Tercon Contractors: The Effect of Exclusion Clauses on the Tendering Process
Canadian Business Law Journal, Vol. 49, p. 187, 2010
26 Pages Posted: 10 Sep 2010 Last revised: 6 Oct 2010
The tendering process (in relation to construction contracts) is one whereby a person (“owner” or “issuer”) wishing to enter into a contract for construction on the owner’s land, requests offers from other persons (“tenderers” or “bidders”), with the goal of obtaining the best price and contractual terms. In Ron Engineering & Construction Eastern Ltd. v. Ontario, Estey J.’s judgment rejected the traditional tendering analysis and established the dual contract model, the modern analysis governing the formation of contracts during the tendering process. This model has governed the law of tendering in Canada for decades. In this, a tender call and the submission of a bid create “Contract A,” in which the tender call constitutes the offer of a contract in relation to the tender process.The submission of each bid constitutes an acceptance of that offer, which creates a binding contract between the individual bidder and the issuer of the tender call. Once a submission is accepted, the owner goes on to enter Contract B, the subject matter of the bid or the construction contract, with the bidder.
Ron Engineering established the dual contract model and commenced the process of defining the types of implied duties and obligations involved in the Contract A/Contract B analysis. If issuers fail to adhere to their own bidding rules, as they arise from the tender documents, or to the implied terms that arise from the tendering process, they risk an action for breach of Contract A from any individual bidder. This is the case even if Contract B is never entered into or is awarded to another bidder.
It is whether the owner was liable for failure to adhere to one of these implied obligations in Contract A that was at issue in Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways), and whether the term could be excluded by a clause excluding liability in the tender documents. In Tercon, the Supreme Court of Canada considered the effect of an exclusion clause in a tendering process for the construction of a highway when the appellant’s compliant bid was rejected and a non-compliant bid was accepted. The 5-4 opinion indicates that the precise boundary for exclusion clauses in tendering processes is unsettled.
It is the modern tendering analysis and the Supreme Court’s judgment in Tercon that lead to the issues discussed in this paper. First, the issue of exclusion clauses in the tendering documents will be examined, and the problems that arise when these clauses attempt to exclude implied duties inherent to the modern tendering analysis. Privilege clauses, which usually allow issuers to pick a bid that is not necessarily the lowest, and to refrain from picking any bid, have become commonplace in the tendering process. However, courts have not settled on the effect of clauses that purport to exclude liability for the fundamental, basic requirements of the tendering process, such as choosing non-compliant bids, or treating bidders unfairly and unequally. Can these clauses be allowed into the tendering process as we recognize it or would they be robbing the process of its legal effect? The answer to that will depend on the perception attributed to the tendering process. Is it a special procedure, requiring its own set of non-negotiable rules? This paper will argue that it is a series of contracts governed by contract law rules of offer, acceptance and implied terms, and owners are allowed to impose any terms they wish and replace the implied obligations with express ones, provided they do so in clear, unambiguous language.
Finding that the tendering process adheres to basic contract rules, and taking the position that these implied terms can be excluded by provisions in the tender call has several implications for the Ron Engineering analysis. Allowing issuers to accept non-compliant bids, as in Tercon, fundamentally undermines the Contract A/Contract B analysis and implicitly ousts the duty of fairness from the tender call. The implications of this are significant for the integrity of the tendering process, the protection of which is the reason underlying the tendering analysis we have today. Depending on the extent of liability that can be ousted by an exclusion clause, the analysis from Ron Engineering may no longer be workable and the state of law that governed tendering prior may be reinstated.
The second part will examine the analysis governing exclusion clauses, as laid out in Tercon. In a much needed move to clarify this area of law regarding fundamental breach, after the division in Hunter Engineering Co. v. Syncrude Canada Ltd., the Tercon court discarded the doctrine of fundamental breach and set out a new test for analyzing the enforceability of exclusion clauses. The test requires the use of the doctrine of unconscionability and the application of public policy to determine the enforceability of exclusion clauses. If clausescanbe used to exclude liability for ousting the implied terms inherent to the tendering process, the Ron Engineering analysis will no longer be workable. The Ron Engineering analysis is an excellent way to allocate the risk between parties during the tendering process. It protects the integrity of the process by implying certain terms, which allow tenderers to submit proposals, secure in the knowledge that the issuer has to abide by certain obligations. However, since this is a contractual process, certain realities exist, namely that implied terms can be ousted by express terms. So while the Ron Engineering analysis is excellent, it only works if issuers do not insert provisions into the tendering documents to oust implied terms that are necessary to the tendering analysis. And unless there is a rule preventing issuers from inserting express terms into the documents that oust these implied terms, then issuers are free to insert any contractual provisions into the documents. If bidders are opposed to them, they can simply refrain from bidding in that tender call. This means that if the Ron Engineering analysis is to continue to apply in light of the contractual realities stated in Tercon, it might be possible to save it under the very test laid out in Tercon.
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