their compatibility with the good faith doctrine developed in Bhasin v. Hrynew and subsequent cases.
Background
Hydro One Remote Communities Inc. ("Remote") is statutorily required under the Electricity Act, 1998 to supply electricity to remote First Nations communities not connected to Ontario's power grid. It fulfills this obligation by supplying diesel fuel to operate local generators, with fuel delivered on an as-required basis.
In 2014, Remote issued a request for proposals ("RPF") for the air delivery of diesel fuel to twelve remote communities. Three carriers submitted bids, including Wilderness North Air ("Wilderness") and Wasaya Airways LP ("Wasaya"). As part of the RFP package, bidders received Remote's standard form contract, which included a limitation of liability clause.
The clause essentially provided that Remote's total aggregate liability for all damages arising out of or related to the agreement would not exceed $50,000.00, regardless of whether the claim was framed in contract, tort, or otherwise.2 The clause also excluded liability for certain categories of loss, including indirect, incidental, consequential, and economic loss, such as loss of profits or business opportunities.
Remote awarded Wilderness primary vendor status for five communities, designating it as the carrier of first resort for air delivery of diesel fuel to those locations. Wasaya, despite submitting a bid, was not awarded any air delivery work under the RFP.
Following the award, several First Nations communities passed Band Council Resolutions supporting Wasaya and opposing Wilderness's continued involvement. Remote ultimately removed Wilderness as primary vendor for most of the communities and awarded the work to Wasaya, despite Wilderness remaining ready, willing, and able to perform. Wilderness subsequently commenced an action against Remote for breach of contract and against Wasaya for inducing the breach.
Breach of Contract and the Duty of Good Faith
At trial, the judge found that Remote breached the contract by removing Wilderness as primary vendor and breached its duty to exercise contractual discretion in good faith.3 The trial judge declined to apply the contractual limitation of liability clause, and awarded Wilderness damages exceeding $2.7 million dollars.4
The Court of Appeal upheld the trial judge's findings on liability.5 Although Remote had discretion to cancel individual purchase orders and to source fuel from other suppliers, the Court agreed that this discretion existed to respond to operational needs and ensure continuity of supply. It did not authorize Remote to remove Wilderness as primary vendor altogether for reasons unrelated to performance.
The Court emphasized that discretionary contractual powers must be exercised consistently with the purposes for which they are granted. Using discretion to defeat the contractual benefit conferred on the counterparty, particularly where that party remains ready and able to perform, constitutes a breach of the duty of good faith.6
By affirming the finding of bad faith, the Court reinforced that contractual discretion is not a licence to reallocate commercial advantage after the fact. Good faith remains a real and enforceable constraint on how contractual powers may be exercised.
Limitation of Liability and the Court of Appeal's Intervention
The Court of Appeal's sole point of departure from the trial decision concerned the application of the limitation of liability clause.
The trial judge concluded that the clause was ambiguous and commercially unreasonable when applied to Remote's removal of Wilderness as primary vendor.7 In her view, it was intended to address limited contingencies, such as the cancellation of individual purchase orders in response to fluctuating fuel requirements, and not a complete reallocation of vendor status.8
That conclusion turned on her interpretation of the exclusion of "economic loss." The trial judge understood economic loss to mean all monetary loss.9 On that interpretation, the exclusion would have captured the damages arising directly from the breach itself, leaving no practical role for the fifty-thousand-dollar liability cap. Because applying the clause in this way would have eliminated any meaningful remedy for breach, she concluded that the clause could not apply to limit Remote's liability in the circumstances.10
The Court of Appeal rejected this interpretation, emphasizing that limitation of liability clauses are a common feature of contracts between sophisticated commercial parties who understand their interests and negotiate risk accordingly.11 The decision signals a reluctance to treat such clauses as ambiguous or commercially unreasonable in the absence of clear textual support.
Read as a whole, the Court of Appeal held that the limitation of liability clause was clear in its operation. The first part of the clause limited damages for breach of contract by capping Remote's maximum liability at $50,000.00, while the second excluded liability for consequential economic loss.12 Properly interpreted, the exclusion clause did not negate the liability cap. A contrary interpretation would deprive the cap of any practical effect.
Result and Implications
Applying the limitation of liability clause, the Court of Appeal reduced Remote's liability for breach of contract from more than $2.7 million dollars to $50,000.00. Wilderness's claim for lost profits was barred as excluded consequential economic loss. Wasaya remained liable for $856,458 for inducing the breach.13
In reaching that result, the Court of Appeal addressed the concern that enforcing the limitation clause would impermissibly exclude liability for breach of the duty of good faith. Relying on Bhasin v. Hrynew and subsequent Supreme Court authority, the Court reaffirmed that the duty of good faith applies to all contracts and cannot be excluded altogether.14 The Court drew a clear distinction, however, between excluding the duty itself and limiting the damages flowing from its breach. A breach of the duty of good faith sounds in contract and is, in principle, amenable to a limitation of liability provision.15 The clause did not amount to a complete exclusion of liability or compromise the minimum core of the duty of honest performance. It limited only the remedial consequences of breach.
The decision thus signals two complementary points for commercial parties: (i) courts will continue to scrutinize the exercise of contractual discretion and will find a breach of good faith where discretion is used to undermine the contractual bargain; and (ii) where sophisticated parties have allocated risk through a clear and properly drafted limitation of liability clause, courts will give effect to that allocation (even where the breach involves bad faith), provided the clause does not purport to altogether eliminate the duty itself.
Footnotes
1. 1401380 Ontario Limited (Wilderness North Air) v. Hydro One Remote Communities Inc., 2025 ONCA 827 [Wilderness North Air v Hydro One Remote Communities].
2. Wilderness North Air v Hydro One Remote Communities, paras 33-34.
3. 1401380 Ontario Ltd. v. Wasaya Airways LP, 1401380 Ontario Ltd. v. Remotes One Remote Communities, 2024 ONSC 4701, paras 120 and 181 [140138 Ontario v Wasaya Airways].
4. 140138 Ontario v Wasaya Airways, para 282.
5. Wilderness North Air v Hydro One Remote Communities, paras 32-36.
6. Wilderness North Air v Hydro One Remote Communities, para 36.
7. 140138 Ontario v Wasaya Airways, paras 181, 196-199.
8. 140138 Ontario v Wasaya Airways, paras 198-199.
9. 140138 Ontario v Wasaya Airways, paras 185 and 195.
10. 140138 Ontario v Wasaya Airways, paras 196 and 199.
11. Wilderness North Air v Hydro One Remote Communities, para 39.
12. Wilderness North Air v Hydro One Remote Communities, paras 43-
13. Wilderness North Air v Hydro One Remote Communities, paras 49, 59-60.
14. Wilderness North Air v Hydro One Remote Communities, paras 46-47.
15. Wilderness North Air v Hydro One Remote Communities, paras 47-48.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2025
