In the recent decision of Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, the Supreme Court of Canada dealt with the important issue of exclusion of liability clauses in the tendering context.

This case involved a Request for Proposals by the Province of British Columbia for the Kincolith project to construct a section of $35 million highway. Initially, the project was intended to cover both design and construction. The Province issued a Request for Expressions of Interest (“RFEI”). The Province changed its mind and decided to design the project itself and issued a Request for Proposals (“RFP”) for the construction of the project only. Pursuant to the RFP it was contemplated that only the original six eligible bidders under the RFEI would be eligible.

In Canada, the law of tendering is governed by the Contract A/Contract B analysis set out in Ontario v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111. This involves two distinct contracts i.e., Contract A and Contract B. Contract A is the tendering contract. Contract B is the substantive construction contract. The terms of Contract A are determined by the terms of the tender documents and the intention of the parties. Terms typically implied in Contract A are the obligations of an owner to accept only a tender that complies with the tender documents and to treat all tenderers fairly and equally.1

The Province’s RFP contained an express exclusion of liability clause which stated:

2:10 . . . 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.

Tercon Contractors Ltd. (“Tercon”) submitted a proposal for the project. Its rival in the bidding process Brentwood Enterprises Ltd. (“Brentwood”) also submitted a proposal. Brentwood was an eligible bidder as it had participated in the RFEI, but it had entered a pre-bidding arrangement to form a joint venture with a party who had not participated in the first round and was therefore not eligible as a bidder itself. The Province awarded the project to Brentwood.

Tercon sued the Province claiming that the Province breached Contract A (i.e., the tendering contract) by awarding the project to an ineligible bidder and sought damages for lost profit.

The trial judge found that the Province breached Contract A and that the RFP’s exclusion of liability clause was ambiguous and did not protect the Province from Tercon’s claim for damages. The trial judge awarded Tercon damages in excess of $3.2 million.2 The Court of Appeal overturned the trial judge. In a short decision, it held that the exclusion of liability clause was clear, unambiguous and effectively barred Tercon’s claim.3

In a 5-4 split, the Supreme Court of Canada overturned the Court of Appeal. Both the majority and dissent agreed on the general analytical framework to be applied in addressing the issue of exclusion of liability clauses, but divided on the interpretation of the clause itself.

The general analytical framework is as follows:

  1. First, as a matter of contractual interpretation, does the exclusion clause in question apply to the circumstances of the case?
  2. Second, if the exclusion clause does apply, is the exclusion clause unenforceable because it was unconscionable at the time the contract was entered?
  3. Finally, are there any overriding public policies based upon which the Court should refuse to enforce the otherwise valid exclusion clause?4

Justice Cromwell, for the majority, narrowly interpreted the exclusion clause and concluded that it did not apply to the circumstances of this case. The majority emphasized the “special commercial context of tendering” and the idea that “[e]ffective tendering ultimately depends on the integrity and business efficacy of the tendering process”.5 According to the majority, the eligibility requirements of the RFP were at the “very root of the RFP”.6

Based upon the premise that the RFP was intended for eligible bidders only, and the special context of the case, the majority interpreted the words “participating in this RFP” as meaning participating in the contest among those eligible to participate only. According to the majority, participating in a process involving ineligible bidders is not “participating in this RFP” (emphasis added). As such, the exclusion clause does not protect the Province from accepting a bid from an ineligible bidder as that is not a claim arising from “this RFP”. Justice Cromwell explained:

[74] I turn to the text of the clause which the Province inserted in its RFP. It addresses claims that result from “participating in this RFP”. As noted, the limitation on who could participate in this RFP was one of its premises. These words must, therefore, be read in light of the limit on who was eligible to participate in this RFP. … Thus, central to “participating in this RFP” was participating in a contest among those eligible to participate. A process involving other bidders, as the trial judge found the process followed by the Province to be, is not the process called for by “this RFP” and being part of that other process is not in any meaningful sense “participating in this RFP”.

Clear language is needed to exclude liability for breach of such a fundamental element of the process. Justice Cromwell explained that eligibility of the bidders was a key element of the process and it seemed unlikely that the parties intended through this exclusion clause to “effectively gut” a key aspect of the process.7

Consequently, “this RFP” was interpreted as not including a process with ineligible bidders and, as such, the clause did not protect the Province from Tercon’s claim. According to the majority “[t]his interpretation of the exclusion clause does not rob it of meaning, but makes it compatible with other provisions of the RFP.” 8

Alternatively, the majority stated that if its interpretation is wrong, it would have concluded that the language is at least ambiguous and would apply the principle of contra proferentem.9

The strong dissent of four judges refused to accept the majority’s interpretation of the RFP’s exclusion clause. Justice Binnie stated the fundamental issue as follows:

[85] The appeal thus brings into conflict the public policy that favours a fair, open and transparent bid process, and the freedom of contract of sophisticated and experienced parties in a commercial environment to craft their own contractual relations. I agree with Tercon that the public interest favours an orderly and fair scheme for tendering in the construction industry, but there is also a public interest in leaving knowledgable parties free to order their own commercial affairs. In my view, on the facts of this case, the Court should not rewrite — nor should the Court refuse to give effect to — the terms agreed to by the parties.

Justice Binnie stated:

[93] … Contract A continues to be based not on some abstract externally imposed rule of law but on the presumed (and occasionally implied) intent of the parties. Only in rare circumstances will the Court relieve a party from the bargain it has made.

[94] As to implied terms, M.J.B. emphasized (at para. 29) that the focus is “the intentions of the actual parties”. A court, when dealing with a claim to an implied term, “must be careful not to slide into determining the intentions of reasonable parties”. Thus “if there is evidence of a contrary intention, on the part of either party, an implied term may not be found on this basis”.

Justice Binnie accepted that the Province breached the terms of its own RFP, but held the exclusion clause was clear and unambiguous. The words “participating in this RFP” applied to this case. The dissent was of the view that the process still continued to be this RFP notwithstanding that an ineligible bidder had entered it. The dissent noted:

[128] … but the conclusion that the process thereby ceased to be the RFP process appears to me, with due respect to colleagues of a different view, to be a “strained and artificial interpretatio[n] in order, indirectly and obliquely, to avoid the impact of what seems to them ex post facto to have been an unfair and unreasonable clause”.

Further, the dissent pointed out that the majority’s interpretation would leave little room for clause to operate given that “[a]ssertions of ineligible bidders and ineligible bids are the bread and butter of construction litigation”. Justice Binnie stated:

[136] … A more sensible and realistic view is that the parties here expected, even if they didn’t like it, that the exclusion of compensation clause would operate even where the eligibility criteria in respect of the bid (including the bidder) were not complied with.

The dissent ultimately concluded that “[w]hile there is a public interest in a fair and transparent tendering process, it cannot be ratcheted up to defeat the enforcement of Contract A in this case. There was an RFP process and Tercon participated in it.”10

Considering the remaining steps in the general analysis, the dissent concluded that the clause was not unconscionable at the time it was entered nor were there any overriding public policy reasons to cause the Court to decline to enforce it. The dissent pointed out that a contractor is free to decline to participate in a tendering process if it so chooses, and if enough contractors decline to participate the owner would necessarily be forced to change its terms. The dissent concluded by stating that “[s]o long as contractors are willing to bid on such terms, I do not think it is the court’s job to rescue them from the consequences of their decision to do so.” 11

This case will undoubtedly be seen as controversial for either side of the debate in an already extremely litigious area of the law. The case illustrates the classic conflict between the public policy that favours a fair, open and transparent bid process and the freedom of contract of sophisticated and experienced parties in a commercial context. The majority’s interpretation of the exclusion clause clearly favoured the policy of a fair, open and transparent tender process. The dissent favoured freedom of contract.