3.200. Contractor Liability

1. The Treasury Board (TB) Secretariat Policy on Decision Making in Limiting Contractor Liability in Crown Procurement Contracts governs the process for limiting contractor liability. Contracting officers are required to understand the application of the Policy in order to ensure compliance and to protect the interests of the Government of Canada. The Policy applies to all Canadian procurements subject to the Government Contracts Regulationsand the TB Contracting Policy for risks under the control of the contractor.
2. The Policy forms the framework for risk-based decision-making, enabling the appropriate application and apportionment of liability risk in contracts. The Policy details the steps and necessary approvals that must be followed, when limiting contractor liability, in order to ensure effective program management and service delivery for the benefit of Canadians. A key element of risk-based decision-making is the requirement for risk assessments to be performed by client departments.
3. The Policy identifies four procurement models that prescribe the extent to which a contractor's liability may be limited and the level of approval required:
   1. Model 1 represents the most common type of procurement contracts and accounts for about 90 percent of all Canada procurement contracts. Under this model, only the contractor's liability to Canada (first party liability) may be limited. Commodity groupings have been established for commonly purchased commodities over which a general risk assessment has been conducted. Under this model, limiting third party liability and indemnification of the contractor requires TB approval.
   2. Model 2 includes complex procurements that have a high degree of uncertainty or risk because of the untested nature of the technology or the unproven, unique or developmental nature of the deliverable. Under this model, PWGSC has the authority to limit first party liability. Limiting third party liability or indemnification of the contractor requires TB approval.
   3. Model 3 includes contracts where there is limited scope for negotiating liability provisions, such as government-to-government agreements, or where no other viable alternative to serve a program requirement exists. Under this model, PWGSC can limit third party liability. Indemnification of the contractor requires TB approval.
   4. Model 4 pertains to highly specialized services contracts in support of ensuring the health, safety and the economic well being of Canadians. Under this model, PWGSC can limit first party liability. Limiting third party liability or indemnification of the contractor requires TB approval.

Indemnification is the requirement for one party to a contract to make the other whole when the latter has suffered a loss. The current default position of Canada on indemnification in procurement contracts is to remain silent. This enables both the parties to rely on their respective rights at law in the event of a loss. Exceptions to this position are where:

1. It may not be in Canada's financial interest to rely on Common Law or the Civil Code.
2. The terms of a commodity grouping include the specific indemnification of Canada by the contractor.
3. Canada agrees to indemnify the contractor due to exceptional circumstances or where the procurement falls under the terms of a Foreign Military Sale. Under this condition, the client department must assume financial responsibility for the substantive transfer of risk to Canada, as determined by a risk assessment. Substantive transfer occurs where the assessed risk value exceeds the limitation of the limitation of the contractor's liability.