The Supreme Court of Canada Weighs In

In 1981, the Supreme Court of Canada in The Queen (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111 invoked a dual contract model governing the law surrounding tender calls, distinguishing between Contract “A” and Contract “B”.

Contract A is an agreement between the owner and the bidder relating to how the tendering process is to be carried out. The call for bids is considered the “offer”, while the submitted bid is the “acceptance” of that “offer”. The terms of Contract A are set out in the wording of the tendering documents while Contract B is the actual contract for the work.

During the tendering process, Contract A imports a duty of fairness owed by the party making the call for tenders to those parties submitting compliant bids. The duty of fairness and the integrity of the tendering process requires that no competitive advantage is given to any bidder and the consistent application of the rules as described in the tender documents. A party calling for tenders may include an exclusion clause in the tender documents. The question is the validity of an exclusion clause where there is a breach of the duty of fairness during the tendering process.

In Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2006 BCSC 499 (“Tercon”) the British Columbia Supreme Court dealt squarely with this issue. Tercon involved six contractors who submitted bids to the Ministry of Transportation and Highways, relating to the construction of 25 kilometres of highway. Tercon submitted the second lowest bid. A joint venture comprised of two parties, only one of which was eligible to bid, based on a prequalification process submitted the lowest bid. The Ministry undertook efforts to disguise the involvement of the ineligible party and accepted the lowest bid from the joint venture. The Contract was awarded in the name of the eligible contractor only.

The Plaintiff, Tercon, then sought damages against the Ministry, alleging the Ministry accepted a non-compliant joint venture, contrary to the terms of the Request for Proposals and in breach of the Contract A. At trial, Dillon, J. held that Contract A was breached by the Ministry in two respects: first, by accepting a non-compliant bid, and second, by breaching a duty of fairness during the evaluation stage when it approved a non-compliant bid as the successful bidder.

The Ministry argued that it could rely on an exclusion clause contained in the tender instructions to thwart any alleged breach of Contract A. The clause 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.

At trial the exclusion clause was held inapplicable due to the finding that the Ministry’s breach of contract was fundamental and attacked the underlying purpose of fair competition.

. . . it is neither fair nor reasonable to enforce the exclusion clause. Although both parties are sophisticated, it could not have been contemplated that there would be no recourse if the Ministry accepted a non-compliant bid: to suggest otherwise would change the base of the tender system without notice. Enforcement of the exclusion clause in these circumstances would not give effect to the intention of the parties and would render the duty of fairness that underlies the dealings between the owner and bidder meaningless.

Damages were calculated based on anticipated revenue minus costs and Tercon was awarded $3,293,998. The Ministry appealed.

The Court of Appeal unanimously reversed the award of damages. It held that the exclusion clause applied because it was clear and unambiguous. It therefore included fundamental breaches and effectively ended the claim of Tercon. The Court of Appeal also found that the intention of the parties was a matter of contract interpretation, not enforcement.

In noting public policy and the future dealings of parties to a tendering process affected by such exclusion clauses, the Court of Appeal added:

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.

Tercon was granted leave to appeal to the Supreme Court of Canada (“SCC”) on July 10, 2008 and the matter was heard on March 23, 2009. On February 12, 2010, in a 5:4 decision, the SCC narrowly reversed the Court of Appeal decision. The majority held that there was no basis to interfere with the trial judge’s finding that only the original six eligible contractors were eligible to submit a response. The requirement that only compliant bids are considered and the implied obligation to treat bidders fairly are central to the tendering process. In this case, the majority found that the parties did not intend to waive the ability to seek compensation for conduct (like that of the Ministry) that went to the root of the tendering process and Contract A.

In order to exclude liability for breach of an implied obligation, clear language would have to had been used in the exclusion clause; especially in cases of public procurement where the need for public transparency is essential.

The majority held that “participating in this RFP”, meant participating in a process where only eligible parties were able to participate. A process involving “other bidders” did not fall within the ambit of the exclusion clause, thus recovery was not barred.

On the other hand, the minority was of the opinion that the clause was clear and unambiguous and that there was no legal ground or rule of law that would permit the Court to override the freedom of the parties to contract with respect to an exclusion clause. On the facts, the minority felt that denying the operation of the exclusion clause, simply because the Minister chose a Brentwood “joint venture” instead of Brentwood itself, would give the clause a strained and artificial interpretation.

What is interesting is that both the majority and minority did not preclude the possibility of contracting out of the implied duty of fairness, so long as clear and unambiguous language is used. However, given the Court’s split on this issue, what exactly constitutes clear and unambiguous language seems illusive. The split court ruling foreshadows that the wording of exclusion clauses will continue to cause problems for the courts.