Tercon a hot case in construction law

Ask any construction lawyer what the hottest construction case is and you’ll get the same response: Tercon Contractors Ltd. v. British Columbia (Transportation and Highways).


The decision from the Supreme Court of Canada, released on Feb. 12, is important because of its potentially far-reaching effects on tendering litigation and the drafting of requests for proposals and other bid documents.

2009 was a year the construction bar saw a sudden increase in tendering litigation across the country. Some saw this as a direct result of the many government stimulus-funded projects being rushed out to tender in order to comply with tight deadlines for shovels hitting the ground. This led to mistakes in documents and in the administration of the tendering process and, as a consequence, litigation.

Others attribute the increase in tendering litigation to the fact that, in more difficult economic times when competition is stiff in order to win a bid, an unsuccessful bidder may be more inclined to litigate given the uncertainty about when the next big job will come along.

Into this overheated environment lands the Tercon decision, which many are saying will lead to a further spike in tendering cases. Why? Well, the Supreme Court purports to have clarified the law by unanimously agreeing to retire the doctrine of fundamental breach and replace it with a three-stage test. When it came time to apply this test to the facts of Tercon, the court was split 5-4 on whether or not the relevant exclusion clause applied in the circumstances. This is not a good omen when the acknowledged goal is to create a clearer standard than that imposed by the doctrine of fundamental breach, which involved characterizing a breach as “immense” or “colossal.” It may well be that the floodgates have been opened.

In terms of retiring the doctrine of fundamental breach, there is one school of thought that it has worked reasonably well and that the top court has not clarified the law but rather has created a new and potentially more troublesome test. Whether such concerns are valid remains to be seen.

In the Tercon case, Tercon Contractors Ltd. lost a bid to build a 25-kilometre, $35-million highway in the Nass Valley of British Columbia from Greenville to Kincolith, a village of the Nisga’a people situated at the mouth of the Nass River. Previously, it was accessible only by float plane or ferry from Prince Rupert. The B.C. Ministry of Transportation’s requests for proposals for the project contained two provisions that were central to this ruling: that only pre-qualified bidders were eligible to bid on the contract, and that the bidders who participated in the process were not entitled to make any claim for compensation.

In fact, the winning bidder was a joint venture consisting of a qualified bidder and an unqualified bidder. Tercon sued and won $3.5 million in lost profits at trial. The trial decision was overturned by the B.C. Court of Appeal. The case was appealed to the Supreme Court, where the majority ruled the exclusion clause did not protect the province in circumstances where the province had unfairly permitted a bidder to participate in the process when that bidder was not eligible to do so.

The Tercon decision has implications beyond the construction context given that the court has set out a new test to be applied in considering whether a party can avoid the consequences of exclusion clauses. Common types of exclusion clauses include express limitation of liability provisions, liquidated damages provisions, warranty provisions, limitation period provisions, pay-when-paid provisions, indemnification provisions, waiver-of-lien provisions, no-fault for delay provisions, disclaimers of liability for accurate information, site investigation and unanticipated conditions provisions, and entire contract provisions.

Most significantly, from a procurement perspective, what will tendering authorities do about this decision? One option would be to not bother including an exclusion clause in requests for proposal or tender documents. However, in our view, this is not the likely result of the decision. Rather, it’s more likely that tender-calling authorities will attempt to draft even stronger exclusion clauses to avoid potential lawsuits by unsuccessful bidders.

Innovative strategies may be used in challenging tendering decisions as we have seen over the last year, including judicial review of government procurement decisions, declaratory orders, and tort claims. In terms of a further spike in tendering cases, time will tell, but given the amount of interest garnered by Tercon in the current tendering market, we would not be surprised at all to see a further increase in tendering cases in 2010.

R. Bruce Reynolds is a partner with Borden Ladner Gervais LLP’s Toronto office. He can be reached at [email protected]. Sharon Vogel is a partner with BLG’s Toronto office. She can be reached at [email protected].

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