February 23, 2010

Supreme Court’s Tercon ruling may force new approach to contracts

RICHARD GILBERT

staff writer

VANCOUVER

The uncertainty created by the Supreme Court of Canada’s decision in the Tercon appeal case may force the construction industry across the country to adopt a more practical and simplified approach to procurement.

“While it provided for a dramatic finale to the Tercon controversy, the much anticipated Supreme Court decision was a disappointment for those who were hoping for clarity under “Contract A,” said Paul Emanuelli, who owns a legal practice known as the Procurement Office.

“In fact, the Tercon decision casts a shadow of ongoing uncertainty.”

The Supreme Court of Canada ruled the B.C. Ministry of Transportation breached the provisions of its tender contract with Tercon Contractors Ltd, when it accepted and awarded a contract to an ineligible bidder. Paradoxically, the ruling also upholds the right of public agencies to include a broad “exclusion of liability” in tender documents.

“I think it is unfortunate that the court effectively accepted the validity of exclusion clauses, which effectively prohibit contractors from any claim against a public agency that doesn’t abide by its own tendering rules,” said Glenn Walsh, who was the chairman of Tercon when legal proceedings began in 2006.

The Supreme Court judges agreed on a new test for determining whether to enforce liability exclusion clauses. The first step involves determining whether the exclusion clause even applies to the case.

If the exclusion clause applies, the second step is to determine whether the clause is unconscionable and thus invalid at the time the contract was made. If the exclusion clause is valid at the time the contract was formed, the third step is to determine whether the Court should, nevertheless, refuse to enforce the exclusion clause because of some overriding public policy.

“If you read this case carefully, the bidders have agreed they have no right to sue for participation in the RFP (Request for Proposal), said Glen Boswall, a partner in Clark Wilson’s Construction Group. “But, the exclusion clause doesn’t apply here, because the case arises from participating in a process outside the RFP. The government brought in an unauthorized bidder, who was not part of the RFP process, which was unfair to Tercon.”

What is so ironic about this judgment is that the Supreme Court’s new test produced a perfect lack of consensus with a 5-4 split decision.

“If, after almost a year of deliberation, the nine most senior judges in Canada can’t agree on how to apply their own legal test to a disclaimer clause, how are those working within the rapid-fire context of the daily tendering cycle supposed to make any use of it,” Emanuelli asked.

According to Walsh, there are other serious problems with the decision reached by the Supreme Court in this case.

The judgment refers to the exclusion clause as a negotiation between savvy participants in the construction business. It said bidders are free to decline to participate in any tender.

Walsh says this shows a lack of understanding of the difference between the public and private tendering process.

“There is no such thing as bargaining with a public agency,” he said. “In a public tender the contractor must accept all of the terms, including the tendering rules, with absolutely no qualifications.”

In sharp contrast to this situation, a negotiated contract between a contractor and a private owner allows for the negotiation of any terms of the contract.

“I cannot accept that a contractor whose primary business is highway construction can choose to not tender highway projects, because of an overly onerous clause that allows the agency to bend the rules, said Walsh. “That effectively takes away his right to carry on his business.”

In response to this situation, Emanuelli has developed what he calls practical principles for the “post-Tercon era.”

“We need to stop relying on the courts to solve our purchasing problems,” he said. “Instead of tinkering with new tendering clauses and sinking deeper into the mire of costly legal complexity, we should adopt a practical three pillar strategy based on simplified formats, clear drafting and mediated disputes.”

Emanuelli advises contractors avoid the entire “Contract A” entanglement by using simplified procurement formats. He argues Tercon proves that clever disclaimers are no substitute for clearly drafted and consistent rules.

Finally, he argues that bid challenges should be streamed away from the courts and towards knowledgeable mediators who can provide expedited, cost-effective resolutions based on individual circumstances.

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