How can the language of indemnification and limitation of liability be drafted in the interest of resolving issues quickly?

June 01, 2017


Astellas Pharma Canada Inc. v. WellSpring Pharmaceutical Canada Corp. 2008 CanLII 46324 (ON SC)

The interplay between the ‘limitation of liability’ clause and the ‘indemnity clause’ used an agreement, were held to be ambiguous with respect to negligent acts of the parties. The wording of these clauses are frequently found in commercial agreements: “6.5 (a) Except as set forth in Section 6.1 and 6.2(i) and (iii), each party shall only be liable to the other party to a maximum value of the fees paid or payable hereunder. Each party shall only be liable to the other party for direct damages and under no circumstances will either party be liable to the other for any special, indirect or consequential loss or damage, such as, without limitation, loss of profits or revenue, cost of capital, or loss of use of equipment or facilities. 6.2(i) WellSpring will indemnify, defend and hold harmless [Astellas], its subsidiaries, divisions, affiliates, directors, officers, employees, agents, successors and assigns from any loss, cost, claim or demand (including but not limited to court costs, reasonable legal fees, awards and settlements) which arise as the direct or indirect result of: (i) WellSpring’s directors, officers, employees, agents, successors, or assigns, negligent act or omission, reckless or willful misconduct; (ii) WellSpring’s breach of its representations and warranties in Section 2.2(1-2); or (iii) any claim of infringement or alleged infringement of third party intellectual property rights relating to the services provided by WellSpring to [Astellas] hereunder.”

Drafters should ensure that there is no ambiguity with respect to the application of a cap on liability, eg. if it caps negligence; whether the limitation of liability clause applies to the indemnity clause etc; and whether the indemnity clause applies only to third party actions. Clear language is required to express the parties’ agreement, especially since judges have given varying interpretations to clauses similar to those noted above.

In Astellas Pharma Canada Inc. v. WellSpring Pharmaceutical Canada Corp., 2008 CanLII 46324 (ON SC), the defendant entered into an Master Services Agreement with the plaintiff in relation to services and supplies to be used in clinical studies undertaken by the defendant for the plaintiff. The plaintiff cancelled the studies prematurely due to the defendant’s alleged negligence in performing its obligations. The defendant brought a motion for summary judgment to limit the amount of liability under the agreement which stated that “each party shall only be liable to the other party to a maximum value of the fees paid or payable hereunder.” The plaintiffs argued that the indemnification clause in the agreement was not limited to third party claims, and that it applied to negligent conduct on the part of the defendant. Where there was no negligent conduct, a party could argue limitation of liability for contractual breaches. The court held that the wording of the agreement, and the state of the case law, was such that there was a triable issue. The motion for summary judgment was denied. Case law could support either side’s interpretation of the clauses, and a consideration of the facts at trial was required to properly interpret the contract.

To read the full case on CanLII, click here.

Limitation of Liability
Master Services Agreement
Liability Cap