Case Brief: Tercon Contractors v British Columbia

Tercon Contractors Ltd. v British Columbia (Transportation and Highways), 2006 BCSC 499, revd 2007 BCCA 592, revd 2010 SCC 4, [2010] 1 SCR 69, online: LexUM http://scc.lexum.org/en/2010/2010scc4/2010scc4.html

This case, similar the earlier case of M.J.B., considered the effect of an exclusion clause in the context of an acceptance of a non-compliant bid. The exclusion clause in this case was more broadly worded than the privilege clause in M.J.B.

Facts

In 2000, the British Columbia Ministry of Transportation and Highways (the “Ministry”) issued a request for expression of interest (“RFEI”) for a major highway design-build project. Six teams of interested contractors made submissions, including Tercon Contractors (“Tercon”) and Brentwood Enterprises (“Brentwood”). After receiving the submissions the Ministry changed its mind and decided to perform the design function itself and issued a request for proposals (“RFP”) for the construction contract only.

The RFP was issued in January 2001 and included among its terms a provision that only participants in the original RFEI process were pre-qualified to bid. The RFP also included a broadly worded exclusion clause excluding liability on the part of the Province for any damage claims arising “as a result of participating in this RFP”. It was specifically worded as follows:

Except as expressly and specifically permited in these Instructions to Proponents, no Proponent shall have and 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 (para 60).

Brentwood found itself unable to submit a competitive bid on its own in part as a result of a lack of experience in drilling and blasting and engaged Emil Anderson Construction (“EAC”) to work with it on the bid. Brentwood sent a preliminary submission to the Ministry’s project manager to advise them that it had changed its team structure and wished to form a joint venture with EAC. The Ministry never responded to this preliminary submission, although it fact it should have pursuant to the provincial Ministry of Transportation and Highways Act then in force. Unlike Brentwood, EAC was not a participant in the original RFEI process and was not on its own an eligible bidder. Brentwood and EAC submitted a bid in Brentwood’s name. Although it understood that the Brentwood/EAC joint venture submission did not constitute an eligible bid, the Ministry nonetheless accepted it and took steps to obscure the reality of the situation. Brentwood and Tercon’s bids were shortlisted and of the two Brentwood was selected for the project.

Tercon sued the Ministry for damages on the basis that acceptance of an ineligible bid constituted a breach of contract, and that the breach had cost it an award of the project.

Procedural history

The trial judge accepted Tercon’s arguments and awarded expectation damages. On the issue of the application of the exclusion clause, she found that it was ambiguously worded and applied the contra proerentem rule to resolve the ambiguity in favour of Tercon, and she also held that the Ministry’s breach was fundamental and thus that it was not fair or reasonable to enforce the clause in light of such a breach. The Court of Appeal reversed the trial decision on the basis that the exclusion clause did cover the Ministry’s default.

Issues to be determined

  1. Did the province breach the tender contract by accepting a bid from an ineligible bidder?
  2. Does the exclusion clause bar a claim for damages for breach of the tendering contract?

Holding

  1. Yes
  2. No, on an interpretation of the clause that found that it did not apply to the circumstances of the breach.

Rule of law

On the issue of the enforceability of exclusion clauses, courts must undertake a three-part inquiry for enforceability:

  1. As a matter of interpretation, does the clause apply to the circumstances established in evidence?
  2. If it applies, was it unconscionable at the time the contract was made?
  3. If it applies and is valid, should the court nonetheless refuse enforcement based on an overriding issue of public policy?

Minority reasons

In a five to four split, the majority reasons for decision were delivered by Justice Cromwell (Justices LeBel, Deschamps, Fish and Charron concurring), while dissenting reasons were written by Justice Binne (Chief Justice McLachlin and Justices Abella and Rothstein concurring in dissent).

In his majority reasons for decision Cromwell J adopted a test put forward by Binnie J in the minority reasons, and so it makes sense to discuss the dissenting reasons first.

Before launching into his dissent, Binne J prefaced them with a statement that sets the tone for the minority reasons:

The important legal issue raised by this appeal is 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. (para 81)

Binnie J did not spend much time on the question of whether the Ministry had breached their obligations to Tercon under the RFP, being satisfied with the finding at trial that they had, and his dissent focuses on the issue of the enforceability of exclusion clauses such as the one contained in the RFP. He noted that:

The appeal thus brings into conflict the public policy that favours a fair, open and transparent bid process, and the freedom of contract of sophisticated and experienced parties in a commercial environment to craft their own contractual relations. I agree with Tercon that the public interest favours an orderly and fair scheme for tendering in the construction industry, but there is also a public interest in leaving knowledgeable parties free to order their own commercial affairs. In my view, on the facts of this case, the Court should not rewrite – nor should the Court refuse to give effect to – the terms agreed to by the parties.” (para 85)

Reviewing Supreme Court jurisprudence on bidding and tendering since its decision in Ron Engineering, Binne J emphasized the contractual nature of the Contract A/Contract B construct, concluding that “contract A continues to be based not on some abstract externally imposed rule of law but based on the presumed (and occasionally implied) intent of the parties. Only in rare circumstances will the Court relieve a party from the bargain it has made.” (para 93).

Turning to the exclusion clause Binnie J stated that there were two separate questions to answer in addressing the clause’s applicability, (i) whether there were a statutory or other legal reason why the parties would not have been free to negotiate the exclusion clause, and (ii) if there were any other reasons why the clause should not be enforced in the circumstances (such as fundamental breach).

On the first question, Tercon had argued that the statute under which the RFP had been undertaken communicated a policy that the Ministry should be accountable for its actions and thus that an exclusion clause was incompatible with the statute. Binnie J gave short shrift to this argument stating that the statute “no where prohibits the parties from negotiating a ‘no claims’ clause” (para 101).

Turning to the second question Binnie J reviewed what was then the leading Canadian case on fundamental breach: Hunter Engineering Co. v Syncrude Canada Ltd. [1989] 1 SCR 426. In that case the Supreme Court had unanimously upheld a contested exclusion clause, but diverged in their assessments of when a court could properly refuse to enforce an exclusion clause. In Hunter, Dickson CJ favoured a pre-breach analysis of whether the clause was unconscionable at the time the contract was made. Wilson J favoured a post-breach analysis considering whether, in the event of a fundamental breach, it were still fair in the circumstances to allow enforcement of an exclusion clause:

Wilson J. considered it more desirable to develop through the common law a post-breach analysis seeking a “balance between the obvious desirability of allowing the parties to make their own bargains . . . and the obvious undesirability of having the courts used to enforce bargains in favour of parties who are totally repudiating such bargains themselves” (p. 510) (para 109)

Binnie J then turned to other more recent cases on the issue of fundamental breach, focusing on considerations of public policy. He was generally of the view that no rule of law needed to be explicitly stated that that a court could resort to public policy to reuse to enforce a contract, but that such discretion on the part of the court went without saying. “Freedom of contract, like any freedom, may be abused” he stated, giving examples of such abuses which would clearly justify refusal to uphold an exclusion clause on grounds of public policy.

Based on his survey of the jurisprudence on the enforcement of exclusion clauses, Binnie J thus stated a three part inquiry for assessing enforceability:

  1. As a matter of interpretation, does the clause apply to the circumstances established in evidence?
  2. If it applies, was it unconscionable at the time the contract was made?
  3. If it applies and is valid, should the court nonetheless refuse enforcement based on an overriding issue of public policy?

The onus of proof of this last inquiry lies on the party seeking to avoid enforcement. (paras 122-123)

Applying this three-part inquiry to the case, Binnie J found that the exclusion clause did apply, holding that Tercon did “participate” in the RFP process, whether or not the process was compromised. (para 128)

On the question of whether the clause was unconscionable, Binnie J held that that while “Tercon is not on the same level of power and authority as the Ministry”, is was nonetheless a major contractor and well able to look after itself, so there was no “relevant” imbalance of bargaining power. (para 131)
On the question of an overriding concern of public policy, Binnie J stated that while “there is a public interest in a fair and transparent bidding process, it cannot be ratcheted up to defeat the enforcement of Contract A in this case.” (para 135) He acknowledged the clear validity of Tercon’s complaints about the Ministry’s handling of the RFP, having no real issue with the trial judge’s “condemnation” of the Ministry’s lack of fairness and transparency, but held simply that that the “Ministry’s misconduct did not rise to the level” required for a court to refuse enforcement on grounds of public policy. (para 140).

Binnie J would have dismissed the appeal.

Majority reasons

Like Binne J, before rehearsing the facts and formally framing the issues Cromwell J prefaced his reasons with a summary paragraph whose wording set the tone for the majority reasons:

The Province accepted a bid from a bidder who was not eligible to participate in the tender and then took steps to ensure that this fact was not disclosed. The main question on appeal, as I see it, is whether the Province succeeded in excluding its liability for damages flowing from this conduct through an exclusion clause inserted into the contract. I share the view of the trial judge that it did not (para 1).

1. Did Brentwood submit an eligible bid?

Cromwell J began by reviewing the authorities for the formation of Contract A in the bidding process and on the nature of implied terms. While the Ministry did not contest the existence of Contract A on Appeal as they had at trial, Cromwell J thought it prudent to review the reasons for the trial finding that Contract A had formed.

The Ministry had not in fact issued a call for tenders, but, as mentioned, a “request for proposals”.

Note: RFP processes are typically used where a project has a significant design element or where for some other reason it makes sense to entertain feedback from prospective bidders with competing solutions prior to negotiating a final contract with one of them. In a definitional sense, they are distinct from a classic call for tenders; but in practice it is sometimes hard to tell the difference.

The terms of the RFP included among other things a period of irrevocability, a requirement of bid security, significant formalities surround the submission of documents, and a set of detailed evaluation criteria. As a result, despite the fact that some details of the main contract were left to be negotiated with the successful bidder, the trial found that the parties had actually agreed to enter a contractual agreement governing the bidding process; i.e. that Contract A had formed.

Cromwell J noted that this model is a little more complicated than the simpler Ron Engineering-style Contract A/Contract B model, where the terms of Contract B are fully articulated from the outset. But, he noted that this did not impact the analysis of the case at hand, and further, it was not necessary to explore in full detail all the terms and conditions of Contract A. The question was merely whether it was a term of Contract A that the Ministry accept bids only from eligible bidders (para 21).

Cromwell J agreed with the trial finding of fact that the bid was ineligible and that the Ministry well knew it:

[The Ministry] had a bid which it knew to be on behalf of a joint venture. Permitting the bid to proceed in this way gave the joint venture a competitive advantage in the bidding process, and the record could not be clearer that the joint venture nature of the bid was one of its attractions during the selection process. The Province nonetheless submits that so long as only the name of Brentwood appears on the bid and ultimate Contract B, all is well. If ever a submission advocated placing form over substance, this is it” (para 49).

Cromwell J further found that the Ministry’s conduct “not only breached the eligibility provision of the tender documents, but also the implied duty to act fairly towards all bidders.” (para 59).

2. Does the exclusion clause successfully exclude the Ministry’s liability for the breach?

Cromwell J first turned briefly to the question of fundamental breach in relation to exclusion clauses, saying that he felt it was time to “lay this doctrine to rest”, although he subsequently said little else about it (para 62).

Cromwell J did state that he agreed with Binne J’s analytical approach to the applicability of an exclusion clause, but disagreed with Binnie J on the interpretation of the clause. As a consequence he did move beyond the first part of the three-part inquiry. Rehearsing some of the legal principles applicable to interpretation of contractual terms, Cromwell J emphasized the principle that terms be read in the context of the entire agreement and highlighted the decision taken by the Court in past cases to carefully “consider the special commercial context of tendering”, and reiterated the view that “[e]ffective tendering ultimately depends on the integrity and business efficacy of the tendering process” (para 67). He went on:

The closed list of bidders was the foundation of this RFP and there were important competitive advantages to a bidder who could side-step that limitation. Thus, it seems to me that both the integrity and the business efficacy of the tendering process support an interpretation that would allow the exclusion clause to operate compatibly with the eligibility limitations that were at the very root of the RFP.

The same may be said with respect to the implied duty of fairness. As Iacobucci and Major JJ, who wrote for the Court in Martel at para. 88, “[i]mplying an obligation to treat all bidders fairly and equally is consistent with the goal of protecting and promoting the integrity of the bidding process.” It seems to me that clear language is necessary to exclude liability for breach of such a basic requirement of the tendering process, particularly in the case of public procurement. (paras 70-71)

Cromwell J asserted that interpreting the exclusion clause this way did not rob it of meaning, but merely that it could not have been intended to operate when the Ministry’s failure to adhere to the RFP process was such as to be completely outside the process altogether. (para 76)

Cromwell J finally stated that in any event if his interpretation of the clause was incorrect, he agreed also with the trial judge’s reasons on the ambiguity of the clause and that it should be read in favour of Tercon. (para 79) Cromwell J restored the trial judgment.

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