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Supreme Court Rules on Tendering Liability

By: Anna Esposito (Construction CanadaNovember 2010)

The year 2010 brought the construction industry a legal ruling of importance to owners and contractors alike. Released in February, the eagerly awaited Supreme Court of Canada decision concerns an owner’s ability to exclude liability in tendering contracts.

The story of Tercon Contractors Ltd v. British Columbia began with a Request for Proposal (RFP) issued by the Ministry of Transportation and Highways of British Columbia. The owner awarded the contract to a joint venture, which included an unqualified bidder. An unsuccessful bidder alleged the Ministry had breached the tendering contract by accepting the joint venture’s bid. The owner attempted to refute the unsuccessful bidder’s claim by relying on the exclusion of liability clause in the tender contract.

The facts and the particular wording of the exclusion clause are important to the eventual outcome. The RFP was limited to six eligible proponents, all of whom had been pre-qualified. It contained the following exclusion clause:

Except as expressly and specifically permitted in these instructions to Proponents, no Proponent shall have any claim for compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a Proposal, each Proponent shall be deemed to have agreed that it has no claim.

Brentwood, one of the eligible proponents, was unable to submit a competitive bid on its own and entered into a joint venture with another company that was not pre-qualified. Together, they submitted a bid in Brentwood’s name.

The Ministry knew Brentwood’s bid was actually that of a joint venture including an unqualified proponent. In fact, the Ministry took steps to hide the bidder’s identity before accepting Brentwood.

Tercon, an unsuccessful bidder, claimed the province had breached the implied obligation of good faith in the tendering contract by entertaining a bid from, and awarding, the contact to an ineligible bidder.

The trial judge agreed and awarded Tercon damages of $3.3 million. At the original trial, Justice Dillon found the province could not rely on the exclusion clause because it had ‘fundamentally breached’ the contract.

Eliminating ‘fundamental breach’

By a majority of just five to four, the Justices of the Supreme Court of Canada upheld the trial decision, but in so doing eliminated the doctrine of ‘fundamental breach’. This doctrine prevents a party from relying on an exclusion of liability clause in the contact where that party’s actions have been deprived the other contracting party of substantially the whole benefit of the contract.

All members of the court agreed that when a plaintiff seeks to escape the effect of an exclusion clause, the following new three-part test applies:

1. Does the exclusion clause as a matter of interpretation apply to the circumstances? (The court will assess the intent of the parties as expressed in the contract.)

2.  If so, was the exclusion clause unconscionable at the time the contract was made? For example, was this a situation of unequal bargaining power?

3. If the clause is valid and applicable, should the court nevertheless refuse to enforce the clause because of the existence of overriding public policy grounds that outweigh the strong public interest in the freedom of contract?

Although all the Justices agreed on the test to be applied, where the majority and minority parted company was in the application of this test to the particular facts of the case and the unique wording of the exclusion clause at issue. In short, the Justices came to opposite conclusions.

How the decision was overturned

The majority concluded the clause did not apply to Tercon’s claim. In coming to this conclusion, the majority considered the special commercial context of tendering, which depends on the integrity of business efficacy of the process.

This factor becomes of particular concern where, as in this case, the tender was in the context of public procurement. In this case, the foundation of the RFP process was a closed list of pre-qualified bidders. Tercon’s claim was not barred by the exclusion clause because of “participating in this RFP” could not include an improper bidding process involving unqualified bidders. It is fair to say the majority was not impressed with the Ministry’s conduct, describing it as “an affront to the integrity and business efficacy of the tendering process”

In contrast, the minority focused less on the integrity and transparency of the bidding process and more on freedom of contract. In the minority’s opinion, “participating in this RFP” began with submitting a proposal, which Tercon did. To conclude it ceased to be an RFP process because the Ministry had conducted the process unfairly was a trained and artificial interpretation of the plain words of the contract. In the minority’s opinion, since the clause applied to the facts, Tercon had therefore agreed to the exclusion of its claim for damages.

Applying the second portion of the three-part test, the minority found there was neither imbalance in the parties’ bargaining power nor any overriding public policy that justified a refusal to enforce the clause. The minority acknowledged a public interest in a fair and transparent tendering process, and that Tercon had legitimate grounds to complain about the Ministry’s conduct. However, it concluded the misconduct had not risen to the level where public policy would justify depriving the Ministry of the protection of an exclusion clause freely agreed to by Tercon.

What does the Supreme Court decision mean?

What does this decision mean to participants in the tendering process? It is clear all members of the Court recognize and acknowledge the importance of a fair and transparent tendering process, especially in the public procurement arena.

The majority is not saying owners are unable to exclude damages for accepting a non-complaint bid. If that is the intent, the message from the Supreme Court of Canada is to draft very tight exclusion clauses using clear and unambiguous language to avoid claims from disappointed bidders.

In the wake of the Tercon decision, courts will undoubtedly continue to enforce well-drafted exclusion clauses which they consider to be bargains freely made by sophisticated parties, unless there is egregious conduct or a compelling public policy reason not to.

However, since all the Justices of the Supreme Court of Canada could not agree on the enforceability of the exclusion of liability clause on Tercon, the contracting parties continue to have little certainty when attempting to enforce such a clause or tying to escape its effect.

Pallett Valo LLP has earned my trust and loyalty based on their extensive legal knowledge and expertise, further enhanced by their prompt service and attention to detail.
Mark Hallink