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Courts Apply Tercon ‘Duty of Fairness’ beyond Tendering Situations

In the preparation of this article, the assistance of articled student Richard Sehmer is gratefully acknowledged. 

You may recall that, on February 12, 2010, the Supreme Court of Canada released its decision in Tercon Construction Ltd. v. British Columbia (Transportation and Highways) 2010 SCC 4 in an attempt to further ensure fairness and balance the interests of owners and tenderers involved in the tendering process. Subsequently, the precedent has not only been applied to cases promoting fairness in the tendering process, as was the case in CMH Construction Ltd. v. Victoria (Town) 2010 NLTD(G) 145, but it has also been more recently applied to fairness in regard to the interpretation of commercial contracts in Strata Plan 226 v. White Rock (City) 2010 BCSC 1358.

In Tercon the Supreme Court held that an exclusion of liability clause in a request for proposals which barred claims for compensation “as a result of participating” in the tendering process, did not, when properly interpreted, exclude Tercon’s claim for damages. It was also held that by considering a bid from a non-compliant, and thus ineligible bidder, the Province not only acted in a way that breached the express and implied terms of the contract, it did so in a manner that was an affront to the integrity and business efficacy of the tendering process.   In its reasons for judgment,  the Court confirmed its own earlier determination in The Queen (Ont.) v. Ron Engineering, [1981] 1 S.C.R. 111 that a bid submitted in the tendering process results in a contract (Contract A) between the bidder and the owner, while the awarding in the tendering process results in a separate contract (Contract B). The owner owes a duty of fairness under both contracts, and, post-Tercon, will not easily be able to exclude liability for unfairly accepting an ineligible bid under ‘Contract A’.

In two recent cases, Tercon has been applied to extend contracting parties’ implied contractual duty of fairness in different situations.   On September 22, 2010, in CMH Construction Ltd. v. Victoria (Town), a plaintiff construction company successfully relied on Tercon to argue that the defendant town, in its request for proposals in the tendering process to renovate the town’s municipal center, breached a duty of fairness it owed to the bidders. In complying with a tender call, CMH Construction submitted a bid pursuant to standard bidding techniques. Without notifying CMH, the defendant town re-issued the tender call to other contractors and suppliers in hopes that they would receive a cheaper bid. After this second round of bids, the defendant accepted a lower bid from an alternate construction company. In holding in favour of CMH, the Newfoundland court confirmed the existence of a “Contract A” in the bidding process and, as in Tercon, affirmed a duty of fairness therein.

Five days after CMH Construction was released, Tercon was applied by the British Columbia Supreme Court to a dissimilar factual scenario in Strata Plan 226 v. White Rock (City) . In this case, the court applied Tercon in an effort to promote fairness in the interpretation of a provision in a restrictive covenant on the title of strata lots in a strata plan.   In doing so, the court applied the Tercon analysis that “the key principle of contractual interpretation here is that the words of one provision must not be read in isolation but should be considered in harmony with the rest of the contract and in light of its purpose and commercial context.” In this appeal, the B.C. Supreme Court overturned a previous decision by a Board Chair who did not consider anything beyond the natural meaning of plain and obvious words as written in the relevant clause. This application of Tercon illustrates the judiciary’s willingness to apply the duty of fairness to a broader scope of commercial relationships.

The Tercon decision found a compromise between an owner’s desire to maintain flexibility during the tendering process and a tenderer’s right to a fair process after having spent considerable resources in preparation of a tender. In applying Tercon more generally, the courts will ensure fairness and transparency in not only the tendering process, but in other business transactions.

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