November 1, 2010
by Paul Emanuelli
The Supreme Court of Canada’s controversial five-to-four split decision in Tercon Contractors Ltd v British Columbia (Tercon)—which was issued on Friday, February 12—is a clear warning to those who break tendering rules and then try to hide behind cleverly worded tender call provisions.
Rather than bullet-proofing the procurement process, the reserved rights and liability disclaimers used in the “Contract A” tendering model have proven to be false comfort clauses, lulling institutions into a misleading sense of security while repeatedly drawing them into the vortex of protracted and unpredictable litigation.
In the wake of the Tercon controversy, this column advocates a departure from the legalistic and litigious approach to tendering and a return to practical procurement based on simplified formats, clear drafting and mediated disputes.
A case study in inconsistency
Ever since the Supreme Court of Canada created the Contract A paradigm in 1981 with its seminal Ontario v Ron Engineering and Construction Eastern (Ltd) decision, the procurement process has been subject to a barrage of bid challenges. To guard against this rising tide of litigation, purchasing institutions have tried to preserve their flexibility through privilege clauses and shield their liability through legal disclaimers.
However, when called on to interpret and enforce these provisions under Contract A, the courts have been unreliable referees.
The Tercon controversy is a perfect case in point. The dispute turned on whether the BC government should pay an unsuccessful bidder $3.3 million in lost profit damages after it awarded a tendered contract to a non-compliant competing bidder or whether a disclaimer in the tender call should shield the government from liability.
Over the course of four years, 13 judges from three different levels of court considered the case and were deeply divided, with the BC government actually winning the popular vote but losing the final decision. In fact, the total judicial tally was seven-to-six in favour of letting the government hide behind its disclaimer and get away with breaking its tendering rules.
However, Tercon Contractors has won where it counts, raking in a $3.3 million judgment at trial and, after losing three-to-zero at the BC Court of Appeal, restoring the trial judgment with a razor thin five-to-four win at the Supreme Court of Canada on February 12.
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.
Tercon case leaves murky legacy
In fact, the Tercon decision casts a shadow of ongoing uncertainty. While the Supreme Court judges agreed on a new test for determining whether to enforce liability disclaimers, they couldn’t agree on how to apply the test to the facts of the case.
The three-part test asks the following questions:
1. Does the disclaimer as drafted apply to the facts?
2. Is the disclaimer unconscionable and therefore unenforceable?
3. Should the disclaimer be voided due to public policy considerations?
In a darkly ironic judgment, the Supreme Court’s new test produced a perfect lack of consensus, as the five-to-four split decision proves. 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?
Practical principles for the post-Tercon era
One verdict is clear: we need to stop relying on the courts to solve our purchasing problems. Instead of tinkering with new tendering clauses and sinking deeper into the mire of costly legal complexity, we should adopt a practical strategy based three pillars:
1. Simplified formats. Rather than creating a formal Contract A tendering process and then trying to duck the corresponding duties and liabilities with unpredictable privilege clauses and lame liability disclaimers, we should avoid the entire Contract A entanglement by using simplified procurement formats. When properly constructed, these formats harness open competition and allow contract finalization based on a far more flexible and low-risk approach.
2. Clear drafting. The Tercon controversy proves that clever disclaimers are no substitute for clearly drafted and consistently enforced compliance rules. We need to spend more time properly filtering our threshold requirements for clarity and adhering to our process rules with consistency.
3. Mediation over litigation. Bid challenges should be streamed away from the courts and towards knowledgeable mediators who can provide expedited, cost effective and discrete resolutions. In the wake of the Tercon controversy, we need to repatriate the procurement process from the lawyers and the courts by adopting a more practical and simplified approach to procurement.
Paul Emanuelli’s practice includes a portfolio of purchasing institutions. He can be reached at email@example.com.