December 3, 2009

Legal Affairs

Construction contract exclusion clauses put tendering process at risk

DAN O’REILLY

correspondent

Exclusion clauses in construction contracts have been denounced as “unconscionable” by a Toronto construction lawyer.

“The tendering process has to be fair,” Joel Watson, partner with Heenan Blaikie LLP, said at the recent Canadian Institute Construction Superconference.

Watson, who was presenting a seminar on lessons from recent case law, made it clear he believes exclusion clauses override the principal of fairness by specifically referring to the Tercon case now being reviewed by the Supreme Court of Canada.

This ongoing legal dispute is over a highway project in northern British Columbia that began with a Request for Proposals.

The successful bidder had joined forces in a joint venture with an outside contractor after pre-qualification but before submission of a proposal.

Tercon, the runner-up bidder, sued for breach of Contract A, with the trial court ultimately deciding the process should be considered as a tender and ruling that the province had committed a “fundamental breach” by accepting an ineligible proponent’s bid.

An exclusion clause which said that no proponent participating in the RFP would have a claim was deemed not to be clear enough to cover circumstances and Tercon was awarded $3.3 million in damages. However, that ruling was overturned by the British Columbia Court of Appeal, which ruled the clause was clear and unambiguous.

In turn, Tercon appealed to the Supreme Court which heard the appeal in March of this year. So far, the court has not made a ruling.

“Tercon really offends me. Exclusion contracts are unconscionable,” said Watson, whose audience included lawyers, public-sector representatives and a handful of contractors.

Describing the Court of Appeal judge’s ruling as “a very academic judgement,” he warned there will be grave consequences for the construction industry if that ruling is upheld by the Supreme Court. “The whole tendering process will become a joke.”

The comments about Tercon were only part of far-reaching and hard-hitting 45-minute presentation on issues that can lead to litigation, especially with the increased use of Public Private Partnerships (P3s) as a construction delivery method in Canada.

“Accept the fact they (P3s) are a reality. We do need new hospitals and infrastructure and that’s the only way they’re going to be built,” Watson said.

But the very nature of public private partnerships is changing the nature of the business and the type of litigation that will arise. Disputes won’t be restricted to traditional points such as whether the tender was compliant or whether the 45-day-lien period has passed.

Now they’re going to encompass a host of issues such as third-party financing, privacy and protection of personal information, and the division of operational responsibilities, Watson said.

“Because government is involved and because of the added parties, projects will be more complicated than ever before. Politics will be an unseen driver in many of these projects, and with the collapse of the credit markets, infrastructure is more popular than ever with the bankers.”

At the same time, infrastructure renewal through this method will usher in a larger role for foreign contractors.

Outside of a group of large firms, most Canadian contractors don’t have the resources to be major partners in P3s, he said.

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