The Supreme Court of Canada Weighs in on Contract Interpretation Principles

The Supreme Court of Canada recently released an important decision (Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) dealing with two issues:
1. principles of contractual interpretation; and
2. interpretation of exclusion of liability clauses.

The province of British Columbia (the "Province") issued a request for expression of interest for the design and construction of a highway. Six parties responded with submissions, including Tercon and Brentwood. A few months later, the Province informed the six respondents that it intended to design the highway itself and issued a request for proposals ("RFP") for constructing the highway. Under its terms, only the six original respondents were eligible to submit a proposal. The RFP also included an exclusion of liability clause which provided:
"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 that it has no claim."

Brentwood had no experience in drilling and blasting. Accordingly, it entered into a pre-bidding agreement with another construction company which was not a qualified bidder. Brentwood submitted a bid in its own name with its partner construction company listed as a "major member" of its team. Brentwood and Tercon were the two short-listed proponents and the Province selected Brentwood for the project.

Tercon sued the Province for damages. The trial judge found that the Brentwood bid was submitted by a joint venture of Brentwood and its partner and that the Province, which was aware of the situation, had breached the express provisions of the tendering contract with Tercon by considering an ineligible bid and by awarding it the work. The trial judge also held that the exclusion clause did not prevent recovery of damages to Tercon because the Province's breach was fundamental and that it was not fair or reasonable to enforce the exclusion clause in the circumstances. She held that the clause was ambiguous and resolved the ambiguity in Tercon's favour.

The British Columbia Court of Appeal set aside the decision. It held that the exclusion clause was clear and unambiguous and barred compensation for all the Province's defaults.

The Supreme Court of Canada ("SCC") allowed the appeal by a surprisingly close 5 to 4 decision. Justice Cromwell wrote for the majority.

He held that the questions for the SCC were whether Brentwood, as the successful bidder was eligible to participate in the RFP and if not, whether Tercon's claim for damages was barred by the exclusion clause. He held that the trial judge had reached the right result on both issues.

In respect of the first issue, the SCC accepted the trial judge's reasoning that the Province not only acted in a way that breached the express and implied terms of the contract by considering a bid from an ineligible bidder, it did so in a manner that was "an affront to the integrity and business efficacy of the tendering process."

Secondly, as for the exclusion clause, the SCC found that it did not protect the Province from Tercon's damage claim which arose from the Province's dealing with an ineligible party and from its breach of the implied duty of fairness to bidders. The key principle of contractual interpretation was that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purposes and commercial context. Further, tendering contracts have a special commercial context which called for treating parties participating in the process fairly so that all bidders would be treated on an equal footing. It was particularly true in the context of public procurement where there was a need for transparency for the public at large.

Justice Cromwell wrote that:
"It seems to me to make even less sense to think that eligible bidders would participate in the RFP if the Province could avoid liability for ignoring an express term concerning eligibility to bid on which the entire RFP was premised and which was mandated by the statutorily approved process. "

Both the integrity and the business efficacy of the tendering process supported an interpretation that would allow the exclusion clause to operate compatibly with the eligibility limitations.
Implying an obligation to treat all bidders fairly and equally meant that clear language was necessary to exclude liability for a breach of such a basic requirement of the tendering process, particularly in the case of public procurement.

Justice Cromwell held that the clause was also ambiguous and that any ambiguity was resolved in the favour of Tercon.

Regards,

Blair