Are Tendering Exclusion Clauses Enforeceable?

One of the big questions in tendering law in recent years is how an owner can protect themselves against unsuccessful bidders when they want to accept a non-compliant bid.  This question has been making its way through the legal system in Canada and the Supreme Court of Canada has recently set out a new test.

FACTS

In Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), the Ministry of Transportation and Highways (the "Province") issued a request for proposals ("RFP") to six pre-qualified bidders for the construction of 25 kilometres of highway in Northern British Columbia.  The RFP contained an exclusion clause that stated:

... no [bidder] shall have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP, and by submitting a [bid] each [bidder] shall be deemed to have agreed that it has no claim.

Tercon was a pre-qualified bidder and submitted a compliant bid. Brentwood, was also a pre-qualified bidder, but submitted a bid as a joint venture with another company, who was not a pre-qualified bidder. The Province eventually awarded the contract to the Brentwood joint venture. Tercon sued.

The BC Supreme Court decided that the Province fundamentally breached Contract A, the tendering contract, by accepting a non-compliant bid from a joint venture, and that the exclusion clause did not prevent Tercon from recovering damages for this breach.  The Province appealed.

The BC Court of Appeal overturned the BC Supreme Court decision. While it found that the Province breached Contract A, the exclusion clause allowed the Province to accept a non-compliant bid without consequence since the wording of the exclusion clause was so clear and unambiguous that it was inescapable that the parties intended it to cover all defaults, including fundamental breaches. Tercon appealed.

SUPREME COURT OF CANADA DECISION

In determining whether or not the exclusion clause was enforceable, the Supreme Court of Canada instituted a new three-part test:

1.     Determine whether the exclusion clause even applies to the circumstances of the case, based on the intentions of the parties as expressed in the tendering contract (Contract A);

2.     If the exclusion clause applies, determine whether the exclusion clause is unconscionable and thus invalid at the time the tendering contract was made; and

3.     If the exclusion clause is valid, determine whether the court should nevertheless refuse to enforce the exclusion clause because of some overriding public policy.

While all nine judges of the Supreme Court of Canada agreed with the new test, they were divided on how it should be applied.

The majority (five of nine judges) decided that the exclusion clause did not even apply in this circumstance (part one of the test). As the RFP process was premised on a closed list of eligible bidders, the Province's decision to accept a bid from a non-eligible bidder was contrary to their own process. Since the exclusion clause only related to claims arising "as a result of participating in [the] RFP" process, not to claims resulting from the participation of other, ineligible parties, it did not apply. To hold otherwise, the majority concluded, would "gut the RFP's eligibility requirements as to who may participate in [the RFP]". In the net result, the majority allowed the appeal and awarded damages to Tercon as already determined by the BC Supreme Court.

In contrast, the minority (the other four judges) decided that the exclusion did apply based on the wording of the contract. As Tercon was a large and sophisticated contractor, that there was nothing unconscionable nor any public policy reason why it should not be upheld, as people should generally have the freedom to contract as they wish.


LESSON FOR CONTRACTORS

  • Read the RFP carefully to ensure what is or is not allowed by the privilege and/or exclusion clauses before you decide whether to incur all of the costs required to bid.
  • While the Supreme Court of Canada's decision may cause owners to comply with the terms of Contract A by not accepting some materially non-compliant tenders, it is still a real possibility that the courts will uphold an exclusion clause barring any damages if the owner chooses a non-compliant bid.  In other words, the Court did not say that materially non-compliant bids cannot be accepted in the face of an exclusion clause.  However, there will now be circumstances in which owners face real risks in accepting such a bid.  If another bid has been accepted that is non-compliant, get legal advice on whether you have a claim.


LESSON FOR OWNERS ISSUING RFPs

  • If the RFP includes an exclusion clause, it must be drafted very precisely for it to apply.
  • Even if an exclusion clause applies, exercise great caution in relying upon it as the court's will interpret it strictly and have broad discretion in determining whether to enforce it, even if it applies.

 

NOTE: This article was written by Kevin L. Boonstra and Ian C. Moes, lawyers who practice in construction law at the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.