The Supreme Court of Canada has issued the following caution to tendering authorities:
Beware the standard limitation-of-liability clauses written into the procurement process to protect against claims from suppliers who claim unfair treatment.
The court’s warning comes in its recently-published 5-4 decision in Tercon Contractors Limited vs. British Columbia.
In the Tercon case, BC’s Ministry of Transportation and Highways initially called for expressions of interest for the design and construction of a portion of a provincial highway. As it became clear later, one joint venture proponent, EAC, had been involved in advising the Province on the project very early in its life, and the Province had asked EAC to prepare a bid for comparison purposes. However, EAC had declined. During the request for expressions of interest (RFEI) process, six others, including Tercon, the appellant, came forward.
The Province decided instead, some many months later, to design the highway itself and asked for requests for proposals (RFP), but limited its circulation of this RFP to “those firms identified through the RFEI process as eligible to submit proposals for the work”.
Brentwood, one of the five other bidders, joint ventured and won the bid. It turned out that Brentwood had formed a joint venture with EAC. This was known to the Province but not to the other bidders.
Tercon, the second lowest bidder, sued on the basis that EAC had not been “identified through the RFEI process” and won at trial. It lost at the B.C. Court of Appeal, however, because of an exclusion-of-liability clause that it had agreed to in the tender documents. Tercon then appealed to the Supreme Court of Canada, arguing the exclusion clause did not apply.
The Supreme Court split in a close 5-4 decision allowing Tercon’s appeal; not enforcing the limitation of liability clause, and restoring a trial judgment against the Province for lost profits in excess of $3 million. The RFP had a term that said “proposals received from any other party would not be considered”.
In Tercon, both the majority and the minority decisions laid the ailing doctrine of fundamental breach to rest and set out a new three-part test for determining whether or not an exclusion clause applies. (The doctrine held that if a breach of contract is so egregious as to be characterized as “fundamental”, the contract essentially is voided. The test was to determine whether the breach was “fundamental” or went to the “root of the contract”. If so, the exclusion clause could not apply. The court said this is no longer the analysis that should be undertaken and set out the new test.)
Of significance is the close call made between the majority and the minority decisions as to whether the exclusion clause applied in the circumstances. 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”.
In my view, the entire case turns on the legal issue identified by Justice Binnie, namely, whether, and in what circumstances, a court will deny a defendant contract breaker the benefit of an exclusion-of-liability clause to which the innocent party, not being under any sort of disability, has agreed.
In a short paragraph, Justice Binnie for the minority summed up his view of the case.
“There is nothing inherently unreasonable about exclusion clauses. Tercon is a large and sophisticated corporation. Unlike my colleague Justice Cromwell, I would hold that the respondent Ministry’s conduct, while in breach of its contractual obligations, fell within the terms of the exclusion clause. In turn, there is no reason why the clause should not be enforced.”
Commercial parties ought to find some comfort in the strong language of the primacy of contract, both in the majority and minority decision which echo in a broad thematic way, the primacy of contract the Supreme Court of Canada has recently applied in CNR v. Royal and Sun Alliance and in Design Services 2008 , both arising in the construction context.
In my view, the minority’s analysis ought to be preferred when determining whether or not to enforce an exclusion clause.
1. The first issue is whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in evidence. This depends on an assessment of the intention of the parties as expressed in the contract.
2. 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” (citing from the Supreme Court’s 1989 decision in Hunter Engineering Co. v. Syncrude Canada Ltd. )
3. The third issue is 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, and because that public policy otherwise outweighs the “very strong public interest in the enforcement of contracts”.
An example of where an exclusion of liability clause would be unenforceable (as the minority decision notes), is in the Alberta Court of Appeal 2004 decision in Plas-Tex Canada Ltd. v. Dow Chemical.
In this case, the defendant, Dow Chemical, had knowingly supplied defective plastic resin to a customer who fabricated natural gas pipelines. Instead of disclosing prior knowledge of the defect, Dow chose to protect itself by a limitation of liability clause. After some years, the pipelines began to degrade with considerable damage and risks to human health from leaks and explosions.
In language endorsed by Justice Binnie, “a party to a contract will not be permitted to engage in unconscionable conduct secure in the knowledge that no liability can be imposed upon it because of an exclusionary clause” (citing the Plas-Tex decision).
Where a party is so contemptuous of its contractual obligation and reckless as to the consequences of its breaches so as to forfeit the assistance of the court, the public policy that favours freedom of contract is outweighed by the public policy that seeks to curb its abuse.
In citing this example as the high watermark for the enforcement of exclusion clauses, the minority departs from the majority. The majority agreed with the trial judge that the Province behaved in an “egregious” way when it allowed the tender to be awarded to the party who should “not have even been permitted to participate in the tender process” to begin with.
For the minority, this was simply a breach of contract caught by the exclusion-of-liability clause.
It is hard to know what language could be sufficient to immunize the tender calling authority where an ineligible bidder is involved.
For the majority, the unique statutory framework of BC’s Ministry of Transportation and Highways Act, which mandated a statutory process for highway repairs, gave life to a policy of “protecting the integrity of the bidding process”.
For the majority, the RFP process was put in place by the Province premised on a closed list of bidders. The contest with an ineligible bidder was not part of the RFP process. It was, in fact, expressly precluded by the RFP’s terms.
Consequently, Tercon’s claim was not barred by the exclusion clause because that clause only applied, in the majority view, to claims arising “as a result of participating in [the] RFP,” and not to “claims resulting from the participation of other ineligible parties”.
To preclude such claims, the Province would have had to reserve to itself “the right to accept a bid from an ineligible bidder or to unilaterally change the rules of eligibility”.
It was not enough that there may have been administrative law remedies to complain about the Province’s award of the tender to the Brentwood/EAC joint venture.
For the majority, enforcing the exclusion clause would have struck at the very heart of the integrity and business efficacy of the tendering process which the Province itself undertook.
The minority would have applied the third element of Justice Binnie’s test requiring Tercon, as the party seeking to avoid the application of the exclusion clause, to demonstrate an overriding public policy outweighing the public interest in the enforcement of contracts. In the end, for the minority, Tercon had not identified a relevant public policy that fulfilled this requirement. Paraphrasing Justice Binnie at paragraphs 126, 127 and 128:
“The trial judge found that Contract A was breached when the RFP process was not conducted by the Ministry with the degree of fairness and transparency that the terms of Contract A entitled Tercon to expect. The Ministry was at fault in its performance of the RFP, but the process did not thereby cease to be the RFP process in which Tercon had elected to participate.
“The interpretation of the majority on this point is disagreed with. ‘Participating in this RFP’ began with ‘submitting a proposal’ for consideration. The RFP process consisted of more than the final selection of the winning bid and Tercon participated in it. Tercon’s bid was considered. To deny that such participation occurred on the ground that in the end the Ministry chose a Brentwood joint venture (an ineligible bidder) instead of Brentwood itself (an eligible bidder) would be to give the clause a strained and artificial interpretation in order, indirectly and obliquely, to avoid the impact of what may seem to the majority ex post facto to have been an unfair and unreasonable clause.”
For the minority, this case did not rise to the high watermark of an abuse of the freedom to contract. For the majority, it did.
A difficulty arises with an after-the-fact postbreach analysis of the parties’ pre-breach intention as expressed in their contract language. However, the majority does offer a cautious approach. It finds that the exclusionary phrase, “participating in this RFP,” could reasonably mean “submitting a proposal” (and thereby precluding Tercon’s claim). It also finds, however, that the exclusionary phrase could also reasonably mean “competing against the other eligible [emphasis added] participants”.
For the majority, contra proferentem, the rule of contract interpretation which provides that an ambiguous term in a contract will be construed against the party that insisted on its inclusion, resulted in this ambiguity being resolved against the Province.
Again, it is hard to justify reading any ambiguity into this clause.
The majority’s intrusive reading of the parties’ prior bargain may come back later to haunt the court in other interpretive disputes in commercial contracts.
It remains to be seen whether this decision in the context of the public procurement process and the peculiar statutory overlay of rules and duties will be expanded into the private sector. I suspect not.
All of this means in practice that it may be difficult for lawyers to make pre-breach predictions as to whether a particular exclusion clause will be enforced after the fact.
It is equally clear that it would be dangerous for any tender-awarding authority, in the face of the Tercon decision, to award a contract to an arguably ineligible bidder. Perhaps the result may be a greater number of cancelled tenders to avoid this risk. Presumably had that occurred, Tercon’s claim would have been limited to the tender mandated $15,000 limitation on wasted bid costs.