Penalty clauses are a practical tool for owners: instead of having to prove actual losses when a contractor falls short, they can rely on a pre-agreed sum. For contractors, however, the stakes are equally significant — a lump-sum penalty can consume a substantial portion of the contract’s value. Still, the mechanism has its limits. Courts may intervene to reduce the penalty if the contractor’s partial performance has conferred a benefit on the owner, or if enforcing the full amount would be oppressive. But where exactly is that line? That was the central question in the March 16, 2026, judgment of the Honourable Louis Lacoursière, J.S.C., in EBC inc. v. Ville de Montréal.
Background
In 2017, the City of Montréal (the “City“) awarded EBC inc. (“EBC“) a $29,975,000 contract (before taxes) for Phase I of an underground infrastructure project designed to reduce sewage overflows into the Rivière-des-Prairies. Phase I — tunnels, pipes, and excavation of a retention basin — was to be completed within 425 days. Phase II could not begin until Phase I was finished.
EBC had made one condition of its participation clear from the outset: the delay penalty had to be capped. Without a ceiling, it would not bid. The City agreed, capping the penalty at 10% of the contract price — $2,997,500. During construction, an unforeseen pipe upheaval caused a 193-day delay, pushing the project 45% past its contractual deadline. EBC pointed the finger at a subcontractor. The City applied the maximum penalty without hesitation, withholding the amount from the balance it owed EBC. In November 2019, the Phase II tender was cancelled for lack of bidders, then relaunched in March 2020.
EBC went to court, arguing that the City had improperly set off $2,997,500 against the amount owed and had done so in breach of its duty of good faith.
The Legal Framework
A penalty clause functions as pre-agreed estimate of damages. It serves two purposes: compensatory, by securing the owner’s anticipated loss in advance, and deterrent, by giving the contractor a strong financial incentive to complete the work on time.
Under article 1623(1) of the Civil Code of Quebec ( C.C.Q.), the City is not required to prove its actual loss — that is the very purpose of the penalty clause. Courts have increasingly required some evidence of actual loss, unless the parties expressly agreed to treat the clause as purely deterrent, in which case the penalty is enforceable even without proof of harm.
Article 1623(2) C.C.Q. introduces a corrective: the penalty may be reduced if partial performance has benefited the obligee, or where the clause is abusive. A clause is abusive when it places the obligor at an excessive and unreasonable disadvantage, violating the duty of good faith. In this case the issue was not that the clause was inherently abusive — it was reasonable as written — but that enforcing it in full, given the circumstances, would be abusive. This is often referred to as circumstantial abuse, which was the core issue in the case.
Why Public Contracts Are Different
The court emphasized that this analysis cannot be done in isolation. Public contracts are subject to constraints not found in the private sector, and these constraints typically work against reducing a penalty. A public owner is obligated to award the contract to the lowest compliant bidder, without discretion over who that bidder is or the ability to renegotiate once the contract is signed. The penalty clause is one of the few tools available to ensure contractors adhere to their schedules. Furthermore, every bidder has priced their tender based on the clause as originally written. Reducing the penalty after the fact would reward the contractor who failed to perform, while disadvantaging those who factored caution into their bids — directly conflicting with the principle of equal treatment among bidders. Additionally, because construction delays cause diffuse, hard-to-quantify harm for public owners, requiring full proof of loss before enforcing the clause would entirely defeat its purpose.
Five Factors, One Nuanced Outcome
On the threshold issue of whether any harm had occurred, the court had no difficulty in finding that it had. The Prolonged disruption for local residents, mobilization of municipal staff, and unplanned remedial work all pointed in the same conclusion. As Justice Lacoursière noted, “it defies common sense that a delay as considerable as this one [45% of the contractual timeline] would have occurred without any consequence whatsoever for the City.”
[Office translation]
Regarding the abuse question, the court framed its analysis as follows:
“Whether the penalty clause is abusive or not must therefore not be analyzed in a vacuum, but in the particular context of the parties’ intent, the quality of their consent, the performance of the contract, and the consequences of its non-performance.”
[Office translation]
Five factors shaped the outcome:
- EBC had itself negotiated the 10% cap and acknowledged it was the reason EBC agreed to bid. This was at odds with EBC’s argument that the clause it had insisted on was abusive.
- The penalty was nearly three times EBC’s expected profit on the project. The court was unpersuaded that this mattered much: if a thin margin were enough to escape a penalty, any contractor who underbid could walk away from its commitments.
- The delay was EBC’s fault. There was no force majeure, or failure on the City’s part — EBC was solely responsible for how the work was carried out.
- The City’s actual losses were probably lower than the penalty, suggesting a potential reduction. But the clause existed specifically so the City would not have to prove its exact losses.
- The clause had a real deterrent function, but there was no clear agreement between the parties that it was purely deterrent — a distinction that would have significantly narrowed the court’s room to intervene.
These factors led the court to conclude that full enforcement of the penalty would constitute abuse. As a result, the penalty was reduced from $2,997,500 to $2,000,000. The issue was not that the City was limited to its provable losses — a deterrent clause is expressly designed to let an owner recover more than its actual loss. The problem, however, was that enforcing the full penalty would have resulted in an unjustified windfall for the City at EBC’s expense. The judgment does not explain the precise reasoning behind the $2,000,000 figure.
Takeaways
The context surrounding a penalty clause is crucial in any abuse analysis. In public procurement, owners face genuine constraints: they cannot select their contractor or reopen negotiations after the contract is awarded. Every bidder tendered under the same terms. These features — which are not present in private contracting — lend particular legitimacy to penalty clauses in the public sector, and they should be given substantial weight when courts are asked to reduce them.
