It is a fundamental principle of contract law, one which public policy favours and subject only to certain well-established and narrowly defined exceptions, that parties are free to determine for themselves the terms of contracts voluntarily entered into. Regrettably, the Supreme Court of Canada recently departed from this principle in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), thereby injecting uncertainty into the enforceability of contractual arrangements.
One of the early landmark decisions advancing the principle of freedom of contract was
Printing and Numerical Registering Co. v. Sampson. In that 1875 decision, Sir George Jessel M.R. stated: “. . . if there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by courts of justice.” It necessarily follows that contracts should not be set aside on the basis that they are simply unjust or unreasonable. As Lord Bramwell held in the House of Lords decision
The Manchester, Sheffield, and Lincolnshire Railway Co. v. Brown: “. . . the fact that it has been voluntarily entered into by them is the strongest possible proof that it is a reasonable agreement. . . .”
Tercon arose out of a tendering contract between the appellant (and unsuccessful) bidder, Tercon Contractors Ltd., and the province of British Columbia. Tercon sought compensation from B.C. due to the latter’s acceptance of a bid from an ineligible bidder. The tendering contract contained an exclusion of liability clause in favour of the province as follows: “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.” Tercon argued the province forfeited such protection by reason of its fundamental breach of the tendering contract.
The Supreme Court of British Columbia found the exclusion clause was ambiguous and it would be unfair and unreasonable to enforce it in light of the province’s conduct. The B.C. Court of Appeal reversed and held that the exclusion clause was unambiguous and barred compensation for all defaults. In a 5-4 split decision, the Supreme Court of Canada agreed with the trial decision and ruled that the exclusion clause was ineffective to protect the province from Tercon’s damage claim. The minority agreed with the appeal court and found no legal basis that permitted the court to override the freedom of the parties to contract.
It appears that underlying the majority decision was its assessment that it would be inequitable to enforce the exclusion of liability clause. Justice Thomas Cromwell stated: “I cannot conclude that the parties, through the words found in this exclusion clause, intended to waive compensation for conduct like that of the province.” The majority also attached a narrow interpretation to the scope of the exclusion clause. In interpreting “as a result of participating in this RFP,” Cromwell stated: “the province’s liability did not arise from Tercon’s participation in the process . . . but from the province’s unfair dealings with a party who was not entitled to participate in that process.” Cromwell went on to hold that “a contest with an ineligible bidder was not part of the RFP process. . . .”
The exclusion clause, however, clearly does not permit one bidder to make a claim for damages resulting from the participation of others. In fact, the exclusion clause provides in plain English “no proponent shall have any claim for any compensation of any kind whatsoever.” Furthermore, as there was only one RFP, we are necessarily dealing with the same RFP, with or without ineligible bidders. For the minority, Justice Ian Binnie wrote: “I accept the trial judge’s view that the ministry was at fault in its performance of the RFP, but the conclusion that the process thereby ceased to be the RFP process appears to me . . . to be a strained and artificial interpretation in order, indirectly and obliquely, to avoid the impact of what seems to them ex post facto to have been an unfair and unreasonable clause.”
Much like the advent of the just and equitable test in determining when to pierce the corporate veil is unwarranted and detrimental to corporate law, the willingness of courts to substitute what they determine, after the fact, to be fair and reasonable for what parties to a contract actually agreed to is equally unwelcome and injurious to contract law.
