Testing the liability shield (November 15, 2010)

It is rare for a construction contract to make it all the way to the Supreme Court of Canada, and rarer still that a construction case at the Supreme Court of Canada may have significant implications in Canadian law outside of the narrow confines of the building and development industry, so when a case like Tercon v. The Province of British Columbia comes along, readers of Building should take heed.


In the Tercon case, The Province of British Columbia issued a request for expressions of interest (the “RFEI”) for the design and construction of a highway. Six bidders made submissions including Tercon and its competitor, Brentwood. A few months later, the Province informed the six then-current proponents that the Province had changed its mind and now wanted to do all of its own design work on the highway itself, leaving only the construction of the highway up for tender. Having made that decision, the Province cancelled the RFEI, and then went ahead and issued a request for proposals (the “RFP”) only for the construction component of the highway.

The RFP set out defined project details and specifications and listed the criteria that were relevant in the selection process. Under its terms, the RFP provided that only the six original proponents under the RFEI were eligible to submit a proposal under the RFP. The RFP also included an express exclusion of liability clause which provided:  “…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.” [emphasis added].


Brentwood apparently lacked the requisite expertise in drilling and blasting necessary to make a competitive bid, so, prior to making a bid, Brentwood entered into joint-venture agreement with another construction company, Emil Anderson (“EAC”), and collectively they made the proposal but ostensibly under Brentwood’s name (but with EAC listed as a “major member” of the Brentwood team). The Brentwood/EAC joint venture and Tercon were the two shortlisted proponents and the Province ultimately awarded the project to the Brentwood/EAC joint venture.


At trial, Tercon successfully argued that the Brentwood bid was, in fact, submitted by a joint venture of Brentwood and EAC and that the Province, which had full knowledge of the Brentwood/EAC collaboration, had breached the express provisions of the tendering contract with Tercon by considering a non-compliant bidder. Furthermore, the trial judge concluded that the exclusion clause was too ambiguous to bar Tercon from recovering its damages arising from the Province’s breach; a breach which was, in any event, so fundamental that the exclusion clause could not insulate the Province from its consequences. While the Brentwood/EAC joint venture still got the project, Tercon was awarded millions of dollars in damages for having been wrongfully deprived of the opportunity.


The Province, undeterred, appealed to the British Columbia Court of Appeal, which set aside the Tercon victory, concluding that, while the Province had in fact breached its own tendering rules in the process, the exclusion clause was comprehensive and unambiguous enough to bar Tercon from seeking any compensation whatsoever for such defaults. Tercon then kicked the case up to the Supreme Court of Canada, which released its decision earlier this year.


In a relatively rare 5-4 split decision, the Supreme Court of Canada allowed Tercon’s appeal, although in so doing, the Supreme Court has left in its wake a significant amount of controversy, with most commentators quite critical of the decision.


The Supreme Court judges were unanimous in the three-part test to be used in analyzing exculpatory clauses like the one relied upon by the Province. The first part, and one that was arguably trite, was whether, as a matter of interpretation, the exclusion clause even applied to the defaults being alleged. If so, the second part was whether the exculpatory clause was “unconscionable” as a matter of law. If the exculpatory clause was not unconscionable, then the third and final enquiry was whether enforcement of the exculpatory would run counter to a principle of public policy (the Supreme Court citing circumstances such as conduct constituting serious criminality or egregious fraud being wellaccepted violations of public policy).


Although the Supreme Court judges all agreed on the specifics of the three-part test regarding exculpatory clauses, the judges were sharply divided on how to apply the three-part test to the facts in the Tercon case.


The majority of the Supreme Court judges felt that the exculpatory clause that the Province was using against Tercon could not pass the first part of the test. In other words, the exculpatory clause was not broad enough to actually cover the Brentwood bid at all. According to the majority of the judges, by accepting a bid from a party who should not even have been permitted to participate in the tender process and by ultimately awarding the work to that ineligible bidder, the Province breached the implied duty of fairness to bidders. The exculpatory clause only barred claims for compensation “as a result of participating” in the tendering process (see the emphasized wording above). Tercon’s claim did not arise from its participation in the tendering process. Tercon’s claim, instead, arose out of the Province’s unfair conduct in dealing with an ineligible bidder, not in Tercon’s participation in the process. Having failed the first part of the test, the Province was barred from relying on the exculpatory clause as a defence, and was thus liable in damages to Tercon.


The minority of the Supreme Court judges felt that the majority’s “as a result of participating” reasoning was, for want of a better term, a bit of legal sophistry. In a somewhat pointed jab at the majority’s position, the minority reasons concluded the majority’s logic was nothing more than a “strained and artificial” way of indirectly avoiding the exculpatory clause just because the majority judges thought, after the fact, that the exculpatory clause seemed unfair and unreasonable.


The minority position was far more commercially laissez faire — Tercon was a sophisticated and experienced contractor that chose to bid on the project knowing full well that there was a comprehensive exculpatory clause preventing it from suing for claims. To be clear, the minority judges did agree that the Province had breached its duty of fairness, and that Tercon had legitimate reason to complain about the Province’s conduct, but concluded that such misconduct was not ultimately unconscionable in light of the relative bargaining power of the parties, did not rise to the level where public policy would justify the court in depriving the Province of the protection of its exculpatory clause.


Commentators have been almost universally critical of the Tercon decision. On the one hand, the Supreme Court has sent the message that there is definitely a duty of fairness in the tendering process and that they will seemingly go out of their way, even to the point of adopting “strained and unreasonable” logic in interpreting exculpatory clauses against owners who try to use such clauses to protect themselves when conducting unfair procurement practices. On the other hand, the Supreme Court has also suggested that, if the exculpatory clause is unambiguous enough and comprehensive enough, it really is ope
n to an owner to exculpate itself from almost any behaviour, with only unconscionable behaviour and violations of public policy left as the only barriers to total lawlessness. Ultimately, when all is said and done, Tercon did not really change the law that much. An owner is still bound contractually to treat bidders fairly in accordance with the published rules once a bidder files a compliant bid, and exculpatory clauses do not provide owners with an unlimited “get of a jail free” card condoning all measures of misconduct. After Tercon, the game will be in determining just how egregious an owner can be in violating its own bidding procedures while still remaining within the terms of its exculpatory clause and without being unconscionable or exceeding the limits of public policy. As many readers of Building will note, maybe Tercon just tells all industry participants that, in the end, it is perhaps just simpler, cheaper and better business to simply make very clear procurement rules and then to actually follow them.

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