Bidder Beware: Reprisal Clauses in Construction

Reprisal clauses allow municipalities to exclude a contractor from bidding on projects when a contractor has been involved in litigation against the municipality, or engaged in conduct prohibited by the municipality. Reprisal clauses can be found in tender documents or a municipality’s by-laws and policies. In Toronto, a reprisal clause is found in the Toronto Municipal Code, which allows City Council to suspend a contractor from bidding for one to five years based upon evidence that there has been a contravention of the Supplier Code of Conduct.^[1]

Reprisal clauses give municipalities significant power, above and beyond the power they already hold as owners. The power to exclude contractors who have engaged in recent litigation or prohibited conduct from bidding is irrespective of the results of any litigation.

Reprisal clauses encourage contractors to weigh the cost and benefit of litigating a dispute against a municipality, against the risk of being unable to bid on that municipality’s projects for a certain period of time and the associated cost.

J. Cote & Son Excavating Ltd. v. Burnaby

In J. Cote & Son Excavating Ltd. v. Burnaby,^[2] the British Columbia Court of Appeal recently weighed in on reprisal clauses, and the Supreme Court of Canada refused to grant leave for an appeal.

J. Cote & Son Excavating Ltd. (“J. Cote”) brought a claim against the City of Burnaby to recover payment in December 2013.

In February 2014, Burnaby included a reprisal clause (the “Clause”) in its tender documents which excluded bids from contractors involved in litigation against Burnaby within the two years before the tender closing date, effectively excluding J. Cote.

In December 2014, J. Cote brought a second action against the City to challenge the constitutional and common law validity of the Clause. J. Cote argued that the Clause infringed the rule of law, infringed access to the courts contrary to the Charter and section 96 of the Constitution Act, 1867 and was contrary to public policy. Section 96 of the Constitution Act guarantees the core jurisdiction of provincial superior courts.

Interestingly, in January 2017, Burnaby removed the Clause from its tender documents and began to use a pre-qualified list of contractors.

At the summary trial, the judge dismissed the application. She found that while there is a constitutional right of access to the courts, it is subject to permissible limits, and that the Clause fell within those limits.

On appeal, the British Columbia Court of Appeal was tasked with determining whether the Clause infringed a constitutionally protected right of access to the courts.

 The Court engaged in a thorough analysis, and ultimately found that the Clause did not infringe constitutionally protected access to the courts. The Clause only appeared in Burnaby’s tender materials, which affected a small number of corporations, and was not imposed by a law of general application. The Court noted that not every limit on access to the courts is automatically unconstitutional, as was the case here.

The Court found that the jurisprudence does not contain a broad constitutional right of unrestricted access to civil superior courts. The Court highlighted the following constitutional findings:

1. Section 96 of the Constitution Act, 1867 is the only path to a constitutionally protected right to civil superior courts, but it only applies when legislation denies access to civil superior courts, and thus infringes the core jurisdiction of the courts.
2. The Charter does not prescribe a general right to access to civil superior courts
3. The rule of law does not independently protect a right of access to civil superior courts. Instead, the right is protected by section 96 of the Constitution Act, 1867 and is bolstered by the rule of law.

In this case, the Court of Appeal agreed with the trial judge that the Clause was neither legislation nor a policy that amounted to a law. Therefore, J. Cote had failed to establish a denial of the limited protection of access to the superior courts provided by s. 96 of the Constitution Act, 1867.

Other Case Law

There are several other cases across Canada on the topic of reprisal clauses. In Hancon Holdings Ltd. v. Nanaimo (City), ^[3] a petitioner applied to the court to seek an order setting aside a City Counsel decision to include a reprisal clause in the City’s purchasing policy and tender documents. The court decided not to interfere with the conduct of the elected officials, and found no evidence of bad faith.  

In Cox Bros. Contracting & Assoc. Ltd. v. Big Lakes (Municipal District),^[4] a municipality passed a policy which banned contractors from bidding who had engaged in litigation against the municipality. The contractor sought judicial review of the policy. The municipality cited a number of reasons for enacting the policy, including that it would be prudent to avoid doing business with litigious parties, the municipality would be guarded and cautious in dealings with  party adverse in interest, and there was a risk of breaching confidentiality when dealing with parties against whom the municipality is in litigation.

The Alberta Court of Queen’s Bench held that the policy did discriminate, but the discrimination was authorized. The municipality made a business decision for business reasons. Courts must respect the power exercised by an elected government, and a court’s role is limited to reviewing whether a municipality exceeded its powers.

In Interpaving Limited v. City of Greater Sudbury,^[5] a contractor issued a statement of claim against the City, and the City barred the contractor from bidding for four years. The contractor allegedly had a history of violating health and safety legislation and engaging in abusive conduct against City employees. The contractor was given a chance to meet with the City, in an attempt to have the debarment rescinded, and the City later provided reasons supporting the debarment. The contractor applied for judicial review of the decision, and sought an order that the by-law which contained the reprisal clause was without effect.  

The Divisional Court noted that the City had the right to determine who to do business with, and found that the by-law containing the reprisal clause was valid.

The Court found that the City should have given the contractor formal notice of its intention to debar, a summary of the grounds and reason for the decision, and opportunity to respond. The City failed to provide notice, and the Court found that this was a breach of procedural fairness. The City’s reconsideration cured the procedural defects in the earlier decision, and the Court found the City did not act in bad faith.

One dissenting judge, Justice Ellies, noted that the duty of procedural fairness required the City to state the evidence it relied on in making its decision, which was not done. Justice Ellies also took the position that the procedural unfairness that occurred could not be corrected by the reconsideration that occurred later. Justice Ellies would therefore have allowed the application.

The Effect on the Construction Industry

Reprisal clauses are an important issue for general contractors. Municipalities represent a large portion of project owners, which are a significant source of revenue for many general contractors.

The Ontario General Contractors Association (“OGCA”) has taken a stand against reprisal clauses and calls for legislative intervention. The OGCA states that reprisal clauses are punitive and do not address the power imbalance between municipalities and contactors. The OGCA argues that reprisal clauses restrict the bidding process and increase the cost of the project because they “force contractors, who may have a dispute with the city, to choose between pursuing their legal rights and bidding on future city contracts.”^[6] The OGCA proposes that municipalities use a fair prequalification system, a contractor and consultant performance program, and a fair scoring system that is not based simply on the lowest bid.

The Canadian Institute of Steel Construction (“CISC”) also opposes the use of reprisal clauses, and President and CEO Ed Whalen notes that “it is essentially extortion and will lead to higher construction prices for the taxpayer with fewer contractors willing and able to bid Government projects.”^[7] Like the OGCA, the CISC classifies reprisal clauses as punitive.

The Canadian Construction Association (“CCA”) also expressed their discontent with reprisal clauses, and states that they allow contractors to be financially punished for enforcing their legal rights.^[8] This deters contractors from seeking a remedy in court, in fear of being banned from future bidding.

The Owner’s Perspective

Municipalities have relied on reprisal clauses for many years now. From the owner’s point of view, a reprisal is a safeguard against litigious contractors or prohibited conduct.

While contractors argue that reprisal clauses drive up the price of construction by limiting the amount of bidders and causing contractors to forego litigation, an owner might argue that costs are controlled by lowering the chance of litigation on a particular project, the cost of which is ultimately borne by the taxpayer. Indeed, a municipality can spend hundreds of thousands of dollars per year on the legal and administrative costs of litigation. A reprisal clause provides a municipality with control, in an effort to assist with cost and schedule control on the project.

Privilege Clauses

The effect of a reprisal clause could conceivably be achieved with a well-drafted privilege clause. The Supreme Court of Canada in M.J.B. Enterprises Ltd. v. Defence Construction (1951) Ltd. held that privilege clauses do not overrule the obligation to only accept compliant bids,  but they do allow owners to not simply accept the lowest bidder.^[9] Owners are allowed to take a more nuanced view of “cost”, so long as contracts are awarded based on disclosed criteria.

If a privilege clause is to have the same effect as a reprisal clause, then the tender documents should inform bidders that past experience and performance on projects is being assessed. To be even more explicit, the privilege clause could state that past litigation is a criterion in the municipality’s award of the contract.

Adjudication

With the recent introduction of adjudication, municipalities may modify their reprisal clauses in an attempt to exclude contractors who engage in adjudications. We expect that the courts will eventually be asked to address a situation where a contractor’s participation in an adjudication is not voluntary, such as in the face of a notice of non-payment from the owner, and the owner triggers a reprisal clause. For example, it remains a live question whether a reprisal clause can be relied upon to prevent a contractor from bidding, if the contractor is forced to adjudicate by operation of Form 1.2 under the Construction Act.

The reprisal clause in J. Cote & Son Excavating Ltd. v. Burnaby barred contractors from bidding if they had “engaged either directly or indirectly through another corporation or legal entity in a legal proceeding initiated in any court against the Owner”. This would presumably exclude adjudications, which are not initiated in a court. This reprisal clause, and many others, would require modification if a municipality intends to exclude bidders who engage in adjudications against them.

Adjudication may become less attractive to general contractors if municipalities will trigger reprisal clauses after an adjudication has commenced. If adjudications gain the popularity that is anticipated, and if municipalities include adjudications in reprisal clauses, then some municipalities may have a very small pool of bidders in the future. This would conceivably drive up the price of construction. 

Conclusion

For the foreseeable future, reprisal clauses are not going anywhere unless the industry groups mentioned earlier succeed in lobbying for legislative change. Contractors should be aware of the use of reprisal clauses, and when considering litigating against a municipality, should consider the triggering of a reprisal clause to be an additional risk. Contractors should also be aware of their right to procedural fairness when a municipality relies on a reprisal clause. Municipalities must consider not only their goals in instituting a reprisal clause, but also the ripple effects, especially since the advent of adjudication brings some uncertainty to the future of reprisal clauses.