Canada: Tendering Law Post-Bhasin: Questions About Honest Contract Performance

Introduction

The Supreme Court of Canada's ("SCC") recent decision in Bhasin v Hrynew ("Bhasin")¹, creating a general duty of fairness in Canadian contract law, may have implications for the law of tendering in Canada.

By establishing a duty of fairness and honest contract performance as a general doctrine of law (that limits freedom to contract), Bhasin could make it more challenging for Owners to avoid their obligations in Canada's Contract A/Contract B tendering framework.

The Ron Engineering Framework and Subsequent Developments

The SCC first established the Contract A/Contract B tendering framework in R. v. Ron Engineering and Construction (Eastern) Ltd.² ("Ron Engineering"). According to this framework, submitting a bid in a tender process for a construction contract (Contract B) leads to an implied contract (Contract A) between each bidder and the issuer (typically an Owner, but potentially general contractors or major subcontractors as well). Contract A leaves unsuccessful bidders with a contractual remedy against an owner that does not follow the bidding rules outlined in the tender documents.³

The Ron Engineering framework is important because it protects the integrity of the bidding process by imposing a duty on the bid issuer to treat all bidders fairly and equally in Contract A.⁴ This duty often leads courts to find an implied term in Contract A that bid issuers will only consider compliant bids. Without this implied term, it would make little sense for a contractor to undergo the expense of making a bid that strictly follows the rules, if the Owner could simply turn around and accept any bid, regardless of whether it follows the rules.⁵

After Ron Engineering, the SCC issued two decisions that narrowed the Contract A remedies available to contractors.

First, in MJB Enterprises Ltd. v. Defence Construction (1951) Ltd ("MJB"),⁶ the SCC held owners could rely on privilege clauses to expressly avoid implied terms in Contract A, if the language of the privilege clause was sufficiently clear. While the SCC did not hold that the privilege clause in MJB was sufficiently clear, the implication was clear, and Owners started wording privilege clauses more clearly and expansively to reserve more discretion for accepting bids.

Second, in Tercon Contractors Ltd v British Columbia (Minister of Transportation & Highway) ("Tercon"),⁷ the SCC, once again, adopted a framework in which express contractual language could be used to oust any implied terms from Contract A. In particular, the SCC held that a clearly worded exclusion clause could prevent a contractor from recovering any damages against an Owner.

Enter Bhasin: Honest Contractual Performance as a Principle of Law

At first glance, Bhasin (which is not a construction case and does not specifically address tendering) may not appear to have any application for construction disputes. However, a closer look reveals that Bhasin could raise Owners' fairness obligation to bidders, and limit their ability to rely on privilege and exclusion clauses in tender documents.⁸

Both MJB and Tercon established that clearly-worded, express contractual terms in bid documents could override any implied fairness obligations arising from the Ron Engineering Contract A/Contract B framework. Given the obvious implications, commentators raised concerns that these decisions threatened to undermine the Ron Engineering framework by allowing Owners to contract out of implied fairness obligations. In the absence of such implied terms, there would be no legal framework to protect the integrity of the tendering process,⁹ which is necessary to ensure bidders have the financial certainty to submit bids in the first place.

In Bhasin, the SCC may have created a remedy for this exact concern. By establishing that the duty of honest performance is more than an implied term—it is a doctrine of contract law—Bhasin imposes an obligation of honest contractual performance as a minimum standard that operates regardless of the intentions of the parties.¹⁰ Unlike implied terms, this duty cannot be avoided by express contractual terms. On this basis, contractors could argue that Bhasin closes the doors that MJB and Tercon were opening.

On the other hand, not being a tendering decision, Owners can submit that Bhasin supports the proposition that clearly worded privilege clauses and exclusion clauses are enforceable, if the Owner otherwise honestly performs its Contract A obligations.

Some Developments After Bhasin—Tilting Towards Bidders?

The Alberta Court of Queen's Bench had the opportunity to apply Bhasin to the tendering process in Elan Construction Limited v South Fish Creek Recreational Association("Elan").¹¹ The Owner, South Fish Create Recreational Association ("SFCRA"), set out a points-based system to assess each bid, and was to award the bid to the bidder with the most points. Points were awarded for total cost, completion date, experience and references.

SFCRA awarded the contract to a contractor, which had a higher cost and later completion date than Elan Construction, but excellent experience and references. However, evidence revealed that SFCRA assessed the completion date and experience components with considerations that were not disclosed in the bid documents.

The Court noted that the interpretation of Contract A must reflect the parties' reasonable expectations in the tendering process. Applying Bhasin, the Court found a breach of Elan Construction's reasonable expectations, and therefore Contract A, when the SFCRA considered factors that were not disclosed in the bid documents. The Court then commented on exclusion and privilege clauses as follows:

Elan suggests that Alberta courts will be inclined to find that Bhasin has raised Owners obligations to contractors in the tendering process.

Concluding Thoughts

• Bhasin creates a general duty of fairness in Canadian contract law that has implications for owners and developers who issue calls for tender.
• Contract A (or the bid contract that is created between a bidder and the issuer of the tender when a bid is submitted) must reflect the parties' reasonable expectations in the tendering process to treat all bidders fairly and equally and to disclose all criteria by which bids will be evaluated.
• Selecting the winning bid using criteria that departs from what is disclosed in the tender documents could lead to damage claims for alleged breaches of Contract A.
• Post-Bhasin it will likely be more challenging for Owners to shield themselves from liability relating to breaches of Contract A through express contractual terms, including privilege and exclusion of liability clauses.
• Prior to issuing calls for tenders, Owners should pay very close attention to the bid criteria to ensure they are willing and able to judge bids solely in accordance with this disclosed criteria.

Footnotes

1. 2014 SCC 71. [Bhasin]

2. [1981] 1 SCR 111. [Ron Engineering]

3. Tercon Contractors Ltd v British Columbia (Minister of Transportation & Highways), 2010 SCC 4, at para 87. [Tercon].

4. Martel Building Ltd v R, 2000 SCC 60, at para 88.

5. MJB Enterprises Ltd v Defence Construction (1951) Ltd, [1999] 1 SCR 619, at para 41. [MJB]

6. MJB, supra, note 5.

7. Tercon, supra, note 3.

8. Privilege clauses reserve the right of the bid issuer to accept a bid even if it is not the lowest bid, or even if it does not otherwise comply with certain terms of the bid documentation. Exclusion clauses limit and/or exclude any damages for which an owner may be liable to a contractor for a breach of Contract A.

9. See e.g., Jassmine Girgis, "Tercon Contractors: The Effect of Exclusion Clauses on the Tendering Process", (2010) 49 Can Bus LJ 187 at 190.

10. Bhasin, supra note 1 at para 74.

11. 2015 ABQB 330.

12. Ibid. at para 97.

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