Boilerplate Across Borders: How Canada And The US Interpret Boilerplate Clauses

Boilerplate clauses, though often viewed as routine, can carry significant implications in cross-border transactions. Their interpretation and enforceability may differ between Canada and the US, affecting risk allocation, enforcement strategies and potential litigation exposure. This insight examines how three commonly negotiated clauses - forum selection clauses, limitation of liability clauses and indemnification clauses - are treated under Canadian and US law, and highlights practical considerations.

Forum selection clauses

Forum selection clauses are a key tool for parties seeking to manage the forum for dispute resolution, offering greater predictability and potentially reducing litigation costs. Although generally enforceable in both Canada and the US, the legal framework varies by jurisdiction, giving rise to important nuances that merit careful consideration.

United States

In the US, courts will generally enforce forum selection clauses; however, exceptions and defenses do apply. The principal grounds for resisting enforcement include: (i) the clause was procured through fraud, undue influence or overweening bargaining power; (ii) enforcement would contravene a strong public policy of the forum, whether declared by statute or judicial decision; or (iii) trial in the contractual forum would be so gravely difficult and inconvenient that the resisting party would, for all practical purposes, be deprived of its day in court. The burden generally rests on the party seeking to avoid the clause to make a strong showing that it should be set aside.

US forum selection clauses generally take one of two forms: (1) mandatory, which requires parties to litigate exclusively in the designated forum; or (2) permissive, which consents to jurisdiction in the designated forum but does not preclude litigation elsewhere. Mandatory forum selection clauses can be particularly valuable where one or more of the contracting parties sees benefit in directing disputes to a specialized court, such as the Delaware Chancery Court, which offers expertise in corporate and commercial matters. To establish a mandatory forum selection clause, drafters should: (i) expressly designate the selected court or courts as the exclusive forum for resolving disputes; (ii) use clear, imperative language such as "shall," "must" or "exclusively" rather than permissive terms like "may" or "submit"; and (iii) include an express consent by each party to the personal jurisdiction of the selected court. Omitting any of these elements may leave room for arguments that the clause is merely permissive, potentially undermining the intended certainty and allowing the opposing party to litigate in an alternative forum.

Canada

Similar to the US, Canadian courts generally uphold forum selection clauses. However, a party seeking to resist enforcement may do so by demonstrating "strong cause" to depart from the chosen forum.¹ If a dispute arises, the party relying on the clause must first establish that it is valid, clear, enforceable and applicable. At this stage, the resisting party may raise defenses such as unconscionability or fraud. If the clause is upheld, the burden shifts to the resisting party to show compelling reasons to depart from the selected forum. In making a determination, courts typically consider factors including convenience, fairness, the interests of justice and public policy.

Canada does not have the same extensive network of specialized business courts found in the US. Nevertheless, parties can still select jurisdictions such as Ontario, where the Toronto Commercial List provides access to judges experienced in complex commercial matters.

When interpreting forum selection clauses in Canada, the precise language used in the clause will determine whether the clause is mandatory or permissive. Terms such as "submit" or "attorn" may indicate consent to a court's jurisdiction but may not, on their own, establish exclusivity. To reduce ambiguity in Canada, parties should clearly indicate whether the chosen forum is "exclusive."

Indemnification

An indemnification clause allows the parties to reallocate responsibility for losses or damages arising in connection with the transaction. In cross-border deals between Canada and the US, the way indemnities are drafted and interpreted will determine how risk is allocated and the potential exposure of each party.

United States

In the US, while indemnification may be implied absent an express contractual right in certain limited circumstances, it is generally advisable to expressly address indemnification in contractual relationships. Although there are certain statutory and common law limitations on the enforceability of indemnification provisions, courts generally enforce them in commercial contracts. It is important to research state law to determine if state law may limit or restrict indemnification in questionable cases such as consumer liability, punitive damages or overly-broad coverage, i.e., coverage of items not listed in contract or liability for items regardless of fault.

When drafting indemnification clauses, parties should, among other things, carefully consider: (i) whether direct (first-party) claims are intended to be the basis for indemnification; (ii) the phrase linking damages to covered events (e.g., broad phrases like "arising out of" or "related to" expand coverage, while narrower phrases like "caused by" or "solely resulting from" limit the indemnifying party's exposure); (iii) the scope of recoverable damages; (iv) the scope of indemnified parties; (v) whether to include an obligation to defend, which is broader than the duty to indemnify because it may apply even if the underlying claim lacks merit; (vi) appropriate limitations, such as liability caps, baskets or carve-outs for consequential damages; and (vii) defense control provisions. Parties should also ensure consistency between the indemnification provision and other risk allocation clauses, including any limitation of liability or sole remedy provisions.

Canada

As in the US, it is generally advisable to expressly address indemnification in contracts. However, indemnification may arise in certain circumstances, even in the absence of an express contractual right. In Canada, such circumstances include: (i) by implied contract, where the circumstances suggest that the parties intended such indemnity; or (ii) by implication, where the circumstances demand a legal or equitable duty to indemnify, with the law recognizing an assumed promise by a person to do what, under the circumstances, they ought to do. Examples of such circumstances include an agent incurring a loss while lawfully carrying out the mandate of their principal; a trustee causing a co-trustee to incur costs through negligent management of the trust; and obligations arising in equity from the relationship between the parties, such as between trustee and beneficiary. However courts have cautioned against the unprincipled expansion of claims arising out of a right of implied indemnification.

Unlike in the US, Canadian legislation does not generally permit, restrict or prohibit indemnification, except with respect to the indemnification of directors in a corporate context. Courts across Canada generally enforce indemnification clauses in commercial contracts, interpreting them in their entirety and within their full commercial context, provided the subject matter is lawful.

Despite differences in legal framework, similar drafting considerations apply in Canada as in the US. Parties should also ensure consistency between the indemnification provision and other risk allocation clauses.

Because indemnification can arise even in the absence of an express clause, both in Canada and in the US, and because the scope of implied indemnification is unclear, silence can create material contracting issues. In many cases in both jurisdictions, a narrowly drafted, clearly worded indemnity clause provides greater certainty and helps ensure that the allocation of risk aligns with the parties' intentions under the governing law.

Limitation of liability clauses

Limitation of liability clauses play a central role in defining the scope of recoverable damages in commercial agreements. Unlike indemnification clauses, which shift liability from one party to the other, limitation of liability clauses cap or exclude a party's exposure.

United States

Limitation of liability provisions in US commercial agreements typically exclude liability for most or all indirect and consequential damages for which a party may otherwise be liable. Parties that bear the most risk in commercial transactions (typically sellers of goods or service) typically insist on a contractual limitation of liability. Sellers must take care not to accept any additional or different commercial terms in a buyer's purchase order or other forms. Without contractual limitations, a party may subject itself to liability greatly disproportionate to the consideration it is receiving under the agreement. In the US, courts generally enforce limitation of liability provisions, but these clauses are typically construed against the party seeking to rely on them. For contracts involving the sale of goods, the Uniform Commercial Code (UCC) provides additional guidance. Under UCC Section 2-719, parties may limit or alter the measure of damages recoverable, including by limiting remedies to repair and replacement of nonconforming goods.

Canada

Limitation of liability clauses are common features of commercial agreements in Canada, often implemented in an effort to allocate risk. Similar to the US, parties that bear the most risk in a commercial transaction typically insist on a contractual limitation of liability. In contrast to the US, where the UCC governs sale of goods contracts, Canada applies the Tercon test to assess the enforceability of limitation of liability clauses in all contracts.² Under this three-step legal test, courts first consider whether the circumstance falls within the terms of the limitation of liability clause. If the clause applies, the courts then consider whether the clause was unconscionable at the time of contract formation. At this stage, the court assesses whether there was an inequality of bargaining power between the parties, taking into consideration factors such as the sophistication of the parties. Finally, the courts weigh whether there are overriding public policy reasons to refuse enforcement of the clause. In commercial contexts, limitation of liability clauses are generally enforced as long as the facts apply and there is no unconscionability or public policy reason not to enforce the clause.

There are notable differences between provinces in Canada. In Québec, under the Civil Code of Québec, clauses that attempt to limit or exclude monetary liability for breach of the duty of good faith may not be enforceable. In the common law provinces, mandatory duties such as the duty of honest performance generally cannot be entirely excluded or contracted out of. However, the case law in these provinces remains unsettled with respect to clauses that seek to limit, rather than completely exclude, liability.

Conclusion

While the principles underlying forum selection clauses, limitation of liability clauses, and indemnification clauses may be familiar to both US and Canadian parties, their enforcement and interpretation can differ in ways that warrant close attention in cross-border transactions. By drafting carefully, considering the governing law, and understanding the nuances of each jurisdiction, parties can better manage uncertainty and ensure that contractual protections align with their commercial objectives.

Footnotes

1 Z.I. Pompey Industrie v. ECU-Line N.V., 2003 SCC 27.

2 Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4.

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