Canada: Contractual Exclusion Clauses: Have the Reports of the Death of the Doctrine of Fundamental Breach Been Greatly Exaggerated?

Upon reading his own obituary, which had been published in error, Mark Twain is said to have remarked that "the reports of my death are greatly exaggerated." The decision of the Supreme Court of Canada in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 provides an odd twist on Twain's witticism.

On the one hand, Tercon has been widely touted as marking the death of the doctrine of fundamental breach. That doctrine reflected judicial hostility to contractual limitation of liability provisions, commonly known as "exclusion clauses," and precluded a party who had committed an egregious breach of contract from relying upon an exclusion clause to avoid or limit liability for the breach.

In fact, the doctrine of fundamental breach was supposed to have died over 20 years ago, when the Supreme Court of Canada rejected it in Hunter Engineering Co. v.Syncrude Canada Ltd., [1989] 1 S.C.R. 426. A decade later, the Supreme Court reaffirmed the doctrine's death in Guarantee Co. of North America v. Gordon Capital Corp., [1999] 3 S.C.R. 423. Thus the announcement of the doctrine's demise in 2010 is somewhat surprising.

On the other hand, while all nine members of the Supreme Court agreed in Tercon that fundamental breach is no longer the law, a five-to-four majority decided the case in a manner that is hard to distinguish from the apparently deceased doctrine.

So what is going on? Is the doctrine of fundamental breach really dead? Or, as Mark Twain would have said, have the reports of its death been greatly exaggerated?

Tercon involved a dispute between a construction contractor and the Province of British Columbia. B.C. issued a request for expressions of interest for the construction of a highway. Six parties responded, including Tercon and a competitor named Brentwood. B.C. then issued a request for proposals (RFP). The RFP specified that only the six parties who had responded to the original request for expression of interest were eligible to participate. In breach of that requirement, Brentwood entered into a joint venture, which made a bid and was awarded the job. Tercon sued B.C. for allowing the Brentwood joint venture to respond to the RFP and for awarding it the highway job.

In defending against Tercon's claim, B.C. pointed to what would seem to be a broad exclusion clause:

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.

Consider first what the court said about the law. Writing for the four dissenters, Justice Binnie decisively held that the doctrine of fundamental breach is no longer good law. He held that whether an exclusion clause applies requires three analytical steps:

  1. As a matter of ordinary contractual interpretation, does the exclusion clause apply to the circumstances established in the evidence?
  2. If yes, was the exclusion clause unconscionable at the time the contract was made?
  3. If no, should the court decline to enforce the exclusion clause because of an overriding public policy concern which outweighs the very strong public interest in the enforcement of contracts?

Applying this test to the facts, Justice Binnie found the exclusion clause to be applicable and enforceable, and would have dismissed Tercon's action.

The majority decision, written by Justice Cromwell, agreed with Justice Binnie's formulation of the legal principles, but disagreed with his interpretation of the exclusion clause.

Justice Cromwell reasoned that by allowing the Brentwood joint venture to participate in the RFP process and by awarding the work to a party ineligible to participate, the very premise of the RFP process was missing. Tercon's claim arose from the participation of ineligible parties in the RFP, not "as a result of participating in this RFP," and thus was not covered by the exclusion clause. In any event, Justice Cromwell found the exclusion clause to be ambiguous and concluded that it should be interpreted contra proferentem against the interests of the drafter of the contract, which was B.C.

So the expression of the law is clear, but difficult to reconcile with the majority's application to the facts of the case. The doctrine of fundamental breach is officially dead, but the animus underlying it — a judicial hostility to exclusion clauses — still seems to be present. It is hard to imagine a clearer and more comprehensive exclusion clause than was present in Tercon ("no Proponent shall have any claim for any compensation of any kind whatsoever, as a result of participating in this RFP"), and difficult to imagine two more sophisticated contracting parties than a highway contractor and a province. Yet the majority of the Supreme Court found a way to interpret the exclusion clause so narrowly that it did not apply.

McCarthy Tétrault Notes

The result of Tercon is an unfortunate uncertainty. Will courts applying Tercon do as the Supreme Court says, or as the Supreme Court does? Is the doctrine of fundamental breach really dead, as the Supreme Court has now said on three different occasions in three different decades (Hunter Engineering in 1989, Guarantee in 1999, and Tercon in 2010)? Or are the reports of its death greatly exaggerated — will future cases, like the majority in Tercon, continue to show an inherent hostility to exclusion clauses that is highly reminiscent of the supposedly deceased doctrine of fundamental breach? Tercon makes it hard to know how to draft exclusion clauses, and harder still to predict whether they will be enforced.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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