In Tercon Construction Ltd. v. British Columbia (Ministry of Transportation and Highways), 2010 SCC 4, the Supreme Court of Canada provided an analytical framework for the interpretation of a clause excluding liability in the context of a request for proposals, giving owners cause to carefully consider the drafting of RFP, tender or other procurement documents in the future.
The decision concerned a 2001 RFP by the Ministry of Transportation and Highways of British Columbia to build a $35-million highway. Under the terms of the RFP, only six bidders were eligible to submit a proposal. These eligible bidders included Tercon Contractors Ltd., the appellant, and Brentwood Enterprises Ltd., both of which were selected as short-listed proponents.
Lacking expertise in key aspects of construction and facing a limited local bonding capacity, Brentwood entered into an agreement with another construction company to form a joint venture. Although the bid was submitted in Brentwood's name, the Court found it to be, in substance, on behalf of the joint venture. Brentwood's partner was not an eligible bidder under the terms of the RFP and would not have been permitted to submit a bid on its own. Despite the fact that the province was aware of the joint venture arrangement and thought that a bid in the joint venture's name could not be considered, the province awarded the contract to Brentwood.
Tercon sued for breach of the tendering contract it entered into with the province through the RFP process, alleging that the province considered and accepted an ineligible bid. The substance of the dispute between Tercon and the province was the exclusion of liability clause contained in the RFP, which provided in part that:
“…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.” (emphasis added)
While the Court was unanimous on the analysis of what should be applied when considering the enforceability of an exclusion clause in the context of an RFP or tender, it was split 5-4 in its interpretation of whether the clause in question applied to the circumstances of Tercon's claim for compensation.
Both the majority and minority followed the lead established by the Court in The Queen in Right of Ontario v. Ron Engineering & Construction (Eastern) Ltd., [1981] 1 S.C.R. 111 (Ron Engineering) finding an intent to create a binding contract for the procurement process, the terms of which were the words used in the RFP. The Court took this opportunity to lay out an analytical framework to be used in determining the enforceability of an exclusion clause in a procurement contract.
The applicable analytical framework was laid out as a series of three enquiries by Justice Binnie writing on behalf of the minority. The first issue is whether the exclusion clause is applicable to the circumstances in question. This is a matter of interpretation, and depends on the court's assessment of the parties' intentions as expressed in the contract as a whole. If the exclusion clause does apply, the court must then determine whether it is valid in that it is not unconscionable as between the parties. This requires a consideration of whether factors such as an inequality in bargaining power existed at the time the contract was entered into. Finally, if the exclusion clause is both applicable and valid, the court may consider whether it should refuse to enforce it because of the existence of an overriding, significant, public consideration.
Justice Cromwell's opinion on behalf of the majority adopted the analytical framework but was more mindful of bidders, focusing on the nature of the tendering process and its inherent implied duty of fairness. In allowing the appeal and restoring the trial judge's conclusion that the exclusion clause did not apply to the circumstances of Tercon's claim for compensation, Justice Cromwell posed the essential question as being whether the exclusion clause, properly interpreted, excluded liability for the province having considered a bid from an ineligible bidder who was not supposed to be “participating in this RFP” process at all. According to the majority's interpretation, a key part of “participating in this RFP” was participating in a contest among those eligible to participate. A process involving ineligible bidders was not what was called for by this RFP, and did not in any meaningful sense amount to “participating in this RFP”. Acceptance of a bid from an ineligible bidder “attacks the underlying premise of the process”, and the majority concluded that the parties could not have intended to waive liability for such an attack.
Justice Binnie for the minority emphasized the “very strong public interest” in upholding and enforcing freely negotiated contracts, and stated that the party seeking to avoid enforcement must point to some “paramount consideration of public policy” in order to override this public interest and defeat the parties' contractual rights. Justice Binnie gave the exclusion clause a more literal interpretation. By submitting a bid, Tercon “participated in” the RFP process, which on its face triggered the application of the exclusion clause. To deny such participation occurred would be, according to Justice Binnie, a “strained and artificial interpretation” to avoid what might be interpreted in hindsight as an unfair clause. There was no relevant imbalance in bargaining power, and the public policy interest in a fair and transparent tendering process was not enough to override the protection afforded the province through the exclusion clause that Tercon freely agreed to. So long as contractors are willing to bid on such terms, Justice Binnie concluded that it is not the court's job “to rescue them from the consequences of their decision to do so.”
Both the majority and the minority approached the RFP first with a view to determining whether it was intended to create contractual relations. Concluding that the procurement document was intended to constitute a contract between owner and bidders, following the established line of cases beginning with Ron Engineering, the Court applied principles of contract interpretation to the contract created by the procurement documents without regard to any distinction based upon whether they were an RFP, tender or bid.
The clear message for owners is that they must approach the drafting of procurement documents with the same level of care as the contracts that they plan to enter into with the successful proponent. Procurement documents are binding contracts that will be interpreted by the Courts as commercial contracts. Failure to do so in this case resulted in a multi-million dollar loss for the owner. Exclusions of liability must therefore be carefully drafted to ensure that they are found to be applicable in the intended circumstances. The language of an effective exclusion clause must be clear and unambiguous.