For the London Free Press – March 22, 2010

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Liability: Courts construe limitations clauses as narrowly as they possibly can.

The Supreme Court of Canada recently released a landmark decision regarding the applicability of clauses that limit liability under a contract. Tercon Contractors Ltd. v. British Columbia (Ministry of Transportation and Highways) dealt with this issue in the context of a tender for highway construction.

The province of British Columbia issued a request for proposal (“RFP”) for the construction of a highway.

The RFP contained this exclusion of liability 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”.

The province of British Columbia selected the lowest bid. That bid was, however, submitted in conjunction with an ineligible bidder as a result of an agreement to undertake the work as a joint venture.

Tercon Contractors Ltd., the proponent with the second lowest bid, brought an action against the province of British Columbia on the basis that the province had breached its contract with Tercon by considering and accepting a bid from an ineligible bidder.

At the trial in 2006, the British Columbia Supreme Court held the Ministry of Transportation and Highways liable for over $3 million in damages for breach of contract and stated that the exclusion clause did not apply. In 2007, the Court of Appeal set aside the decision of the British Columbia Supreme Court and held that the exclusion clause was clear and unambiguous and barred recovery for the breaches.

In a 5-4 decision, the Supreme Court of Canada restored the decision of the British Columbia Supreme Court and overturned the decision of the Court of Appeal. In its reasons, the Supreme Court of Canada stated that the concept of fundamental breach should be “laid to rest” and relied on a strict interpretation of the limitation of liability clause.

The Supreme Court of Canada ultimately held that the exclusion clause did not apply in the Tercon case as the clause applied only to claims that arose “as a result of participating” in the request for proposal process — it did not apply to claims that arose as a result of the province acting unfairly and allowing ineligible bidders to participate in the process.

The court noted that “clear language is necessary to exclude liability for breach of such a basic requirement of the tendering process, particularly in the case of public procurement”.

The dissenting minority was of the opinion that the exclusion clause was clear and unambiguous and applied to this case.

Frankly, I think most lawyers would agree with the dissent that the damages were “as a result of participating in the RFP”.

While the courts talk about adopting contractual terms, it seems clear that they will construe limitation clauses as narrowly as they possibly can.

Unfortunately this approach does not lead to commercial certainty, and makes it very difficult to draft effective limitation clauses.