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Fundamental Breach Beached
Published in the April 2010 issue of Litigation Notes - View Article
The Supreme Court of Canada has unanimously ‘laid to rest’ the doctrine of fundamental breach in relation to exclusionary clauses in contracts.
The Supreme Court of Canada has unanimously ‘laid to rest’ the doctrine of fundamental breach in relation to exclusionary clauses in contracts. Justice Cromwell noted that Chief Justice Dickson of the Supreme Court, as he then was, was inclined to do this 20 years ago in the case of Hunter Engineering Co. v. Syncrude Canada Ltd. and Justice Cromwell believed that “the time has come.” The decision of the Supreme Court was split five to four on the result, but all agreed with respect to the analytical framework to be employed when determining the applicability of an exclusion clause.
The facts of the case are as follows. The British Columbia Ministry of Transportation and Highways set out to build a $35 million road in the Nass Valley of British Columbia. The Ministry issued a request for expression of interest (“RFEI”) for the design and construction of this road. Six companies responded to the RFEI. Tercon Contractors was one, Brentwood was another. The Ministry then decided that it would design the road itself. It then issued a request for proposal (“RFP”) with very specific terms. One of the terms was that only the six companies that responded to the RFEI would be allowed to participate in the RFP. Another important term of the RFP, which was central to this litigation was the exclusion of liability clause. This clause indicated that these six companies could not claim damages arising from participation in the tendering process.
Brentwood, realizing that it did not have the capability of completing the road project itself, entered into a joint venture with Emil Anderson Construction Co. (“EAC”) and responded to the RFP. The Ministry accepted the Brentwood/ EAC bid as the most attractive response. Tercon took the position that EAC was not one of the six companies enumerated in the RFP and therefore not able to respond to it. As a result, it asserted, the Brentwood/ EAC bid was ineligible. Tercon sought damages on the basis that, but for the Ministry’s breach of the tendering process in accepting an ineligible bid, it would have been awarded the contract and earned profit from it.
The trial judge held that the Brentwood/ EAC bid was ineligible and the Supreme Court of Canada agreed. With this settled, the Court was required to decide whether the exclusion clause, inserted to preclude those participating in the tendering process from bringing claims against the Ministry for damages arising from it, actually protected the Ministry in this case.
At the trial level, Tercon Contractors argued that the Ministry had fundamentally breached the contract in question and therefore could not rely on the exclusion clause. In reference to this, Justice Binnie of the Supreme Court, wrote: “On this occasion we should again attempt to shut the coffin on the jargon associated with “fundamental breach”. Categorizing a contract breach as “fundamental” or “immense” or “colossal” is not particularly helpful.” Justice Binnie was writing for the dissent, but again, all of the Justices agreed on this point.
Justice Cromwell, writing for the majority, indicated that he agreed with the analytical framework laid down by Justice Binnie in the dissent. This framework involves a three branch analysis to determine whether a party seeking to escape the effect of an exclusion clause “or other contractual terms to which it had previously agreed” is able to do so. The questions the Court is to ask itself are:
1) Whether, as a matter of interpretation, the exclusion clause even applies to the circumstances established in the evidence?
2)If it does apply, whether the exclusion was unconscionable; “as might arise from situations of unequal bargaining power”?
3) f the clause is valid and applicable, has the plaintiff established that there is an overriding public policy reason to refuse to uphold a valid agreement that outweighs the very strong public interest in enforcing a contract?
With respect to this third branch, Justice Binnie wrote, “Conduct approaching serious criminality or egregious fraud are but examples of well-accepted and “substantially incontestable” considerations of public policy that may override the countervailing public policy that favours freedom of contract.”
While the members of the Supreme Court agreed upon the test for determining whether a party can escape the effect of an exclusion clause, they differed on the interpretation of the clause itself. The majority interpreted the exclusion clause in question narrowly and indicated that the exclusion was not applicable to the circumstances. Accordingly, it was not required to examine the second and third branches of the test. The exclusion clause applied to those “participating in this RFP.” The majority held that once the Ministry stepped outside the prescribed process by entertaining an ineligible bid, the process was no longer one that was called for in the RFP, and therefore Tercon’s involvement did not arise from “participating in this RFP.”
Justice Binnie, writing for the dissent, believed this was a “strained and artificial interpretation in order, indirectly and obliquely, to avoid the impact of what seems to them ex post facto to have been an unfair and unreasonable clause.” The dissenting Justices were of the opinion that the exclusion clause did apply, it was not unconscionable, and an overriding public policy reason to negate the effect of the exclusion clause had not been established.
Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4