Frontier Justice and the End of Contract A

By Paul Emanuelli

(This article was published in the August 2018 edition of Purchasing B2B magazine.)

For those still using Contact A tendering formats, the June 2018 Yukon Court of Appeal decision in Mega Reporting Inc. v. Yukon (“Mega Reporting”) serves as a last call to finally part company with the unclear Contract A rules and join the growing ranks of institutions using flexible, lower-risk tendering formats.

Mega Reporting, which dealt with a flawed evaluation process for court reporting services in a Yukon government Contract A RFP process, is another case where the courts could not agree on applying the ground rules for Contract A liability. In fact, forty years after the original 1978 trial dispute that led to the Supreme Court of Canada’s 1981 R. v. Ron Engineering Contract A precedent, the rules around Contract A lost profit damages remain more uncertain than ever and, win or lose, leave Contract A users fully exposed to lengthy lawsuits.

However, there is an alternative. In 1999, the Supreme Court of Canada brought some order to the litigious tendering system in M.J.B. Enterprises Ltd. v. Defence Construction (“MJB”). This decision confirmed that purchasing institutions can avoid the fixed-bid Contract A process and run tendering procedures under traditional contract law rules where bids remain negotiable and losing bidders have no right to sue for lost profit damages. That precedent should have ended the lost profit liability debate years ago.

Unfortunately, while an ever-increasing number of institutions left Contract A lost profit claims behind by adopting flexible, lower-risk negotiated RFP formats, other institutions persisted within the flawed Contract A operating system and have unnecessarily exposed themselves to protracted litigation and lost profit damages. This has cost hundreds of millions in court-awarded damages and countless more in out-of-court settlements and legal fees. As explained below, the experiment in attempting to limit litigation and reliably protect against lost profit awards by adding liability disclaimers to Contract A tendering formats has failed.

By way of recap, in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways) (“Tercon”), the BC government banked on a disclaimer to try to shield itself from liability after it awarded a contract to a non-compliant bidder. In its 2010 precedent-setting decision, the Supreme Court of Canada established a three-part test for enforcing liability disclaimers: (1) Did the disclaimer apply to the breach? (2) Was the disclaimer unconscionable? (3) Are there public policy reasons against enforcing the disclaimer? Unfortunately, the Supreme Court could not agree on how to apply its own test and rendered a 5-4 split decision. The ruling majority sided with the original trial judge and determined that the BC government should be liable for $3.3 million in lost profits, finding that the disclaimer was not drafted clearly enough to shield the government from liability. The four-judge minority went the other way, as had the three judges on the BC Court of Appeal, ruling in favour of the clause and against liability. In summary, thirteen judges over three levels of court considered the same clause and divided 7-6 on whether it should shield the government from liability within Contract A. Notwithstanding these conflicting results, some institutions dismissed the problem as a wording issue that could be cured by drafting better disclaimers within their Contract A documents.

Mega Reporting has put an end to that wishful thinking. In this case there was no issue with the wording of the disclaimer. Rather, the trial court struck down the clause on public policy grounds under part three of the Tercon test and awarded lost profits. The Yukon Court of Appeal then reversed the trial decision, ruling that disclaimers should only be struck down on policy grounds in extreme situations where harm to the public good is “substantially incontestable”. In other words, while the courts agreed that the clause was clear enough to apply under part one of the Tercon test, they could not agree on whether it should apply under part three of the test and, for good measure, also failed to clarify whether the clause was unconscionable under part two of that test. This left many unresolved issues for a potential appeal to the Supreme Court and, win or lose, further exposed Contract A users to more protracted litigation.

As these cases prove, institutions that rely on Contract A disclaimers remain at the mercy of the courts, who, forty years after the trial decision that first led to Contract A, are still working out the bugs in the Contract A liability analysis. In the interim, for those interested in avoiding lengthy litigation and the risk of lost profit damages, the Supreme Court offered another solution in 1999 in MJB when it unanimously ruled that we can avoid the Contract A tendering system in its entirety by using more flexible tendering formats. The verdict is now in on the better option.

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