The issue of disclaimer clauses is important in claims for negligent misrepresentation as often the challenged contract may contain such a term to avoid liability.

Tercon – Supreme Court Defines the Rules on Disclaimer Clause

The most recent decision on this issue is the Supreme Court of Canada ruling in Tercon Contractors Ltd. v BC (Transportation and Highways) released in 2010.

In this case, the province sought to escape liability to the plaintiff contractor based on a claim under a tendering contract by way of an exclusionary clause. The defendant had awarded the contract in question to a party which was an ineligible bidder which should not have been permitted to participate in the process. The process had been based on six pre-selected bidders as the sole permitted candidates.

It then defended the claim by pleading the exclusionary term which forbade claims for compensation “as a result of participating” in the tendering process.

The disclaimer clause read as follows:

Except as expressly and specifically permitted in these Instructions to Proponents, no Proponent shall have any claim for 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.

The trial judge had found that as a matter of interpretation that the clause did not prevent recovery. This term, she concluded was ambiguous and hence the clause was read in favour of the plaintiff.

She also applied, what was then the traditional argument, to defeat such a term, that the breach was fundamental and that it was unfair to enforce such a clause in view of the nature of the breach, which parenthetically, had been found to be egregious.

The Supreme Court concluded that the time was right to forego the fundamental breach approach to the exclusionary term. Both the majority decision written by Cromwell J. and the dissent authored by Binnie J. came to the same conclusion on this issue.

It may be noted that apart from the analysis which follows with respect to the approach to exclusionary term, the Court agreed with the trial judge on the construction of the contractual term as ambiguous and would have upheld the trial decision for this reason, in any event.

Binnie J. determined that the exclusionary clause was enforceable and hence was a proper defence to the plaintiff’s claim and would have dismissed the action. He did, however, like the majority, state that the fundamental breach argument to escape the impact of the exclusionary clause made no sense.

The majority decision agreed with the words of Binnie J. that the proper analysis was (1) does the exclusionary term apply to the events in question as a matter of the interpretation of the contract, (2) was the term unconscionable at the time the contract was made as “might arise from situations of unequal bargaining power between the parties” and (3) if otherwise valid, may the Court refuse to apply it as a matter of public policy.

Binnie J. summarized the new law as follows:

     The first issue, of course, is whether as a matter of interpretation the exclusion clause even applies to the circumstances established in evidence.  This will depend on the Court’s assessment of the intention of the parties as expressed in the contract.  If the exclusion clause does not apply, there is obviously no need to proceed further with this analysis.  If the exclusion clause applies, the second issue is whether the exclusion clause was unconscionable at the time the contract was made, “as might arise from situations of unequal bargaining power between the parties” (Hunter, at p. 462).  This second issue has to do with contract formation, not breach.

[123]               If the exclusion clause is held to be valid and applicable, the Court may undertake a third enquiry, namely whether the Court should nevertheless refuse to enforce the valid exclusion clause because of the existence of an overriding public policy, proof of which lies on the party seeking to avoid enforcement of the clause, that outweighs the very strong public interest in the enforcement of contracts.

The dissent continued to find that the clause applied as a matter of interpretation, that the parties were both equals in the negotiating process and that there was no public policy need to intervene. The Court of Appeal decision, which dismissed the action, would have hence been upheld.