The Decision

Historically, Canadian courts have attempted to protect the integrity of the tendering process by implying an obligation that all bidders must be treated equally and fairly. Owners who breach that duty of fairness, including awarding contracts to non-compliant bidders, have been sanctioned through damages awards that include lost profits.

The Supreme Court of Canada decision of Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways) (“Tercon”) is consistent with this notion and once again attempts to safeguard the integrity and business efficacy of the tendering process. The case focuses on two competing fundamental principles – the rights of the parties to rely on contractual terms and the protection of the integrity of the bidding process. Earlier today, the Supreme Court of Canada released its decision in Tercon and held that the “no claims” exclusion clause contained in the tender documents could not be relied upon by the owner to avoid liability following acceptance of a materially non-compliant bid. The case turns on the interpretation of the clauses relating to the eligibility of parties to participate in the process and the exclusion clause.

Background

The British Columbia Ministry of Transportation and Highways (“the Ministry”) issued an RFP for the construction of a 25 km gravel highway to six “eligible” firms, which were pre-qualified based upon their participation in a previous pre-qualification process on the project, and which included Tercon and Brentwood Enterprises Ltd. (“Brentwood”). The RFP contained an exclusion clause which read:

Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for any 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 and Brentwood submitted responses to the RFP. Prior to submitting its RFP proposal, Brentwood informed the Ministry that it was forming a joint venture with Emil Anderson Construction (“EAC”) in order to submit a more competitive bid. EAC was not part of the pre-qualified proponent. Discussions between the Ministry and Brentwood ensued regarding the need for the proposal to be submitted in the name of the qualified team. As a result, Brentwood submitted a proposal in its name alone and named EAC as a major member of the team. The Ministry awarded the construction contract to Brentwood, with knowledge of the intention of Brentwood and EAC to perform the construction contract as a joint venture. Tercon was the second ranked bidder.

At trial, the British Columbia Supreme Court found in favour of Tercon and awarded damages for lost profits in the amount of $3,293,998.00. The Court held the Ministry had committed two breaches - accepting a non-compliant bid and approving a non-compliant bid as the successful proponent - thus breaching its implied duty to treat all proponents fairly and equally in accordance with the RFP process. Further, the Court determined that these breaches were fundamental and that the Ministry could not rely upon the exclusion clause to avoid liability. The trial judge found the wording of the exclusion clause to be ambiguous and that it was inconceivable that the parties could have intended the exclusion clause to apply to a fundamental breach of this nature. As a result, the Court held that it was neither fair nor reasonable to enforce the exclusion clause, as this would “render the duty of fairness that underlies the dealings between the owner and bidder meaningless”. The trial judge determined that Tercon had submitted a compliant bid, that there was a reasonable certainty that Tercon would have successfully negotiated the construction contract, and awarded Tercon the amount of profits it would have realized had it been awarded the contract.

The Ministry successfully appealed the trial decision, with the Court of Appeal holding that the exclusion clause was a complete bar to Tercon’s claim. It reasoned that Tercon and the Ministry were equally sophisticated parties to the contract and the wording of the exclusion clause was “so clear and unambiguous that it is inescapable that the parties intended it to cover all defaults, including fundamental breaches”. As a result, the Court of Appeal held it was not unconscionable, unfair or unreasonable to enforce the exclusion clause. The Court agreed that reliance on exclusion clauses to excuse acceptance of non-compliant bids would negate the public interest to have an orderly and fair scheme for tendering in construction contracts, but it held that it is not the court’s role to interfere in commercial dealings:

The answer lies not in judicial intervention in commercial dealings like this but in the industry’s response to all-encompassing exclusion clauses. If the major contractors refuse to bid on highway jobs because of the damage to the tendering process, the Ministry’s approach may change. Or, the industry may be prepared to accept that the Ministry wants to avoid suits for contract A violations, and the contractors will continue to bid in the hope that the Ministry acts in good faith.

The Supreme Court of Canada Decision

In a split, five-four decision, the Supreme Court of Canada allowed the appeal. The majority of the Court agreed with the trial judge that a proposal was accepted from, and the contract was awarded to, a party that should not have been permitted to participate in the tender process, thus breaching the express eligibility provisions of the tender documents and the implied duty of fairness to all bidders. The Ministry was contractually bound to accept bids only from eligible bidders. Furthermore, the Court held that the exclusion clause did not exclude the Ministry’s liability for “unfair dealings” with a party who was not entitled to participate in the tendering process.

The majority of the Court found the exclusion clause to be “at best” ambiguous and stated that it had to be interpreted in harmony with the rest of the contract and in light of its purposes and commercial context. The Court recognized the unique commercial context of tendering and stated that “effective tendering ultimately depends on the integrity and the business efficacy of the tendering process” and that this is particularly the case in public procurement, where there is a need for transparency. The Court determined that the integrity and business efficacy of the tendering process supported the conclusion that the exclusion clause be interpreted consistent with the eligibility limitations included in the RFP and that only clear language would permit the exclusion of liability for breach of the implied duty of fairness.

The dissenting portion of the Court found that the Ministry’s breach of its contractual obligations under the RFP fell within the exclusion clause, as it was found to be unambiguous. They held that there was no rule of law which permitted a court to override the freedom of the parties to enter into contracts with these terms and that the court had no discretion to refuse to enforce the clause. As found by the Court of Appeal, the dissenting judges of the Supreme Court of Canada held that the industry players should determine whether or not to participate in tender processes which include an exclusion of remedies for breach of the rules.

In addition, while the document was entitled Request for Proposals, the Court determined that the impact of a number of the conditions in the procurement documents was such that Contract A was created. Hence, the Tercon decision provides some guidance as to the distinction between situations where Contract A does or does not come into existence.

What this Means for You

As before, care must to be taken in both the creation, and reading, of the express wording contained in procurement documents. While the Canadian courts will continue to take steps to interpret the terms of RFPs and tender packages in ways which preserve the integrity of the tender process, the Court will enforce clear contractual language if it is found to reflect the reasonable expectations of the contracting parties.

Bidders must ensure that they fully understand the terms of the procurement documents and assess the risks before they participate in the process. Submission of a response commits the contractor to the contractual terms, including the express terms of an exclusion clause. If the potential risks are too significant, a contractor should consider whether they want to participate in the process or wait for another project.

Owners will need to consider how far to take their ability to include express language to limit their exposure in the procurement process. There is some speculation that, if requirements become too onerous for contractors, owners may receive fewer responses, higher prices and, possibly fewer compliant bids, which could result in unsuccessful procurement processes and delays in starting projects.

As always, legal decisions are based upon the specific facts and contractual language in the documents. In its decision in Tercon, the Supreme Court of Canada appears to have kept open the possibility of a carefully worded exclusion clause, which includes clear and unambiguous language, which excludes liability for a breach of the duty of fairness to bidders.

The Tercon decision will be felt by both owners and bidders, as both sides consider its consequences. It will be very interesting to watch how the industry responds. Given the Supreme Court of Canada’s split decision, following the extreme divergence in the courts below, the interpretation of procurement documents and, in particular exclusion clauses, may require more consideration and direction from the court.