*Guest Post by Michael E. Mitchell, McCarthy Tétrault LLP
The tendering and procurement process in Canada has traditionally been treated by the courts as a special area of contract law in which fairness and protecting the integrity of the tender process have been guiding principles. Courts have implied terms into contract “A” bid contracts that have obliged owners to act fairly, and wide discretionary clauses have been interpreted narrowly to ensure the integrity of the tendering process.
Owners looking to maximize their control over the selection of contractors have continued to fine-tune instructions to bidders and attempt to limit their own liability. How far will the courts go to intervene in these commercial contracts because of the special status historically bestowed on the tendering process? In a 5 – 4 split decision, the Supreme Court of Canada (SCC) has delivered its views in the case of Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), 2010 SCC 4. The SCC has highlighted the importance of maintaining the integrity of the tendering process and treating bidders fairly, but has also “laid to rest” the doctrine of fundamental breach in connection with exclusion clauses and provided guidelines for the future preparation and analysis of tender documents.
Facts in Tercon
The British Columbia Ministry of Transportation and Highways (MOTH) issued a tender call for the construction of a gravel highway and the bid rules prohibited joint venture bids. MOTH accepted a low bid submitted by a joint venture consisting of two parties, one of which might have alone been a qualified bidder, and MOTH directed the “acceptance” to that single member of the two-party joint venture bidder. Tercon Contractors Ltd. was one of the unsuccessful bidders, and they sued MOTH on the argument that the contract could not be awarded to a non-compliant bidder. On the facts, MOTH had broken its own tendering rules but it rejected Tercon’s claim for compensation and relied on the following limitation provision included in the MOTH tender instructions:
“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.”
Variations on this clause have since become known as “Tercon clauses.”
Supreme Court of British Columbia Decision (March 2006)
The British Columbia Supreme Court heard the arguments of the parties and determined that MOTH had awarded the contract to a non-compliant bidder. The BC Supreme Court maintained that it had the discretion to restrict the enforceability of the Tercon limitation clause. The court decided that the discretion to limit such exclusionary clauses may be exercised in the tendering context on policy considerations, and under general contract law on principles of fundamental breach, unfairness, unreasonableness and unconscionability. In this case, the court found that it was neither fair nor reasonable to enforce the exclusion clause and that MOTH had acted egregiously in awarding the contract to a non-compliant bidder. Tercon was awarded damages in the amount of $3,293,998.
Court of Appeal for British Columbia Decision (December 2007)
MOTH appealed the trial decision and the Court of Appeal did not consider it necessary to determine whether the successful bid was non-compliant with the instructions to bidders. Instead, the Appeal Court focused on the exclusion clause and found that the trial judge had erred in refusing to give effect to it.
The Court of Appeal recognized that while the integrity of the bidding process, especially for public works, should be given high value, it considered “ … the words of the exclusion clause so clear and unambiguous that it is inescapable that the parties intended it to cover all defaults, including fundamental breaches.”
In answer to the argument that such exclusion clauses may be contrary to the public interest by disrupting an orderly and fair scheme for tendering, the Appeal Court observed that judicial intervention in this area of commercial dealings is not appropriate and that the industry will have to react by choosing whether to bid in the presence of such clauses.
The clear and unambiguous exclusion clause was held to be a complete bar to Tercon’s claim against MOTH.
Supreme Court of Canada Decision (February 2010)
In a 5 – 4 decision of the SCC, the appeal of Tercon was allowed. While the entire court agreed on the appropriate framework of analysis in reviewing whether a party can avoid the effect of an exclusion clause, they were divided on how the formula applied to the facts of Tercon. The majority concluded that the words in the exclusion clause, “participating in this RFP,” must mean “participating in a contest among those eligible to participate.” Consequently, the majority decided that the Province of British Columbia had accepted a bid from a party who should not have been eligible to participate, and a process involving ineligible bidders could not be covered by the clause. The minority sided with the BC Court of Appeal and considered the exclusion clause to be clear, unambiguous and applicable.
The SCC decided that a party attempting to escape the effect of an exclusion must apply the following three-step analysis:
1. the clause does not apply to the circumstances, as a matter of interpretation; or, if it does apply;
2. the clause was unconscionable at the time it was made and therefore invalid, such as in the case of an inequality of bargaining power between the parties; or, if this cannot be shown;
3. the clause offends “an overriding public policy … that outweighs the very strong public interest in the enforcement of contracts” (this third part of the analysis replaces the doctrine of fundamental breach as a policy basis for avoiding a contract provision).
The Future of Exclusions in Procurement Documents
Exclusion clauses that will be upheld by the courts will require more detailed acknowledgements and clarity in order to be enforced. Although the minority decision in Tercon considered the exclusion clause to be clear and unambiguous, the preparation of such clauses will require more fine-tuning to avoid judicial interference. The Tercon decision provides some guidance, or at least a reaffirmation, of the principles to be followed in the administration of any procurement process:
A. Prepare clear rules regarding how the procurement process will be administered, and follow those rules. Do not award to a party who is not in material compliance with the rules.
B. If a revised “Tercon clause” is to be included in procurement documents, it must address, to the greatest extent possible, the circumstances of the parties and the mutual acceptance of the intent to waive claims arising out of the process. If this approach is repugnant to contractors they may refuse to participate, and this risk will have to be evaluated by the entities initiating the procurement process.
The message from the Supreme Court of Canada seems to be that clearly drafted, unambiguous exclusion clauses will be permitted in the absence of egregious conduct by the party conducting the procurement process.
If you would like to discuss the potential impacts of the Tercon case on tendering law or any procurement contracts, please contact Michael Mitchell, Counsel in McCarthy Tétrault’s Vancouver office at 604-643-7937 or firstname.lastname@example.org.