The time span in which these two cases played out should be of interest to owners and bidders contemplating a fight in the courts. In the first case, it took the rejected bidder six years from rejection by the owner to rejection by the Court of Appeal. In the second case, the parties litigated for five years to reach the trial decision which runs to almost 200 paragraphs.

Owners attempt to limit damages payable to unfairly rejected bidders

Paul Sandori

Revay and Associates Limited

Editor, Construction Law Letter

Ever since the 1999 decision of the Supreme Court of Canada in M.J.B., owners have been targeted by unsuccessful bidders for awarding the contract to a non-compliant bidder or, in the case of requests for proposals or RFPs, proponent. They often ended up paying substantial damages. The typical privilege formula (“lowest or any tender not necessarily accepted”) did not offer much protection. The various elaborations of the same formula (so-called discretion clauses) produced a mixed bag of results.

Some owners took a different approach. They inserted in the bid documents limitation clauses that limited or even completely excluded the amount the owner would be required to pay in damages for awarding the contract to a non-compliant bidder.

Two recent decisions illustrate the reaction to such clauses of two levels of British Columbia courts. The details of the plaintiffs’ claims are left out in the following summary in order to focus on the legal issues.

The time span in which the two cases played out should be of interest to owners and bidders contemplating a fight in the courts. In the first case, it took the rejected bidder six years from rejection by the owner to rejection by the Court of Appeal. In the second case, the parties litigated for five years to reach the trial decision which runs to almost 200 paragraphs.

Elite Bailiff Services Ltd. v. British Columbia

In 1997, the B.C. Ministry of Attorney General issued a request for proposals for persons interested in providing court bailiff services to the British Columbia Supreme Court. Since court bailiffs must obviously be trustworthy and exercise a considerable degree of skill and discretion, price was not the critical factor.

Elite Bailiff Services Ltd. had been in the bailiff business for several years but was unsuccessful in its bid to win the contract. In a summary trial in 2001, the trial judge ruled that the Ministry was liable to Elite for breach of the implied term of Contract A to treat all proponents fairly.

However, the RFP documents contained the following limitation clause:

In addition to the preceding paragraph, the proponent, by submitting a proposal, agrees that it will not claim damages in excess of an amount equivalent to the reasonable costs incurred by the proponent in preparing its proposal for matters relating to the agreement or in respect of the competitive process, and the proponent, by submitting a proposal, waives any claim for loss of profits if no agreement is made with the proponent. [Emphasis added.] The trial judge applied the limitation clause and limited the damages payable by the Ministry to just the reasonable costs incurred in preparing the proposal. Elite appealed. Counsel for Elite argued that the clause was unenforceable: it was unclear whether the word “agreement” referred to Contract A or Contract B and the reference to “matters relating to the agreement or in respect of the competitive process” was unclear, or would have been unclear to a person in Elite’s position reading the document.

The Court of Appeal agreed with the trial judge that the clause was not so vague or uncertain as to be unenforceable. The court found that the term “agreement” referred to Contract A and the phrase “relating to the agreement or in respect of the competitive process” was obviously intended to limit the owner’s liability not only in respect of matters arising directly out of Contract A itself but to matters involving the process generally.

The limitation clause must be given its clear meaning, decided the court. The proponents, by submitting a proposal, agreed that they could not look to the Ministry for anything other than reasonable costs for any matter relating to the agreement or to the competitive process. The proponent’s complaint in this case was clearly in respect of the competitive process.

The Court of Appeal dismissed Elite’s appeal.

British Columbia Court of Appeal
   Finch C.J.B.C., Newbury, Levine JJ.A.
   February 20, 2003

Just over three years later, another British Columbia case involving a breach of Contract A had a very different outcome. Whereas the bid documents in the Elite Bailiff case purported to limit the owner’s liability, the documents in the next case attempted to exclude liability altogether.

Tercon Contractors Ltd. v. British Columbia

In this case, Tercon Contractors Ltd. sued the British Columbia Ministry of Transportation and Highways for failure to reject the first ranked proposal from Brentwood Enterprises Ltd. which, according to Tercon, did not comply with the Ministry’s RFP issued in 2001.

Justice Dillon of the British Columbia Supreme Court found that the Brentwood proposal was from an ineligible proponent, a joint venture between Brentwood and another company. This was material non-compliance with the terms of Contract A which allowed Brentwood to put forward a more competitive price. The Brentwood proposal was therefore not valid and could not be accepted.

In nevertheless accepting the Brentwood proposal, the Ministry breached the duty of fairness to Tercon. At best, said Justice Dillon, the Ministry ignored significant information to its detriment. At worst, it covered up its knowledge that the successful proponent was an ineligible joint venture.

In its defence, the Ministry relied on the following exclusion clause in the RFP documents designed to protect it from liability in any event:

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. [Emphasis added.]

From the British Columbia Court of Appeal decision in Elite Bailiff briefly summarized above, it was apparent that an owner might limit its liability for breach of Contract A by an appropriately drafted limitation clause. However, the case did not stand for the proposition that exclusion clauses are necessarily enforceable in the bidding context.

There was a Contract A between the Ministry and Tercon because the latter had submitted a compliant proposal. Justice Dillon asked himself whether, in the circumstances, it was appropriate for the court to intervene in a bargain between parties of equal bargaining power. He decided that the answer lay in the legal doctrine of fundamental breach of contract.

A fundamental breach occurs when the effect of one party’s breach deprives the other party of substantially the whole benefit that the parties intended that he receive under the contract. In addition, fundamental breach has also been described as undermining the nature and purpose of the contract.

In 1989, in the Hunter Engineering Co. v. Syncrude Canada Ltd. decision, the Supreme Court of Canada reviewed under what circumstances the courts should accept exclusion clauses that would free one party from liability for breach of contract.

One approach holds that if a party to a contract is guilty of a breach going to the very root of the contract — a fundamental breach — it cannot rely on the exemption clause to escape liability even if the parties had excluded liability by clear and express language.

In Syncrude, the Supreme Court of Canada preferred a different approach. Although an ambiguous exclusion clause is to be strictly construed against the party who drafted it, it is nevertheless to be given full force and effect if the language in which it is drafted is sufficiently clear to leave no doubt as to its meaning.

Only where the contract is unconscionable, as might arise from situations of unequal bargaining power between the parties, should the courts interfere with agreements the parties had freely concluded.

Justice Dillon found that (a) the Ministry’s breach of Contract A was a fundamental breach, that (b) the exclusion clause in the bid documents was ambiguous, and (c) that, in any case, it would be unconscionable to enforce that clause.

The Ministry’s breach was, first, that it accepted a non-compliant bid and, second, that it approved a non-compliant bid when the proponent was ineligible to bid in the first place. Such conduct undermined the essence of the bid documents, which was to ensure that only compliant bids would be accepted. It also attacked the underlying premise of the process which was to ensure fair competition. It denied Tercon any potential benefit from Contract A. Obviously, the breach was fundamental.

The next question before the court was whether the exclusion clause applied to the breach in question.

Justice Dillon found that there were problems with the exclusion clause. It was broadly drafted to exclude any claim for any compensation of any kind whatsoever as a result of participating in the RFP. The court found this ambiguous. The clause did not refer to Contract A or to any specific liability that it sought to avoid. It did not specifically exclude liability for damages for fundamental breach of Contract A, or for acceptance of a non-compliant bid. Finally, it was unclear to the judge exactly what the word “participating” meant.

Finally, the court relied on its insight into the intentions of the parties to the bidding process. Justice Dillon found it “inconceivable” that, given all the work and expense required to submit a bid based on elaborate bid documents, the practice and legal requirement to accept only compliant bids, and the eligibility requirements in the RFP, Tercon would have agreed that the Ministry could accept a non-compliant bid without Tercon having a chance of legal recourse against the Ministry’s breach.

It was equally inconceivable to the court that the Ministry could fundamentally breach Contract A and expect a bidder who had submitted a compliant bid to accept that it had no legal recourse against such a breach.

The ambiguity in the exclusion clause therefore had to be resolved in favour of Tercon: the clause did not apply to the Ministry’s breach. Justice Dillon concluded:

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.

In the circumstances, continued the judge, it would be neither fair nor reasonable to enforce the exclusion clause. Although both Tercon and the Ministry were equally sophisticated in legal matters and of equal bargaining power, it could not have been contemplated that there would be no recourse if the Ministry accepted a non-compliant bid. To suggest otherwise would change the base of the bidding system without notice. Enforcement of the exclusion clause therefore would not give effect to the intention of the parties and would render the duty of fairness that underlies the dealings between owner and bidder meaningless.

The conduct of the Ministry deprived Tercon of any benefit under Contract A, including the opportunity to conclude a Contract B and to eventually construct the project. The Ministry acted egregiously when it knew or should have known that the Brentwood proposal was not compliant whilst ensuring that this fact was not disclosed.

“These circumstances do not lead this court to give aid to the defendant by holding the plaintiff to this clause,” concluded Justice Dillon.

The same reasoning that applies to exclusion clauses can, of course, also apply to limitation clauses but the British Columbia Court of Appeal had in Elite Bailiff accepted such a clause. Justice Dillon assumed that the limitation clause was treated differently because the breach in that case was not found to be fundamental.

Tercon was awarded $3,293,998 in damages.

Supreme Court of British Columbia
     Dillon, J.
     March 27, 2006