Waiver During A Bidding Process Held To Bar Claim Arising From The Tender

The Ontario Superior Court recently dealt with the troubling issue of whether an owner can rely upon a waiver of claims signed by a bidder during a tender to defeat a contractor’s claim arising from the tender. In Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), the court held that the owner was entitled to do so. The court also dealt with two other issues relating to tenders: whether there was a contract between the owner and the bidder; and whether the limitation period to assert a claim arising from the tender had expired.

For these three reasons this decision is an important one in relation to the law of tenders. .

Background

Todd Brothers was the lowest bidder in an invitation to tender which closed in April 2009. The invitation to tender had been issued by the Township for the construction of a new runway and the rehabilitation of an existing runway at the Township’s airport. An environmental assessment of the project was undertaken of the project by the federal environmental agency. Todd Brothers then agreed to extend the time for acceptance of its tender to July 15, 2009. The municipality decided to proceed with the project in phases because some phases did not require environmental approval. Todd Brothers agreed to the phasing of the project, and to a further extension of the time for acceptance of its tender.

In September 2009, Township council passed a resolution accepting Todd Brothers’ tender in accordance with the tender documents, subject to the Canadian Environmental Assessment Act.

Prior to the Township council resolution accepting its tender, Todd Brothers signed a “Compensation Waiver Acknowledgment” which provided that Todd Brothers would:

“not seek any compensation for … work identified but not completed … in the event that the Township cannot proceed to any of the phases as a result of matters beyond the control of the Township of Algonquin Highlands, or delays resulting from the review being completed by the CEAA … any other public issues/concerns or the withdrawal of funding from applicable sources.”

The Canadian Environmental Assessment Agency (CEAA) completed its review in December of 2010. However, the new municipal council decided not to proceed with the project. Ultimately, the Township proceeded with a joint project with the provincial government which resulted in the first three parts of the original project not proceeding.

Todd Brothers started an action against the Township on July 10, 2013, asserting that the Township’s failure to proceed with the full project was a breach of contract. The limitation issue was whether Todd Brothers had discovered or ought to have discovered its claim prior to July 10, 2011. If so, its claim was barred by the two year limitation period in the Limitations Act, 2002.

Decision of the Ontario Superior Court

The first question was whether any contract had come into existence between Todd Brothers and the Township. The Township submitted that although the Township council passed a resolution accepting Todd Brothers’ tender, the tender documents said that an award of the contract required the Township’s “written confirmation mailed to the successful bidder”, and no such confirmation was mailed; and that no acceptance of the tender was ever communicated to Todd Brothers.
The court rejected that submission, stating:

 “This provision does not, as argued by the Township, make an award of the contract conditional upon the Township’s “written confirmation mailed to the successful bidder”. Rather, it provides an obligation on the part of the contractor to sign the contract contained in the RFT, within seven days of being advised that its tender was accepted. If the Township failed to mail written notice of the award to Todd Brothers, it cannot rely upon that failure to argue that acceptance of the tender did not create a binding agreement.”

In arriving at this conclusion, the court relied upon the Contract A/Contract B analysis of the Supreme Court of Canada in the Ron Engineering decision. The court in the present case explained the application of Ron Engineering as follows:

“Contract A is formed when a contractor submits a compliant bid in response to an invitation to tender. The principal terms of Contract A are the irrevocability of the tender during the acceptance period provided for in the RFT, and the obligation of both parties, if the tender is accepted, to enter into a contract (Contract B), on the terms set out in the RFT. The obligation of the parties to enter into Contract B arises from Contract A, and is not dependent upon communication of the acceptance from the owner to the contractor.”

The second question was whether the waiver signed by Todd Brothers barred its claim. The court held that it did. The circumstances fell within the wording of the waiver. The court concluded that the Township was unable to proceed with the first three parts of the project due to the ongoing CEAA review. Once that process was finished, then the Township was:

“unable to proceed with those parts of the original project after December of 2010, because of the joint airport improvement proposal made by MNR. Had the Township failed to pursue the joint project with MNR, as required by the OMAFRA contribution agreement, it risked withdrawal of provincial funding.”

The third issue was the limitation question. The court held that Todd Brothers did not discover nor ought to have reasonably discovered its claim before July 2011. Its claim only arose when “Todd Brothers discovered that this work would no longer be made available to it.” In July 2012, the discussions with the environmental authorities were still ongoing and Todd Brothers had reason to believe that they would work out. It was not reasonable to insist that Todd Brothers commence an action at that point when discussion between the parties were still unfolding.

Discussion

Each of these three issues are of interest. The first point raises two questions:

What events give rise to a contract under an invitation to tender?

And if a contract arises, did it oblige the Township to enter into Contract B-the building contract?

The court answered the first question. It concluded that Contract A was formed when Todd Brothers submitted its bid and the tenders closed. At that point there was a Contract A between Todd Brothers and the Township governing the bidding process. That contract came into being automatically and without any need for a communication from the Township to Todd Brothers.

The court did not apparently answer the second question. Under the Ron Engineering regime, Contract A required the Township to enter into Contract B – the construction contract – unless there was a justifiable reason not to do so. But the court did not consider whether there was justification for the Township not to enter into Contract B. Why were the CEAA process and the dealings with the province of Ontario not a sufficient justification for the Township not to proceed with the contract with Todd Brothers? Indeed, in its discussion of waiver, the court appears to have concluded that the CEAA process and the dealings with the provincial government did justify the Township in not entering into the building contract with Todd Brothers.

The court’s conclusions about waiver also seem problematic. What was the consideration for the waiver? Todd Brothers was the low bidder and, under the Ron Engineering analysis, the Township was obliged to enter into the building contract with Todd Brothers, absent reasonable justification for not doing so. It does not seem open to the Township to say that it awarded the contract to Todd Brothers in consideration of receiving the waiver: as the court said, the Township was obliged to award the contract to Todd Brothers due to the Ron Engineering regime. So what was the consideration that made the waiver enforceable? Why was it not a gratuitous promise or unilateral offer that Todd Brothers was entitled to withdraw?

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 3, part

Todd Brothers Contracting Ltd. v. Algonquin Highlands (Township), 2015 CarswellOnt 3045
2015 ONSC 1501

Building Contracts – Tendering – Contract A-Contract B- consideration – waiver – limitation periods

Thomas G. Heintzman O.C., Q.C., FCIArb                                     March 24, 2015

www.heintzmanadr.com

constructionlawcanada.com

 

Grounds For Reviewing Arbitration Decisions Are Narrow: B.C. Court of Appeal

A recent decision of the British Columbia Court of Appeal warned that the grounds for reviewing an arbitral award are narrow. In Boxer Capital Corp. v. JEL Investments Ltd., the court noted that arbitral dispute had gone through two separate arbitrations and nine (yes, nine) judicial proceedings already. The Court of Appeal said: “Surely that procedural history is inconsistent with the objectives of commercial arbitration.” The court held that the motion judge had no basis to over-turn the last arbitral award and re-instated that award.

Background

The issue in the appeal was whether the second arbitrator was bound by principles of res judicata arising from the award of the first arbitrator or the decision of the judge who heard an appeal from that first award. The second arbitrator held that he was not bound by those decisions by reason of res judicata. The judge hearing an appeal from that decision held that the second arbitrator was so bound. I wrote about that decision in my article of February 17, 2014.

From that latter decision an appeal was taken to the British Columbia Court of Appeal.

The B.C. Court of Appeal’s decision

The B.C. Court of Appeal agreed with the arbitrator. The issue turned upon whether the issue before the second arbitrator was the same as the issue before the first arbitrator or the court which heard the appeal from the first award. The Court of Appeal held that it was not:

“Respectfully, Mr. Justice Abrioux erred in characterizing the issues so broadly, and in finding that they had been the same throughout. When the issues are properly framed, it becomes apparent that they are quite different. The issue before [the firs] Arbitrator….., as defined by the parties who chose to submit their dispute to him, was whether the shotgun purchase price under the [Co-Owner’s Agreement, or COA] was $1.425 million or $2.19 million. The issue before[the court on appeal from the second arbitral award], as defined by this Court’s decision granting leave to appeal, was whether [the second] Arbitrator “erred in failing to have regard to established principles of law in deciding that a term should be implied”. Finally, the issue before [the second] Arbitrator, again as defined by the parties, was whether the Boxer Parties had a continuing interest in the venture. These are different issues.”

  The B.C. Court of Appeal then concluded:

“It was open to [the second] Arbitrator to construe the COA afresh on the continuing interest issue. It is not for this Court to review the merits of his decision in this regard. His decision is the last word on the interpretation of the COA.”

In the course of making its decision the court made a number of comments about the decision of the Supreme Court of Canada in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53.

First, it distinguished the role of a court in an appeal from an arbitral award from its role in an appeal from another judicial decision; the former role is much more limited than the latter. It said:

Like the present appeal, Sattva dealt with an issue of contractual interpretation. Mr. Justice Rothstein explained that in most cases, issues of contractual interpretation will be important only to the parties themselves, and will not have a broader impact….. However, the role of appellate courts (including the B.C. Supreme Court, when sitting on appeal from an arbitral award) is generally not to provide “a new forum for parties to continue their private litigation” but rather to ensure “the consistency of the law” and decide legal issues of public importance (ibid.). Accordingly, “our legal system leaves broad scope to tribunals of first instance to resolve issues of limited application”…. In sum, “the goals of limiting the number, length, and cost of appeals, and of promoting the autonomy and integrity of trial proceedings … weigh in favour of deference to [arbitrators] on points of contractual interpretation”.”

Second, it said that if the principles in Sattva had been applied in the present case, there might have been no appeal from the first arbitral award and the matter might have ended there:

“Sattva held that questions of contractual interpretation should almost always be regarded as questions of mixed fact and law…. (Historically they were seen as questions of law.) This means that, after Sattva, leave will rarely be granted to appeal an arbitral award on a question of contractual interpretation. (If Sattva had been decided earlier, leave arguably would not have been granted to appeal the parties’ initial arbitral award and this lengthy saga would have been avoided.)”

Discussion

As in most debates, defining the question largely defines the answer. The Court of Appeal said this about the exercise involved in defining the question in an appeal from an arbitral award:

“This appeal serves as a reminder of the importance of judicial restraint in the review of arbitral awards, at least in the commercial context. When sitting on appeal from an arbitral award, a court’s jurisdiction is narrow. The inquiry differs fundamentally from a trial, and even from a judicial review of an administrative decision.”

As a result of the new test in Sattva for reviewing arbitration decisions, and the narrow definition of the question involved in the appeal from the second arbitral award, the Court of Appeal held that that question was not the same as the questions in the first arbitration or the appeal from the first arbitral award.

This decision does not mean that the doctrine of res judicata should be applied narrowly by arbitral tribunals. It means that, in reviewing a decision by an arbitrator about that doctrine, the court has a very narrow jurisdiction. If the arbitrator has the jurisdiction to determine whether the doctrine applies or not – and that was not doubted in the present case – then the conclusions of the arbitrator must be accepted, unless the arbitrator’s errors about those matters result in a complete loss of jurisdiction or an error on a pure question of law.

In any event, this decision can go down as Exhibit A about how arbitration can lead to expense and delay if the procedures get out of hand. As I said in my February 12, 2014 article about the lower court decision in this case, “proponents of arbitration may wonder if there are better ways to find speedy justice. The parties selected arbitration presumably to avoid the costs and delays of the court system. That objective was not achieved in the present case.”

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 11, part 3.

Boxer Capital Corp. v. JEL Investments Ltd., 2015 CarswellBC 96, 379 D.L.R. (4th) 712

Arbitration – Appeal – Res Judicata – Standard of Review – Shot-gun agreements

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                                March 13, 2015

www.heintzmanadr.com

www.constructionlawcanada.com

Owner Awarded Nominal Damages For Deficient Construction Not Affecting Market Value

What is the appropriate remedy when a contractor fails to build the building in accordance with the specifications but the deficiencies are not proven to affect the market value of the property? Should the answer to that question depend on the sort of building being constructed: a home as opposed to an office building? Should the answer be the same if the contractor’s work is deficient rather than not in accordance with the specification?

These were the issues dealt with recently by the New Brunswick Court of Appeal in Diotte v. Consolidated Development Co. The court upheld an award by the trial judge of nominal damages in the amount of $2,000 when the owner claimed $54,000 to correct the deficiency. This area of the law is largely unexplored in Canada so this important decision will be of interest to all those involved in building contracts.

Background

Diotte agreed to build an office building and garage for the owner, Consolidated. The building was to be built to the specifications of the federal Department of Fisheries and Oceans, which had agreed to lease the building. The specifications called for a garage of 150 sq. meters. The garage as built was 6.5 sq. meters, or about 4 percent, less than the specified size. The owner sought about $54,000 to pay for the remedial work to make the garage comply with the specifications. The trial judge awarded $2,000 and the award was upheld by the New Brunswick Court of Appeal.

Decision of the New Brunswick Court of Appeal

The Court of Appeal reviewed the seminal decisions of Cardozo J. in Jacob & Youngs Inc. v. Kent, 129 N.E. 889 (U.S. N.Y. Ct. App. 1921) (where the failure was the installation in a country residence of pipe which was of identical quality but a different brand than the contractually specified pipe) and the House of Lords in Ruxley Electronics & Construction Ltd. v. Forsyth, [1995] UKHL 8 (U.K. H.L.) (where the failure was the construction of a household swimming pool to a depth of 6 feet 9 inches instead of the specified 7 feet 6 inches). In both cases, the courts discussed what approach a court should take when the contractor installs something which does not meet the specifications but causes no economic damage to the property or the owner.

The New Brunswick Court of Appeal set out the four basic ways in which damages can be assessed in these circumstances: the cost of re-instatement:

the diminution in the value of the property:

the savings by the contractor by the breach; or

the loss of amenities to the owner.

In selecting the appropriate measure of damages, the N.B. Court of Appeal referred to the classic words of Justice Cardozo in the Jacob & Youngs decision:

“It is true that in most cases the cost of replacement is the measure. The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. “There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable”. The rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance, has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.” (underlining added)

The court then devoted fourteen lengthy paragraphs to a discussion of the Ruxley decision, and concluded with this summary:

“To summarize, their Lordships are in agreement that for breach of contract, the assessment of damages begins with measuring the actual loss suffered from the unfulfilled bargain. The damage award is to place the claimant in as good a situation as if the contract had been performed. Thus, as stated by Lord Lloyd with respect to building cases, the loss is “almost always measured in one of two ways: either the difference in the value of the work done or the cost of reinstatement” ….. Reasonableness informs the assessment, resulting in cases such as Ruxley, where it would “fly in the face of common sense” to award the cost of reinstatement, but where the difference in the value of the work done amounts to nil. It is in such cases of contract deviation that their Lordships diverge somewhat in approach. However, whether referred to as a personal preference, a consumer surplus, or the loss of an amenity, each judgment rendered in Ruxley recognizes that a non-monetary loss, arising from a deviation from contract specifications, is real and deserving of compensation, despite not being easily measurable in economic terms. Taken together, the various approaches make it evident that the law of damages allows some flexibility in constructing an appropriate award.” (underlining added)

Writing for the New Brunswick Court of Appeal, Justice Robertson emphasize that this case was one of “first impression” and that “care must be taken not to lay down rules or frameworks that are too distant from the trial judge’s factual determinations.” He expressed his view about the importance of the decision as follows:

“the substantive issue at hand forces the writer to make general observations with respect to matters that may become relevant in future cases. Experience teaches that the articulation or development of legal rules or principles or legal frameworks is rarely achieved with the issuance of a solitary set of reasons. These reasons for decision should be interpreted accordingly. As they are to be released on the eve of my retirement, the task of ensuring a solid foundation to the law of New Brunswick is left with my colleagues.”

Justice Robertson then went on to make the following points:

  1. The case did not ‘raise allegations that the work performed was defective in the sense that it involved shoddy workmanship, below the “industry standard”. ‘ Accordingly the court did not have to decide whether the same approach to damages ought to be taken in the case of shoddy workmanship as opposed to a failure to meet the specifications. On the one hand, Justice Robertson was of the view that in the former case, “one is driven to expect that the law would expect the contractor to redo the work or, alternatively, provide the owner with compensation equal to the cost of reinstatement.” On the other hand, “the distinction between contract deviation and defective workmanship may be one without a difference. An appraiser may well conclude that it is not difficult to justify a diminution in value of property, due to slapdash workmanship, by reference to the cost of reinstatement. I say no more of the perceived distinction other than to point out that the law should be careful not to craft rules that serve as an incentive for builders to depart from their contractual obligations.”
  1. A different damage rule could possibly be justified when “the innocent party is a consumer who complains of contract deviation,” as opposed to the situation when “both the owner and builder are commercial parties.” Justice Robertson did not hold that there should always or necessarily be a different approach in the two cases, saying:

“Fortunately, this is not a case where breach of the contract specifications has deprived the owner of an amenity or personal preference. This is a commercial case in which the owner (Consolidated) lost 4.33 percent of the garage’s leasable floor space because of the builder’s (Diotte’s) failure to adhere to the contract specifications. The broad issue is whether it would have been reasonable to award damages equal to the cost of reinstatement ($54,000) or some lesser sum ($2,000). Evidence was led to demonstrate that Diotte had offered to undertake renovations that would have eliminated some of the deficiency in the size of the garage, but that Consolidated was unwilling to provide Diotte with access to the building. Evidence was also led at trial to establish that the tenant, who leased the property from Consolidated and for whom the property was being constructed, was prepared to enter into possession without compensation for the deficiency. In response, Consolidated argued that future tenants might not be as obliging.”

Justice Robertson also noted that the trial judge had found that Consolidated had not effected any of the repairs recommended by any of the experts and had not allowed Diotte to make the repairs that it had offered to make, leaving the trial judge with the “strong suspicion that even if the Court is to grant compensation to Consolidated to reinforce the garage or increase the usable space, the work will never be done.”

  1. Justice Robertson was strongly influenced by the absence of evidence about the impact of the deviation on the value of the property. Since the building was for rental purposes, in his view it would have been a “relatively simple matter to assess damages based on the lower of the cost of reinstatement or diminution in value of the work done. Had the appraisal revealed the fair market value of the property to be lower, because of the contract deviation, and by an amount less than the cost of the reinstatement, the court would be compelled to award damages based on the property’s diminished value. On the other hand, had the cost of reinstatement been lower than the diminished value of the property, the court would normally be compelled to award damages equal to the former….In the absence of expert evidence regarding the impact of the contract deviation on the property’s value, it cannot be assumed that an award of damages equal to the cost of reinstatement is reasonable.”
  1. However, Justice Robertson was satisfied that Consolidated was entitled to an award of nominal damages, either for lost expectations or a presumed diminishment in value. He pointed out that, to date, Consolidated has experienced no loss as a result of this missing square footage since the tenant had accepted the building as provided, and paid the rent as negotiated. Consolidated’s view that a future tenant might not be so accommodating was speculative, and Consolidated had not allowed Diotte to rectify the problem. In these circumstances, the trial judge’s award of $2,000 nominal damages was reasonable.

Discussion

This fascinating decision should definitely be put in the top drawer to be pulled out the next time we have to deal with the proper measure of damages when a contractor fails to adhere to the specifications. It contains a discussion of the relevant principles and the leading U.S. and U.K. decisions. It raises the key issues of whether damages should be assessed in a different way in the case of a commercial property as opposed to residential property, or in the case of defective work as opposed to work which deviates from the specifications.

Ultimately, however, the decision was based on the facts and the absence of evidence: the willingness of the tenant to take the building with the smaller garage; the refusal of the owner to allow the contractor to remedy the situation; the absence of any impact on market value; the absence of any savings by the contractor; and the failure of the owner to spend any money to correct the deficiency. All of these factors led both the trial judge and the Court of Appeal to conclude that it would not be fair to award the cost of correcting the deficiency to the owner.

But a decision based on facts is just as useful as one based upon law. This decision helps us provide advice to the owner or contractor about what to do or not do to support or avoid a claim for substantial damage award arising from defective work or work which does not meet the specifications. And it helps counsel decide what evidence ought to be led at trial to establish or negate the claim.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 9, part 6(m)(i)(B)

Diotte v. Consolidated Development Co. 2014 CarswellNB 410, 32 C.L.R. (4th) 282

Building Contracts – Damages – Measure of Damages – Breach of Contract

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                                       February 28, 2015

www.heintzmanadr.com

www.constructionlawcanada.com