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16 Mar 2010

Excluding liability in a procurement process

by Cate Greene

The Canadian Supreme Court rejected an exclusion clause that sought to exclude liability for all claims by unsuccessful bidders "for compensation of any kind whatsoever, as a result of participating in this RFP".

Principals and government entities involved in procurement should undertake an urgent review of their Requests for Proposals (RFPs) following a decision recently handed down by the Supreme Court of Canada in Tercon Contractors Ltd v British Columbia (Transportation and Highways 2010 SCC 4). The decision sheds new light on the precise wording required to exclude unsuccessful bidders from successfully recovering losses incurred in a procurement process.

Broadly, the Canadian Supreme Court rejected an exclusion clause that sought to exclude liability for all claims by unsuccessful bidders "for compensation of any kind whatsoever, as a result of participating in this RFP".

One of the eligible bidders had entered into a joint venture with a company that was ineligible to bid. This gave this particular bidder an advantage in terms of expertise and this bid was ultimately successful. An unsuccessful bidder claimed damages for loss it incurred in putting together a bid as a result of the ineligible bidder being allowed to participate in the tendering process and eventually being appointed the successful bidder.

Although the court acknowledged that parties have the right to use exclusion clauses in their RFPs, it confirmed that such clauses cannot be ambiguous. If they are ambiguous, the general principle that ambiguous exclusion clauses will be construed against the party seeking to rely on them will apply.

Although Canadian decisions are not binding in Australia, this case is likely to influence the drafting of RFP exclusion clauses and the interpretation of those clauses by Australian courts in the future.

The clear message from the Canadian decision is that a party cannot rely on an exclusion clause unless the clause is drafted broadly enough to apply to the specific claim brought by the unsuccessful bidder. This is particularly so for entities who are commercially sophisticated and have the ability to draft clear exclusion clauses.

The Canadian decision is especially pertinent with regard to government procurement, because the court specifically referred to transparency and fairness being essential in public procurement.

Principals and government entities should conduct a thorough and urgent review of their exclusion clauses to minimise their exposure to compensation claims from unsuccessful bidders in connection with a procurement process.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.