The Supreme Court of Canada last week issued an important decision as to the interpretation and enforceability of exclusion clauses. The decision is Tercon Contractors Ltd v. British Columbia 2010 SCC 4 (S.C.C.).

The issue arose out of a tendering contract for the design and construction of a highway. In a prior process six companies had submitted responses to a request by the Ministry of Transportation and Highways of the Province of British Columbia (“the Province”) for expressions of interest (“RFEI”). The Province then advised that it intended to design the highway itself and issued a request for proposals (“RFP”) for its construction. Under its terms, only the six original proponents were eligible to submit a proposal. The RFP also included a clause excluding all claims for damages “as a result of participating in this RFP”. Specifically, the clause provided:

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. [Emphasis added by the Court]

One of the six, B, was not able to submit a competitive bid on its own, so it teamed up with another company, which was not a qualified bidder, in a joint venture which submitted a bid in B’s name. B and Tercon were the two shortlisted proponents and ultimately B was selected as the preferred proponent.

Tercon brought an action seeking damages alleging that the Province had considered and accepted an ineligible bid and that but for that breach, it would have been awarded the contract. The trial judge agreed and awarded roughly $3.5 million in damages and prejudgment interest. The Court of Appeal reversed. The Supreme Court of Canada, in a 5:4 split, allowed the appeal and restored the trial judgment.

Submitting a bid in response to a tender call may give rise to a contract (called “Contract A”) between the bidder and the owner, the express terms of which are found in the tender documents.1 The trial judge found that the Province breached the express terms of the tendering contract by accepting a bid from, and awarding the contract to, an ineligible bidder. She also found that this and related conduct by the Province breached the duty of fairness to bidders and that the Province had acted egregiously by ensuring that the true bidder was not disclosed. These findings were not in issue on the appeal which related solely to the exclusion clause. The trial judge found that as a matter of interpretation the clause did not bar recovery and also found that there was a fundamental breach which in the circumstances barred its enforcement.

Whether to Enforce an Exclusion Clause - Fundamental Breach?

On the issue of fundamental breach, Cromwell J. for the majority in the Supreme Court of Canada said:

“[62] On the issue of fundamental breach in relation to exclusion clauses, my view is that the time has come to lay this doctrine to rest, as Dickson C.J. was inclined to do more than 20 years ago: Hunter Engineering Co. v. Syncrude Canada Ltd., [1989] 1 S.C.R. 426, at p. 462. I agree with the analytical approach that should be followed when tackling an issue relating to the applicability of an exclusion clause set out by my colleague Binnie J.….”

Binnie J. reviewed in some detail the jurisprudence regarding the doctrine of fundamental breach. He noted that the members of the Supreme Court in Hunter Engineering v. Syncrude2 had disagreed as to whether the doctrine of fundamental breach should be laid to rest. He said:

“[113] The law was left in this seemingly bifurcated state until Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423. In that case, the Court breathed some life into the dying doctrine of fundamental breach while nevertheless affirming (once again) that whether or not a “fundamental breach prevents the breaching party from continuing to rely on an exclusion clause is a matter of construction rather than a rule of law” (at para. 52). In other words, the question was whether the parties intended at the time of contract formation that the exclusion or limitation clause would apply “in circumstances of contractual breach, whether fundamental or otherwise” (para. 63). The Court thus emphasized that what was important was not the label (“fundamental or otherwise”) but the intent of the contracting parties when they made their bargain. “The only limitation placed upon enforcing the contract as written in the event of a fundamental breach”, the Court in Guarantee Trust continued,

‘would be to refuse to enforce an exclusion, of liability in circumstances where to do so would be unconscionable, according to Dickson C.J., or [note the disjunctive “or”] unfair, unreasonable or otherwise contrary to public policy, according to Wilson J.’ [Emphasis added; para. 52.]

(See also para. 64.)

What has given rise to some concern is not the reference to “public policy”, whose role in the enforcement of contracts has never been doubted, but to the more general ideas of “unfair” and “unreasonable”, which seemingly confer on courts a very broad after-the-fact discretion.”

He reviewed subsequent jurisprudence and writings and concluded that the following analysis should be carried out in determining whether to enforce an exclusion clause:

“[121] The present state of the law, in summary, requires a series of enquiries to be addressed when a plaintiff seeks to escape the effect of an exclusion clause or other contractual terms to which it had previously agreed.

[122] The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence. This will depend on the Court’s assessment of the intention of the parties as expressed in the contract. If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis. If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties” (Hunter, at p. 462). This second issue has to do with contract formation, not breach.

[123] If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.”

He gave examples of situations which might justify the refusal to enforce an exclusion clause under the third enquiry. He noted that “conduct approaching serious criminality or egregious fraud are but examples of well-accepted and ‘substantially incontestable’ considerations of public policy that may override the countervailing public policy that favours freedom of contract.”

As noted above, Cromwell J. for the majority agreed with this analysis and it thus has the endorsement of the full Supreme Court.

Interpretation of the Exclusion Clause

The members of the Court differed on the interpretation of the exclusion clause.

Cromwell J. said that, in his view, the clause does not exclude Tercon’s claim for damages. Alternatively, he said that if he was wrong about that, the clause is at best ambiguous and should be construed contra proferentem as held by the trial judge.3

As to the applicable principles of construction, he said:

“[64] The key principle of contractual interpretation here is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context. The approach adopted by the Court in M.J.B.4 is instructive. The Court had to interpret a privilege clause, which is somewhat analogous to the exclusion clause in issue here. The privilege clause provided that the lowest or any tender would not necessarily be accepted, and the issue was whether this barred a claim based on breach of an implied term that the owner would accept only compliant bids. In interpreting the privilege clause, the Court looked at its text in light of the contract as a whole, its purposes and commercial context. As Iacobucci J. said, at para. 44, “the privilege clause is only one term of Contract A and must be read in harmony with the rest of the tender documents. To do otherwise would undermine the rest of the agreement between the parties.”

[65] In a similar way, it is necessary in the present case to consider the exclusion clause in the RFP in light of its purposes and commercial context as well as of its overall terms. The question is whether the exclusion of compensation for claims resulting from “participating in this RFP”, properly interpreted, excludes liability for the Province having unfairly considered a bid from a bidder who was not supposed to have been participating in the RFP process at all.”

He referred to the importance of the integrity and business efficiency of the tendering process. He noted that the RFP process put in place by the Province was premised on a closed list of bidders; a contest with an ineligible bidder was not part of the RFP process and was in fact expressly precluded by its terms. However, as a result of how the Province proceeded, the very premise of its own RFP process was missing, and the work was awarded to a party who could not be a participant in the RFP process. He reviewed in some detail the significance of these factors in the bidding process in this case. He also addressed the clause in its context in the agreement, referring particularly to the consistency of the interpretation of the exclusion clause with another term of the agreement.

He concluded that the exclusion clause was not applicable because the clause only applies to claims arising “as a result of participating in [the] RFP”, not to claims resulting from the participation of other, ineligible parties. He also concluded that the words of the exclusion clause are not effective to limit liability for breach of the Province’s implied duty of fairness to bidders.

He further said that, if he was wrong about that interpretation of the clause, he would hold that its language is at least ambiguous. If, as the Province contends, the phrase “participating in this RFP” could reasonably mean “submitting a Proposal”, that phrase could also reasonably mean “competing against the other eligible participants”. He said: “Any ambiguity in the context of this contract requires that the clause be interpreted against the Province and in favour of Tercon under the principle contra proferentem5...”.

To Binnie J., and his colleagues in the minority, there was no ambiguity in the clause and it applied to exclude the claim.

Conclusion

This case is significant for the unanimous statement by the Supreme Court of the analysis to be made in determining whether to enforce an exclusion clause as set out in the reasons of Binnie J. It is also significant for the review made by Cromwell J. of the factors in giving a purposive construction to the exclusion clause in the context of the contract as a whole and in light of its purposes and commercial context.