Good Faith, Limited Liability: Ontario Court of Appeal Confirms Liability Caps Can Apply to Breaches of Good Faith

In 1401380 Ontario Limited (Wilderness North Air) v. Hydro One Remote Communities Inc., 2025 ONCA 827, the Court of Appeal for Ontario held that a properly constructed limitation of liability clause can limit one party’s liability to the other for breach of the duty of good faith.

Key takeaways

• The organising principle of good faith from Bhasin v. Hrynew does not automatically invalidate contractual risk allocation.
• Courts will enforce negotiated limits of liability even in the face of bad faith.

Summary

Remote contracted with Wilderness to deliver fuel to remote First Nations communities. Wasaya, an unsuccessful bidder for the job, complained to Remote about Wilderness, and Remote removed Wilderness as a vendor. Wilderness then sued Remote.

At trial, the judge held that Remote breached its contract with Wilderness and that Remote breached its duty to exercise its contractual discretion in good faith.

At issue on appeal was a limitation of liability clause that purported to limit Remote’s liability to CAD 50,000.

At trial, the judge found the clause was unclear about when the clause applies and to what it applies and awarded damages to Wilderness beyond the limit of CAD 50,000.

On appeal, the Court of Appeal found otherwise.

Read as a whole, the limitation of liability clause properly limits liability for breach of contract to CAD 50,000 and excludes liability for indirection or consequential damages.

The Court of Appeal held that while parties cannot contract out of the doctrine of the duty of good faith altogether, parties can agree to modify the duty or add limits of liability that apply to breaches of the duty of good faith. The Court found that the clause, properly interpreted, limits liability for breaches of the duty of good faith.

Application to construction contracts

The analysis above applies equally to construction contracts.

Limitation of liability clauses are standard fare in contracts between sophisticated commercial parties. Parties know their interests and negotiate the terms of their contracts accordingly.

As a starting point, parties are generally free to structure their contractual risk as they see fit. That freedom, however, operates alongside certain statutory and common law constraints. For example, while parties may limit damages for breaches of contractual duties, including the duty of good faith, they cannot contract out of statutory obligations, like trust obligations, under the Construction Act.

Within those boundaries, construction contracts frequently contain robust limitation provisions. Owner–contractor agreements often exclude liability for consequential damages or limit recovery to the direct costs incurred as a result of a breach. Owner–consultant agreements commonly limit a consultant’s liability to the value of its fees or to a specified monetary cap, often tied to available professional liability insurance. Unless the contract provides otherwise, these types of clauses may also apply to damages arising from a breach of the duty of good faith.

This issue frequently arises where a contract grants one party a discretionary right. For example, owners may retain the discretion to assign portions of the work to others, terminate for convenience, or make determinations affecting payment or performance. The exercise of those rights is constrained by the duty of good faith, which requires parties to exercise contractual discretion reasonably and with appropriate regard for the legitimate contractual interests of the counterparty. A failure to do so may expose the decision-maker to liability, but the resulting damages may still be limited by a properly drafted limitation of liability clause.

Understanding how limitation clauses interact with other contractual mechanisms is critical to assessing risk. Construction contracts often distinguish between per-claim and aggregate limits of liability, which can affect how multiple claims arising from the same project are treated. Similarly, limitation clauses frequently apply to liability “arising out of or relating to the services” or the contract, language broad enough to capture contractual breaches, negligence, and potentially breaches of the duty of good faith.

Parties should also consider how limitation clauses interact with indemnity provisions, third-party claims, and insurance requirements. Professional liability insurance and other coverage may effectively define the practical ceiling of exposure where a contract ties liability caps to available insurance or to the consultant’s fees.

Concluding thoughts

In short, the decision underscores the importance of careful drafting. Clear limitation of liability clauses aligned with indemnities, insurance provisions, and other contractual risk-allocation mechanisms remain an effective tool for managing exposure, including potential claims grounded in the duty of good faith.

If you have questions about how limitation of liability provisions operate in your construction contracts or about how to best structure contractual risk in light of this decision, please contact Dylan Dilks.