Damage suffered: essential element for using a penalty clause


The penalty clause makes it possible to establish, in advance, the damages to be paid by the party that does not respect its obligation1. It is particularly well known for accompanying a non-competition clause that may be found in an employment contract.

When parties negotiate the terms of a transaction, agreement or contract, they often include a confidentiality clause, which may be accompanied by a penalty clause. However, in order for the penalty clause to apply and for damages to be claimed, the party claiming breach of confidentiality must have suffered loss.

This is what the Court of Appeal recalled in the case Bacon-St-Onge v. Conseil des Innus de Pessamit2in a decision dated November 25, 2021.


The dispute in this case arose from the termination of employment of the appellant, Mr. Bacon-St-Onge. It was during a settlement following the contestation of this termination of employment that a transaction was concluded, including a confidentiality clause, which was accompanied by a penal clause. This penalty clause reads as follows:

“The parties agree that this agreement is strictly confidential and failure by either party to maintain such confidentiality will result in the imposition of liquidated damages in the amount of $5,000 in favor of the party that has complied with the agreement without prejudice to the rights of the party that has complied with the agreement to seek injunctive relief from the Superior Court (translated)”.

According the Mr. Bacon-St-Onge, the confidentiality clause should have applied both to the fact he was dismissed and to the fact that he received an amount as severance pay as part of the transaction. In particular, he contends that the Council breached the confidentiality clause by referring to this information in legal proceedings between the tw006F parties.

Superior Court Analysis

In the first instance, the Superior Court concluded, following its analysis, that the objective sought by the confidentiality agreement was the non-disclosure of the amount received as severance pay under this transaction. The dismissal of Mr. Bacon-St-Onge was publicly known and had even been published on Radio-Canada. The purpose of such a clause could not therefore be to make a publicly known fact confidential.

Mr. Bacon-St-Onge argued that the publicity surrounding his dismissal had caused him damages, including damage to his reputation. In the first instance, however, the Court considered that, because of the sharing of the situation on social networks by Mr. Bacon-St-Onge himself, as well as the legal claims he filed, he had to expect a certain amount of retaliation from the Conseil des Innus de Pessamit, which could not be the basis for a claim for damages under the penal clause.

Court of Appeal Analysis

Mr. Bacon-St-Onge, dissatisfied with the first instance decision, decided to appeal to the Quebec Court of Appeal. He argued that the penalty clause should have been applied, contrary to the Superior Court’s conclusion. The Court of Appeal first recalled that, in the absence of a manifest and determining error, “a court of appeal must refrain from modifying the finding of fact and the mixed findings of fact and law made by the trial judge” (translated).

In addition, the Court considers that the first instance judge did not commit a manifest and determinative error in concluding that the confidentiality clause related only to the payment of the indemnity and not to the dismissal. Nor did it made such an error in rejecting the claim for disclosure of the compensation, or in finding that Bacon-St-Onge had suffered no prejudice.

Finally, the judges of the Court of Appeal added, based on the applicable case law and doctrine, that it is well established that a finding of no prejudice generally defeats a claim based on a penalty clause.

In sum, it is not sufficient for the payment of a penalty to be due that the other party has breached any clause which itself contains a penalty clause ancillary to it. It is also necessary that the party claiming the breach has suffered damage as a result. More specifically, for a penalty clause to be enforceable, there must be proportionality between the value of the damage and the clause itself.

Written with the collaboration of Mr. Luc Robitaille, law student.


1 Code civil du Québec, RLRQ c CCQ-1991, art. 1622.
2 Bacon St-Onge c. Conseil des Innus de Pessamit, 2021 QCCA 1765.