Contractor holding a sledgehammer | Reprisal clauses allowed in Canada

The Supreme Court of Canada recently issued a ruling that could have serious consequences for anyone working on public construction projects. The ruling allows government agencies to insert a “reprisal clause” into their bidding invites for city contracts. The clause targets parties who have been involved in legal proceedings against the government entity within the past 2 years. When included, the reprisal clause essentially blacklists construction companies from bidding on public works projects.

Where did the reprisal clause come from?

The controversy here surrounds a “reprisal clause” that a city government included in their contract bidding. The City of Burnaby included the clause shortly after a dispute arose between the city and J. Cote & Son Excavating (Cote). In the litigation, Cote sought to collect funds from the city for a workplace death due to hazardous job site conditions.

The City of Burnaby’s reprisal clause

While the case was ongoing, this reprisal clause began to appear in the invitations to tender, or bid.

Tenders will not be accepted by the City of Burnaby (the “Owner”) from any person, corporation, or other legal entity (the “Party”) if the Party, or any officer or director of a corporate Party, is, or has been within a period of two years prior to the tender closing date, engaged either directly or indirectly through another corporation or legal entity in a legal proceeding initiated in any court against the Owner in relation to any contract with, or works or services provided to, the Owner; and any such Party is not eligible to submit a tender.

In other words, the city won’t accept bids from anyone who has sued them over payment, work, or services under a city contract.

After they resolved the dispute, Cote challenged the validity of the reprisal clause in December of 2014. This clause would bar them from city projects for the next 2 years, and 25% of Cote’s revenues came from city contracts! Cote argued that it violated the constitutional right of access to courts, and that the clause was against public policy. The case made it all the way to the Supreme Court of Canada.

Canada Supreme Court rules that reprisal clause is valid

The Supreme Court declared that the inclusion of these types of clauses in tender documents is valid. They reasoned that the right of access must impose some sort of undue hardship; and that this doctrine can’t be extended to provisions that may indirectly discourage the use of the court system. Furthermore, municipalities are entitled to freedom of contracting when it comes to the public works bidding process. Particularly because there is no evidence of bad faith in the exercise of the City of Burnaby’s power.

The fallout: Reprisal clauses in government contracting

This decision was immediately met with opposition from the construction industry, as press releases continue to surface. The Canadian Construction Association (CCA), among others, expressed their displeasure with the ruling.

The CCA President, Mary Van Buren, said that the clause forces parties in a dispute with the city to “choose between pursuing their legal rights and bidding on city contracts for the next few years.” The same sentiment came out from the National Trade Contractors Council of Canada (NTCCC), which said that fear of losing out on future projects will discourage contractors from pursuing their legal rights.

The use of reprisal clauses may begin to spread into more cities and provinces. This could have the unfortunate effect of driving up construction costs for contractors and suppliers. They’ll have to absorb additional costs that would have otherwise been compensated by enforcing their rights. Which is unfortunate, especially because of the lucrative nature of public works projects. The sting worsens when you consider that the Canadian government has committed to investing over  $137B in public transit and infrastructure projects over the next 12 years.

Given the serious implications of this ruling, expect more pushback to come in the near future. The limits and details of these clauses have yet to be tested. Questions the court has yet to consider: What constitutes a legal proceeding? Does that include arbitration? What about the adjudication requirements under the recently passed CA Prompt Payment Act?

As this issue develops, we’ll keep you updated.