Tercon Contractors v. B.C.: It’s Only A Matter Of Time!

1 juin 2010 | William (Bill) M. Pigott

( Disponible en anglais seulement )

We shouldn’t be surprised that the Supreme Court of Canada – in Tercon Contractors Ltd. v. BC – should confirm that Contract A is a real contract, meaning that the parties can pursue their legitimate goals in their contracts which include – among other things – managing risk. The Court spilt 5/4 on whether Tercon should recover – it did recover, to the tune of over $3,000,000. But, the difference between the majority and the dissent was on the application of the law to the facts, not on the underlying law itself.

Facts

The BC Ministry of Transportation and Highways issued a request for proposal (RFP) for the construction of a highway. The essential elements of the RFP led three levels of our courts to conclude that Contract A was formed between the Province and compliant bidders, including Tercon.

In essence, the RFP provided that the Province would entertain bids only from pre-qualified bidders. If a pre-qualified bidder wanted to change its team or organization, the RFP outlined a re-qualification process which required the approval of the Province.

Brentwood was pre-qualified but it recognized that it lacked some important skills and, without those skills, it would not succeed. So, it made arrangements with a company called Anderson to create a joint venture if Brentwood’s bid was selected by the Province. Brentwood submitted a request to add Anderson to its team but the Province didn’t respond – one way or the other. Neither did the Province advise the other bidders that there might be a new, pre-qualified player in the game.

At closing, Brentwood submitted its bid essentially as a joint venture between itself and Anderson. Recall that Anderson is not a pre-qualified bidder. Neither was Brentwood/Anderson.

Brentwood – in conjunction with Anderson – made a very attractive bid. After evaluation, the Province awarded the contract to Brentwood/Anderson but covered up the fact that Brentwood/Anderson was a joint venture – entering a contract that made it appear that Brentwood alone was prime contractor.

Tercon sued, alleging that Brentwood/Anderson was not a pre-qualified bidder. The Province threw up a number of defences, the most notable of which was the following clause found in the RFP:

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.

As an observation, clauses similar to this one appear in most Instructions to Bidders and requests for proposal. Most bidders probably understood the clause to mean that the bidder and not the owner bears the cost of preparing a bid. The carve-out at the beginning of the clause refers to a token payment ($15,000) which the Province will make to each bidder in the event that it cancels the process without awarding a contract to anyone.

Decisions at Trial and in the BC Court of Appeal

At trial, the judge considered the relevant case law on bidding – Ron Engineering and its descendants – and concluded:

  • that the RFP created Contract A with successful proponents;
  • that the Province breached Contract A by awarding the contract to a non-compliant bidder (Brentwood/Anderson, in fact);
  • that the exclusion clause did not bar recovery for a breach of Contract A;
  • that it would not be fair or reasonable to enforce such a clause given the “fundamental breach” of Contract A by the Province.

The trial judgment ordered the Province to pay approximately $3.3 million to Tercon as damages for breach of Contract A.

The BC Court of Appeal took a contrary view, finding that the exclusion clause was clear and unambiguous and barred Tercon from making a recovery. Further, there was no imbalance in bargaining power – after all, Tercon needn’t have bid – to persuade the Court of Appeal to interfere with the bargain the parties had made. Whether the Province’s breach of Contract A was “fundamental” or not, was of no consequence.

Supreme Court of Canada

The Supreme Court of Canada had the final word. The fact that the Court restored the judgment of $3 million plus was important to the Province and Tercon. But, the decision has much broader implications for bidders and owners because it predicts a shift in bidding dynamics which is not for the better – if you are a bidder.

(i) Common Ground

When you take the essence of the majority and minority opinions in the Supreme Court of Canada, you find that the Court was unanimous on the following:

  • the underlying legal framework for the law of bidding as enunciated in Ron Engineering, MJB, Martel, Naylor and Double N;
  • whether the RFP prepared by the Province was capable of creating Contract A with compliant bidders (it was);
  • whether Contract A was created between the Province and Tercon (it was);
  • whether Contract A between the Province and Tercon was breached by the Province (it was);
  • whether and under what circumstances the parties may rely on clauses which limit or exclude liability even where the party attempting to rely has fundamentally breached their obligations (they can rely – subject to two follow-on tests).

(ii) The Majority Decision

The nine members of the Court seem to have been of one mind until it came down to interpreting the exclusion clause. There, paths diverged with the result that, by the thinnest margin possible, Tercon recovered damages.

The majority decision was written by Mr. Justice Cromwell. At paragraph 62 of the decision, he lays the foundation for the majority decision and identifies the single point on which there was divergence. His Lordship states:

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 Dixon C.J. was inclined to do more than twenty years’ ago: Hunter Engineering Co. v. Syncrude Canada Ltd. … 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.  However, I respectfully do not agree with him on the question of the proper interpretation of the clause in issue here. In my view, the clause does not exclude Tercon’s claim for damages, and even if I am wrong about that, the clause is at best ambiguous and should be construed contra proferentem as the trial judge held. As a result of my conclusion on the interpretation issue, I do not have to go on to apply the rest of the analytical framework set out by Binnie J.

Contra Proferentem. A legal principle of contract interpretation providing that any ambiguity in a term of a contract must be resolved against the author if the choice is between him and the other party to the contract who did not participate in the drafting.

So, the short answer is that the majority held that the exclusion clause did not do the job. But, neither side of this divided Court suggested that an exclusion clause was repugnant to the whole notion of Contract A. Far from it. The exclusion door has always been open – because parties have freedom of contract. And, this reality has been highlighted by the Court which seems to have no qualms about seeing an owner – if it drafts the clause properly – create total protection for itself should it breach Contract A, however flagrantly.

(iii) The Disent

That’s not to say that a well drafted clause is a “gimme”. Because, there are circumstances – though not many – under which a Court might refuse to enforce even a well drafted exclusion clause.

Mr. Justice Binnie laid out those circumstances:

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.

The first issue, of course, is whether as a matter of interpretation the exclusion clause 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 pg. 462). This second issue has to do with contract formation, not breach.

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.

(a) Unconscionability

The first move in this two-step analysis was a visit to the issue of unconscionability, usually resulting from an inequality of bargaining power. On this issue, Mr. Justice Binnie made the following statement:

While Tercon is not on the same level of power and authority as the Ministry, Tercon is a major contractor and is well able to look after itself in a commercial contract. It need not bid if it doesn’t like what is proposed. There was no relevant imbalance in bargaining power.

The Court also observed that the clause only excluded the recovery of monetary damages. Open to Tercon, at least in theory, were remedies such as specific performance and injunction. Specific performance – when another bidder already has the project – is hard to imagine. An injunction may be a bit of a stretch since one of the requirements of an injunction (an order to prevent someone from doing something) is that an award of monetary damages would not be an adequate remedy. Is the Court likely to order an injunction where the bidder willingly, from the perspective of the dissent, gave away its right to claim monetary damages?

(b) Public Policy

Having decided that bargaining power/unconscionability was not an issue, the Court turned its attention to whether there was a public policy interest to animate non-enforcement.

As it did with unequal bargaining power, the Court reviewed a number of authorities to reach its conclusion on how public policy would or would not play in this case. The Court quoted Professor Stephen Waddams and agreed with his characterization of the power of the Court and the nature of a public policy override. The Professor wrote:

It is surely inevitable that a Court must reserve the ultimate power to decide when the values favouring enforceability are outweighed by values that society holds to be more important.

If you have been an avid reader of bid cases over the years, you will have encountered the commitment of the Courts to the protection of the integrity of the bid process. Actually, all the Supreme Court of Canada decisions involving Contract A have underscored that principle and have founded their decisions – at least in part – on the need to preserve that integrity. Here, the Court recognized the same public interest but felt uncompelled by it. Mr. Justice Binnie wrote:

While there is a public interest in a fair and transparent tendering process, it cannot be ratcheted up to defeat the enforcement of Contract A in this case. There was an RFP process and Tercon participated in it.

So, if the much invoked integrity of the bid process isn’t enough, what is?

Mr. Justice Binnie gave two examples where the Court might invoke public policy to set aside an exclusion clause. One example is found in an earlier Court of Appeal decision in Alberta and the other is a hypothetical. Both focused on public policy in relation to the behaviour of the person trying to shelter behind the exclusion clause.

As a hypothetical, the Court imagined a milk manufacturer attempting to shelter behind an exclusion clause when it had intentionally adulterated its product with serious public health consequences – no argument there. Pretty extreme, though.

In the real world, the Alberta Court of Appeal held that public policy overrode a clause in favour of a pipe manufacturer which had knowingly sold defective pipe which, when it degraded prematurely, caused property damage and risk to human health. In the Tercon case, had the minority prevailed, neither public policy nor inequality of bargaining power would have been of any comfort to Tercon.

Commentary

Both the facts and the law as described in the Supreme Court of Canada decision are more interesting and more nuanced than this note. But, the stark message to the marketplace is that if an exclusion clause is crafted properly then, absent a finding of unequal bargaining power (unconscionability) or absent some overriding public policy, the breaching owner will avoid liability. Tough hill for a bidder to climb, that!

In the British Columbia Court of Appeal, Mr. Justice Donald surmised that if bidders don’t like exclusion clauses, they won’t bid. If owners can’t solicit bids, they will soon get the message. If only the bidding world worked like that.

Oddly, bidders may soon be in a worse position than they occupied before Ron Engineering established the Contract A/Contract B model almost thirty years ago. Facing an effective exclusion clause, bidders have all of their Contract A obligations and are liable to the owner if they commit a breach – as in refusing to accept an award of contract or attempting to withdraw their bid, having discovered a mistake. Owners, on the other hand, are at liberty to breach their own Contract A obligations and skate away unscathed – if they get the exclusion clause right. Once the “perfect clause” is developed, it’s hard to imagine a breach of Contract A by a bid calling owner that would be odious enough to result in a judicial override.

What’s a bidder to do? Have no fear: they will think of something. After all, before Ron Engineering, and the bidder’s rights which arose from it, contractors managed to get work and make a living. Inventive souls that they are, they will adapt.

Rock solid exclusion clauses: it’s only a matter of time!

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