Recent Development in Construction Law

The Supreme Court of Canada unanimously confirmed that it was time to put to rest the doctrine of fundamental breach of contract. The Court however, was again divided by a five to four split in dealing with the effectiveness of an exclusion or exculpatory clause in Instructions to Tenderers, where the owner intended to lessen or eliminate its liability for breach of the terms of Contract A.

One will recall the 2007 decision of the Supreme Court of Canada in Double N Earthmovers Ltd. v. City of Edmonton (2007), 58 C.L.R. (3d) 4, where the Supreme Court of Canada in a five to four decision held that Sureway Metals' tender was substantially compliant, notwithstanding that Sureway failed to meet the tender requirements of providing 1980 or newer equipment and equipment that had City of Edmonton registration numbers. The majority judgment (Justices Abella, Rothstein, LeBel, Deschamps, Fish), held that an informality was something that did not affect the price or performance of Contract B and the absence of the licence and serial numbers were informalities that could be waived. The minority (Chief Justice McLachlin and Justices Bastarache, Binnie and Charron) commenced their dissenting judgment by indicating:

This is the cautionary tale of the tendering process gone badly wrong.

The minority held that the equipment must be 1980 or newer. This was not an "idle request" and was "essential" to the tender. The minority held that as the tenderer Sureway had not met the requirement of providing 1980 or newer equipment and equipment with a City of Edmonton registration number, Sureway's tender was not compliant and not eligible for acceptance by The City of Edmonton.

Again, in the Tercon case, the Supreme Court of Canada split divisively on the question of whether or not an owner could rely upon an exclusion clause to escape liability for breaching the terms of the bid contract (Contract A).

The facts in the Tercon case are extremely interesting and in some commentators minds raise the serious question of the propriety of the actions of the Government of British Columbia. The government issued a request for an expression of interest for the design and construction of a highway. Six contractors, including Tercon and Brentwood, responded with proposals. The province then advised the proponents that the province intended to design the highway itself and requested a construction proposal for the construction only. Only the original six tenderers were eligible to submit such proposals for construction. Brentwood was one of the original tenderers.

Emil Anderson Construction had not submitted a tender under the original request for proposal of interest. In the second go-round, however, Brentwood and Emil Anderson Construction submitted a tender as a joint venture.

The Government of British Columbia was concerned that this proposal, which was the lowest in price, would be viewed as noncompliant because one of the members of the joint venture was not one of the original tenderers. The Government of British Columbia suggested that the tender be resubmitted by Brentwood with Emil Anderson listed as a "major subcontractor". The government then awarded the contract to Brentwood.

Tercon alleged that Brentwood was not a compliant tenderer and commenced legal proceedings against the Government of British Columbia alleging that the Government breached the terms of Contract A by accepting a noncompliant and non-eligible tender.

The tender package contained an exclusion clause that was raised by the government as a defence. This clause stated:

Except as expressly and specifically permitted in these Instructions to Proponents, 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.

Madam Justice J.R. Dillon rendering the trial judgment held that the Brentwood proposal was from an ineligible proponent, being the joint venture of Brentwood and Emil Anderson Construction. This was material noncompliance and hence the Brentwood proposal was not valid and not capable of acceptance.

The trial Judge further discussed the issue relating to the conduct of the Ministry in performing the evaluation of the Brentwood proposal. She indicated the integrity of the tendering process depends upon no competitive advantage being given to any tenderer, as there is an implied duty of fairness upon those calling for tenders in relation to their dealings with tenderers which calls for the reasonable expectation of the parties involved in the bidding process to be respected. In following the judgment of the Supreme Court of Canada in Martel, the trial Judge held that there could be no special treatment and requirements cannot be ignored. The Court held that the whole of the conduct of the government left her with no doubt that the government breached the duty of fairness to the tenderers by changing the terms of eligibility to Brentwood's competitive advantage. In concluding that Brentwood's tender was noncompliant, the Court indicated:

The defendant breached Contract A in two respects: first, it accepted a bid that was incapable for acceptance for noncompliance; second, it treated the plaintiff unfairly in the evaluation process by approving a noncompliant bid as the successful bidder.

The trial Judge then considered the question as to whether or not the exclusion clause applied and whether it should be enforced. The trial Judge held that it was then necessary to consider whether this was an appropriate circumstance to intervene in a bargain that was made between parties of equal bargaining power. The Court indicated:

This depends upon an assessment of fundamental breach and the construction of Section 2.10 in the face of fundamental breach.

If a breach is fundamental to the contract, the breaching party may be prevented from relying on an exclusion clause as a matter of construction.

The trial Judge further went on to state:

The breach here was, first, to accept a noncompliant bid and, second, to approve a noncompliant bid as the successful proponent when the proponent was ineligible to bid in the first place. This attacks the essence of the tender documents, that is, to ensure that only compliant bids are accepted. It attacks the underlying premise of the process to ensure fair competition. It denied the plaintiff any potential benefit from Contract A. The breaches were fundamental.

The trial Judge further stated:

A party should not be allowed to commit a fundamental breach sure in the knowledge that no liability can attend to it and the Court should not be used to enforce a bargain that a party has repudiated ... While unconscionability is usually considered in situations of unequal bargaining power, there can be situations of equal bargaining power that still give rise to an unconscionable result.

The trial Judge awarded loss of gross profit to the plaintiff in the amount of $3,293,998.

The Government of British Columbia appealed the matter to the British Columbia Court of Appeal, which set aside the judgment and held that the exclusion clause was clear and unambiguous and barred any claim for compensation.

The Court of Appeal stated:

In my respectful opinion, the Judge followed a rational sequence in her analysis on a correct understanding of the law. I differ from her in only one crucial aspect, and that is the interpretation of the clause. I appreciate the force of the argument advanced by the respondent that the integrity of the bidding process, especially for public works should be given high value: see Graham Industrial Services Ltd. v. Greater Vancouver Water District, 2004 BCCA5, 25 B.C.L.R. (4th) 214 at paras. 25–28. But I find the words of the exclusion clause so clear and unambiguous that it is inescapable that the parties intended to cover all defaults, including fundamental breaches.

The Court of Appeal went on to state:

... the respondent seeks to support the judgment on the basis that, to the extent the clause excuses acceptance of non-compliant bids, the public interest in an orderly and fair scheme for tendering in the construction industry is thwarted. This is a valid point. In my opinion, however, the answer lies not in judicial intervention in commercial dealings like this but in the industry's response to all-encompassing exclusion clauses. If the major contractors refuse to bid on highway jobs because of the damage to the tendering process, the Ministry's approach may change. Or, the industry may be prepared to accept that the Ministry wants to avoid suits for contract A violations, and the contractors will continue to bid in the hope that the Ministry acts in good faith.

Tercon made application for leave to the Supreme Court of Canada. Leave was granted.

The length of time that the Supreme Court of Canada took to come to a final conclusion, in both the Double N Earthmovers case and the Tercon Contractors case, is indicative of the deep division within the Supreme Court of Canada in coming to a decision on these important tendering matters. Usually the Supreme Court of Canada attempts to hand its judgments down in three to five months. However, in the Double N Earthmovers case the appeal was heard by the Supreme Court of Canada on the 16th of June, 2006, and judgment was not pronounced until the 25th of January, 2007. In the Tercon Contractors case, an even greater length of time was required for the Supreme Court of Canada to hand down its judgment. The appeal was heard by the Supreme Court of Canada on the 23rd of March, 2009, and the judgment was not handed down until the 12th of February, 2010.

While the Supreme Court of Canada in the Tercon Contractors case agreed with putting to rest the doctrine of fundamental breach of contract, the Court was divided on the effect of the exclusion clause. Mr. Justice Binnie wrote the dissenting judgment, though the dissenting judgment was concurred with by the majority dealing with the issue of fundamental breach. Mr. Justice Binnie dealing with the issue of fundamental breach stated:

On this occasion we should again attempt to shut the coffin on the jargon associated with 'fundamental breach'. Categorizing a contract breach as 'fundamental' or 'immense' or 'colossal' is not particularly helpful.

Mr. Justice Binnie dealt with the interesting, but again far from unanimous, pronouncements of the Supreme Court of Canada in Hunter Engineering Co. v. Syncrude Canada Ltd. [1989] 1 S.C.R. 426, where then Chief Justice Dickson and Madam Justice Wilson disagreed on the concept of fundamental breach. Mr. Justice Binnie referred to the doctrine of fundamental breach as an unruly horse and agreed it was time to put to rest the "unruly horse".

While the Supreme Court of Canada split five to four on how to interpret this particular exclusion clause, the Supreme Court of Canada was unanimous in agreeing to the analysis that is to be applied to determine if the owner is entitled to escape the effect of an exclusion clause or other contractual terms that it wishes to raise as a defence in an action for breaching Contract A.

In dealing with the interpretation of the exclusion clause, the Supreme Court of Canada was unanimous that there were three issues that had to be answered.

The first issue was whether or not the exclusion clause applied to the circumstances established in the evidence. Mr. Justice Binnie wrote at paragraph 122:

This will depend on the Court's assessment of the intention of the parties as expressed in the contract.

The unanimous judgment of the Supreme Court of Canada further went on to indicate that if the Court was of the view that the parties intended that the exclusion clause would apply, the second issue to be determined was whether or not the exclusion clause would be considered unconscionable at the time the contract was made. Mr. Justice Binnie indicated:

... as might arise from situations of unequal bargaining power between the parties.

The Supreme Court of Canada then held that if the exclusion clause was within the intention of the parties and was not unconscionable, the third issue that the Court must inquire into was whether or not the Court should refuse to enforce the valid exclusion clause because of the existence of an overriding public policy. The Court held at paragraph 123 that the onus of proof:

... lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.

The majority judgment of the Supreme Court of Canada was written by Mr. Justice Cromwell, which judgment held there was a requirement implied in the bidding process that only compliant tenderers would be considered and there was a further implied obligation to treat all tenderers fairly and that those factors would contribute to maintain the integrity and business efficacy of the tendering process. The majority of the Supreme Court of Canada held that this type of exclusion clause could not be used as a defence to a claim as such that strikes at the very heart of the tendering process.

In interpreting the exclusion clause, the majority of the Supreme Court of Canada adopted the comments of Mr. Justice Iacobucci in M.J.B. Enterprises Ltd. v. Defence Construction Canada (1951) Ltd. (1999), 44 C.L.R. (2d) 163, where the issue was whether or not the privilege clause (the lowest or any tender will not necessarily be accepted) allowed the owner the discretion to award the construction contract to whomever it wished. The unanimous judgment of the Supreme Court of Canada held that such privilege clause did not grant such wide discretion to the owner. Mr. Justice Iacobucci stated:

... the privilege clause is only one term of Contract A and must be read in harmony with the rest of the tender documents. To do otherwise would undermine the rest of the agreement between the parties.

Mr. Justice Cromwell further indicated:

To begin, it is helpful to recall that in interpreting the contract documents, the Court has been careful to consider the special commercial context of tendering. Effective tendering ultimately depends on the integrity and business efficacy of the tendering process.

In considering the exclusion clause and whether such clause could be raised as a defence by the owner who breached the terms of its contract with those submitting tenders, Mr. Justice Cromwell stated:

It seems unlikely, therefore, that the parties intended through this exclusion clause to effectively gut a key aspect of the approved process.

The majority of the Supreme Court of Canada then indicated that it could not conclude that the parties, through the words found in the exclusion clause, intended to waive compensation for conduct like that of the province as the province undertook the tendering process and to allow the exclusion clause to be enforced would strike at the very heart of the integrity and business efficacy of the of the very tendering process which the province put in place.

The clear message from the Supreme Court of Canada to those initiating the tender process is that the integrity of the tendering process must be protected and that clauses which would harm the tendering process will not be enforced unless it is clear from the circumstances of the case that both parties recognize that one party could act improperly and that was a business risk accepted by those who subsequently submitted tenders.

All in all, the Supreme Court of Canada's message is that the courts will endeavor to find a way to negate or limit the applicability or effectiveness of exclusion clauses where it is possible to do so.