Canada: Contracting Out Of A Duty Of Fairness - Fair Play? -Tercon Revisited

Last Updated: July 20 2018
Article by Michael B . Morgan

Can a public owner contract out of any liability for a failure to follow its own directives, policies and, indeed, its own terms and conditions of a procurement process, including a duty of fairness? Although that issue was largely resolved in the Supreme Court of Canada case of Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, a variation of that question was front and center again in a very recent decision from the Court of Appeal of Yukon in Mega Reporting v. Yukon (Government of), 2018 YKCA 10. In Mega Reporting, the court addressed the thorny issue of whether a clearly written and unambiguous exclusion clause could assist the Yukon Government ("Yukon") to avoid liability for breach of, among other things, a duty of fairness.

The facts of the case are relatively straightforward. Yukon sought to reduce costs on court reporting services by replacing live court reporters with a digital recording system and transcribing those recordings later, as necessary. As such, Yukon issued an RFP seeking bids for a one year contract for court transcription services. The bidding process was governed by both the Yukon Contracting and Procurement Regulation and the Contracting and Procurement Directive. Essentially, the principles in the Directive provided, among other things, that the Government would act with "fairness, openness and transparency" in its public procurements. However, the RFP included a form of exclusion clause purporting to waive Yukon's liability for any costs associated with unfairness in the RFP process. Two proponents responded to the RFP. It appears from the decision that the process in awarding the contract was somewhat flawed but there was no contemporaneous record of the decision, which was made regarding the rejection of Mega Reporting Inc. ("Mega")'s proposal.

After meeting with Yukon officials to receive feedback on why its proposal was not successful, Mega filed a Statement of Claim alleging breach of duty by Yukon to fairly review its proposal. The trial court allowed the claim and concluded that the evaluation committee acted unfairly to Mega on a number of grounds. The court went further and concluded that the exclusion clause did not bar Mega's claim and held, relying on Tercon, that public policy reasons justified refusing to enforce the clause. It concluded that to give effect to the exclusion clause would allow Yukon to represent to the public that it engages in fair procurement without suffering any consequences for failing to do so. Mega was therefore awarded damages of just over $335,000. The main issue on appeal was whether Yukon was entitled to rely on the exclusion clause to avoid liability for not acting fairly to Mega. The Court of Appeal decided that the trial judge was in error in concluding that it was against public policy to apply the exclusion clause.

The test outlined in Tercon, which has been subsequently applied in other appellate cases, was

  1. Whether as a matter of interpretation, the exclusion clause even applies to the circumstances based on the intention of the parties;
  2. Whether the clause was unconscionable at the time the contract was made; and
  3. Whether the court should nevertheless should refuse to enforce a valid clause because of an existence of an overriding public policy that outweighs the very strong public interest in the enforcement of contracts, the proof of which lies on the party seeking to avoid enforcement.

In Tercon, a majority of the SCC held that the exclusion clause did not apply to the circumstances of that case and so therefore did not need to consider the public policy argument.

Accordingly, in Mega Reporting, the public policy argument had to be directly addressed in that it was clear the exclusion clause applied to the circumstances alleged by the aggrieved proponent. In the court below, the court had held that "though the public has a strong interest in maintaining the right to contract freely, in this case this interest is offset by a similar public interest in ensuring a fair, accountable, open and transparent bid process". The Court of Appeal noted, at paragraph 32 of its decision, the trial judge appears to have considered whether one policy interest merely outweighed the other. It concluded that was an error. The high threshold to overcome is that harm to the public must be "substantially incontestable". With respect to whether the public policy interest to be protected in this case is substantially incontestable, the court stated that if the government has come to the conclusion that the proper policy interest motivating, among other things, fairness, "should not override their ability to protect themselves from liability...[W]hy should the court step in now and tell that party that they misunderstand their interests or that they are improperly weighing the impact that enforcement of the exclusion clause will have on the competitiveness and efficiency of future RFPs? Surely that cannot be a "substantially incontestable" public policy consideration in the circumstances."

Therefore, the court found that there is no overriding public policy that is substantially incontestable to outweigh the strong interests in enforcement of the exclusion clause. Freedom of contract once again prevails. Before concluding, the court also noted that there was no finding that Yukon knowingly acted in breach of the procurement principles or otherwise in bad faith towards Mega. Whether any such findings would have changed the result is not clear but unless any such breaches could be found to be "substantially incontestable" public policy considerations, it is very likely that the result would have been the same in any event.

Mega Reporting is another example of the court finding that freedom of contract is paramount, regardless of the nature or character of the contracting parties. Unless one is able to fit within one of the three exceptions to the enforcement of an exclusion clause as outlined in Tercon, the courts will give effect to such a clause even if it allows a contracting party to act unfairly to another.

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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Michael B . Morgan
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