The Supreme Court’s decision in Tercon Contractors Ltd. v. British Columbia,1 released February 12, 2010, marks an important development in the laws of contract and tendering. Although the decision resolves uncertainties with respect to the interpretation of exclusion clauses that have lingered for more than 20 years, the Court was divided in a five-four split on the application of the now-settled law to the procurement in question.

The case concerned whether the Province of British Columbia could rely on an exclusion clause to preclude a bidder from recovering damages when the Province accepted a bid from a supplier who was ineligible to bid. In restoring the decision of the trial judge, the Majority affirmed that the Province had breached the tendering contract and the exclusion clause did not apply to bar the claim made by Tercon.

Background

The facts of the case were as follows. The Province had issued a Request for Expression of Interest (RFEI) for the design and construction of a highway. Six responses were received, including from Tercon and Brentwood Enterprises Ltd. The Province then issued a Request for Proposal (RFP). Participation in the RFP process was limited to the six proponents that had participated in the in the RFEI. Brentwood lacked experience in drilling and blasting, and between the time of the RFEI and the RFP, elected to enter into an agreement with Emil Anderson Construction Co. Ltd. to undertake the work. Brentwood was successful and Tercon challenged the procurement.

The Province Accepts a Non-Compliant Bid

The Majority found that the agreement between Brentwood and Emil Anderson was, in substance, a joint venture. Thus, when the Province selected the Brentwood proposal, it accepted a proposal from a noncompliant bidder (i.e., one who was not among the six eligible bidders). The Dissent agreed that the Province’s conduct was in breach of its contractual obligations. The disposition of the case accordingly turned on the effectiveness of the exclusion clause, which provided:

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.

Law Relating to Exclusion Clauses is Clarified

The Court was unanimous in agreeing that the time has come to lay the doctrine of “fundamental breach” to rest. All members of the Court agreed that it was not particularly helpful to base the enforceability of an exclusion clause on a characterization of whether the breach in question was “fundamental”, “immense” or “colossal”. Indeed, the Court found that “[t]here is nothing inherently unreasonable about exclusion clauses”.

Since the Supreme Court’s decision in Hunter Engineering Co. v. Syncrude Canada Ltd.,2 there has been uncertainty surrounding the test to be applied when interpreting exclusion clauses, and whether to adopt the approach of Dickson J. in that case whereby exclusion clauses are to be upheld except in the case of unconscionability, or the approach of Wilson J., which continued to consider whether the foundation of the contract has been undermined by a party not providing the very thing that was bargained for. The Court resolved this issue by setting out the following three-part test:

  • The first issue is whether as a matter of interpretation the exclusion clause applies to the circumstances established by the evidence of a given case. The application of the clause will depend on the intention of the parties as expressed in the contract.
  • If the exclusion clause applies, the second question is whether the exclusion clause was unconscionable at the time the contract was made, which may include consideration of the respective bargaining power of the parties.  
  • Third, even if the clause is found to be enforceable on these tests, a court may undertake a third enquiry into whether the Court should nevertheless refuse to enforce the clause because of an overriding public policy concern. The onus of proof lies on the party seeking to avoid enforcement of the clause in view of the very strong public policy in favour of the enforcement of contracts.

The Split

The Court split on how this test should be applied to the facts of the case. The Majority found, as a matter of interpretation, that the Province’s exclusion clause did not apply. “Clear language” was necessary “to exclude liability for breach of such a basic requirement of the tendering process, particularly in the case of public procurement”. The Majority found that the clause was insufficiently clear to “gut a key aspect” of the RFP process, namely the requirement that only six bidders were eligible to bid. The Majority did not go on to consider whether the exclusion clause would have been unconscionable or contrary to public policy.

The dissenting Judges disagreed with this interpretation and placed emphasis on the fact that Tercon had willingly participated in the RFP process notwithstanding the clause. The Dissent did not find the clause to be unconscionable or contrary to public policy.

Implications

The issue that remains outstanding as a result of the Tercon decision is whether an exclusion clause will ever oust the duties of that Canadian tendering law has developed since the seminal case of The Queen in Right of Ontario v. Ron Engineering & Construction (Eastern) Ltd.3 – i.e., the duties to accept only compliant tenders, to a be fair and consistent in evaluating bids, etc. The close split between in the Majority and Dissent in the Tercon decision suggests that such exclusion clauses will be the subject of significant future litigation.