Tercon Contractors: Taking the Road Less Travelled

Last week, Tercon v Ministry of Transportation and Highways, 2010 SCC 4, the Supreme Court of Canada (“SCC”) revisited the doctrine of fundamental breach. While in Hunter Engineering Co v Syncrude Canada Ltd, [1989] 1 SCR 426 [Syncrude], the Court had previously professed to abandon the doctrine, the competing approaches offered in that judgement raised questions as to when to enforce exclusion clauses. Nearly twenty years later, the Court again offers its take on this issue.

Background

Historically, Kincolith was the most important village of the Nisga’a people; however, since it was only accessible by ferry or plane, it was quickly eclipsed by other villages that had road access. The Nisga’a and the federal and provincial governments agreed in 1996 to jointly fund the construction of a 25-km two lane highway. The British Columbia Ministry of Transportation and Highways was appointed in charge of the project.

In 2000, the Ministry issued a Request for Expressions of Interest (“RFEI”) where teams of contractors were invited to submit a proposal for the project, the required budget, and the composition of the team. Six teams, including Tercon and Brentwood, submitted proposals. The Ministry then decided to use its own design, but contracted out the construction project to the lowest bidder. Bidding under this scheme was to be restricted to the original six teams that submitted proposals under the RFEI.

In 2001, the Ministry issued a Request for Proposals (“RFP”) to the six teams. Due to time constraints and a lack of expertise, Brentwood approached EAC and proposed the formation of a joint venture. EAC was NOT a team under the original RFEI. Although each team in its proposal had to set out the composition of their team, there was some concern over the fact EAC was not an eligible bidder. The Ministry, therefore, advised Brentwood that any bid should be made only in its name and not in the name of EAC. Brentwood submitted the lowest bid, followed next by Tercon. Tercon then sued the Ministry for breach of contract in accepting a bid from an ineligible bidder.

Judicial History

The issues at trial were: whether a binding contract was created by submitting a proposal; whether the Ministry had breached that contract by accepting the Brentwood/EAC bid; and, whether the exclusion in the RFP excluded any liability in the event of a breach. The exclusion clause stated:

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 it has no claim. [emphasis added]

The trial judge held that a contract was creating by Tecron submitting a proposal, and that this contract was subsequently breached by the Ministry in accepting what was essentially a joint venture between Bentwood and EAC when EAC was not an eligible bidder. The judge held that, since exclusion clauses are construed contra proferentem, the clause did not apply to that breach because the Ministry would not have contemplated itself breaching the agreement in that manner. Alternatively, since the breach was fundamental and it would be neither fair nor reasonable to enforce the exclusion clause, no effect would be given to that clause.

The Court of Appeal, however, held that the clause was clear and unambiguous and the parties intended it to encompass all defaults (including fundamental breaches). Since it was the parties intention to exclude any such liability, it would be fair and reasonable to enforce the clause against Tercon. Finally, since the parties were of roughly equal bargaining power, the Court of Appeal found it difficult to say the clause was unconscionable.

Reasons

The issue in front of the SCC was whether the Ministry had breached a contract and (if so) whether the exclusion clause excluded any liability for the breach. Both the majority and the minority agreed with the trial judge in so far as: there was a binding contract created by the proposal; Brentwood was a joint venture; and, by accepting the bid the Ministry breached this contract.  My analysis is therefore restricted to the scope and function of the exclusion clause, and the doctrine of fundamental breach.

The doctrine of fundamental breach has a storied history. A fundamental breach occurs where a breach by one party deprives the other party of substantially the whole benefit that he or she was to derive from the contract. The question is whether a fundamental breach should prevent the breaching party from relying on an exclusion clause to escape liability or not. Over the past century, courts have oscillated back and forth on the issue.

In the leading case of Syncrude, the Court attempted to move away from the doctrine of fundamental breach, and offered two different approaches to exclusion clauses. Dickson C.J. pointed out that not all fundamental breaches were unreasonable, and argued courts should seek to uphold legitimate bargains between parties. He preferred to use unconscionably to defeat unreasonable exclusion clauses; in his view, an exclusion clause should be upheld unless the court determines that, at the time of contracting, the parties were of unequal bargaining power and did not intended the clause to exclude liability for this breach.

Wilson J., on the other hand, was of the opinion that courts should retain the residual discretion to refuse to enforce such clauses if a judge determines that, at the time of breach, it would be unfair or unreasonable to exclude liability, or enforcing the clause would be otherwise contrary to public policy.

Having reviewed the case law, Binnie J. then sets out the necessary framework to be adopted when seeking to enforce exclusion clauses. First, as a matter of construction, it is necessary to determine whether the exclusion clause applies to the circumstances at hand. Second, if the clause is applicable, the court must determine whether it is unconscionable as made between parties of unequal bargaining power. Finally, if the clause is valid and applicable, the Court must balance the public interest in enforcing contracts and giving efficacy to the parties’ bargain against any other public policy concerns.

The Court unanimously articulates the appropriate analytical approach, but splits in its application to the facts. Writing for the majority, Cromwell J. addresses the first inquiry as to the scope of the exclusion clause. The clause excludes any liability resulting to proponents “participating in this RFP”. Since the RFP was applicable to those eligible to bid, any process involving ineligible bidders would not be the process contemplated by “this RFP”. The parties could not have intended to exclude damages resulting from the Ministry unfairly permitting a bidder to participate when it could not do so. Since the exclusion clause does not apply to such a breach, it is unnecessary to consider the second and third inquiries.

Binnie J. dissents, pointing out that the term “participating in this RFP” was prefaced by “submitting a Proposal”, such that the RFP process involved the consideration of each bid. While the Ministry varied from the agreed-upon process, the exclusion clause as written is applicable to the entire process (including Tercon’s submission of a proposal.) Binnie J., therefore, proceeded to consider the other two inquiries.

Both parties were sophisticated and of roughly equal bargaining power, and therefore he was not concerned with potential unconscionably. Finally, he found no public policy interest in preventing enforcement of the clause sufficient to override the public interest in giving efficacy to parties’ bargains. Although Binnie J. identified a public interest in having an open and transparent bidding process, he found it could not defeat the other competing interests. Therefore, he held Tercon’s claim should be barred by the exclusion clause.

Conclusion

Over twenty years after Hunter was decided, it seems the Supreme Court has finally picked a side. The second inquiry outlined by Binnie J. is essentially that of Dickson C.J. in Hunter regarding unconscionably. On the other hand, Wilson J.’s position is not completely abandoned, as public policy concerns are imported into the final line of inquiry. As Binnie J. notes, the Court will always have an overriding discretion where public policy dictates some other need; nonetheless, Wilson J.’s standards of fairness and reasonableness are left by the wayside.

On reflection, it seems only logical. Fairness and reasonableness are vague standards that provide limited guidance in determining when an exclusion clause should be enforced. Rather, it seems an ex ante appraisal of the enforcing the bargain intended by the parties so long as they are on equal footing paired with an assessment public policy concerns may provide the best framework going forward.

It is still somewhat questionable, however, how much guidance this analysis actually provides. It is somewhat telling when the Court agrees on the framework to adopt, but disagrees on its application, that certainty is not quite achieved. While any test or line of inquiry should be more than just a mechanical application but should revolve on the particular circumstances at hand in the background of the larger policy concerns, each particular set of facts should give rise to the same result. Whether this framework will prove workable should be realized within the next twenty years or so.